1991 (10) TMI 34 - HC - Income Tax

Summary

Issues Involved:
1. Taxability of arrears of rent received in a later year under section 22 of the Income-tax Act, 1961.
2. Classification of arrears of rent as "Income from house property" or "Income from other sources".

Summary:

Issue 1: Taxability of Arrears of Rent Received in a Later Year u/s 22

The primary issue was whether the additional or extra rent attributable to preceding years, which could not be taxed u/s 22 of the Income-tax Act, should instead be taxed under the head "Income from other sources." The assessee received arrears of rent during the year of account ending October 31, 1981, which related to the period from July 1979 to October 1980. The Income-tax Officer included these arrears in the gross rent for the accounting year, although they pertained to an earlier period. The Commissioner of Income-tax (Appeals) held that the arrears received during the relevant accounting year should be taxed as income from house property for the assessment year 1982-83. However, the Tribunal concluded that such arrears could not be taxed u/s 22 but could be taxed under "Income from other sources."

Issue 2: Classification of Arrears of Rent as "Income from House Property" or "Income from Other Sources"

The Tribunal's decision was based on the premise that arrears of rent could not be taxed u/s 22 and should be classified under "Income from other sources." The Tribunal argued that the scheme of section 22 is clear about what is chargeable and that rent not attributable to a particular previous year cannot be taxed as rental income of that year merely by reason of receipt. However, the High Court disagreed, stating that income arising from the ownership of house property remains "Income from house property" even if it is not taxable in the year of receipt. The Court emphasized that rent, whether current or in arrears, retains its character as income from house property and should be taxed accordingly. The Court found it difficult to reconcile with the Tribunal's approach of classifying such arrears under "Income from other sources" merely to ensure they do not escape taxation.

Conclusion:

The High Court concluded that arrears of rent received in respect of tenancy of a house property do not lose their character as income from house property. The rent, whether current or in arrears, is the yield of the house property and should be classified under "Income from house property." The Court held that such arrears could not be taxed under the residuary head "Income from other sources" and answered the question in the negative, in favor of the assessee. There was no order as to costs.