2007 (1) TMI 99 - HC - Income Tax

Assessee, owner of premises was increased the rent of premises retrospectively w.e.f. 1-4-94 by way of an agreement - appellant contended that the sum of arrears was in the nature of mesne profits and not arrears of rent and as such the same cannot brought to tax under the head income from house property Comm(A) & tribunal were justified in taking it as arrears of rent so it is assessable u/s 5(1)(a) of IT Act no question of law arise

Summary

Issues:
- Taxability of arrears of rent received by the appellant
- Nature of income received: rent, damages, or mesne profits
- Applicability of Section 25(B) of the Income Tax Act
- Interpretation of the judgment in CIT Vs. Ms. Sadhna Chadha [2004] 270 ITR 534

Analysis:

Taxability of Arrears of Rent:
The appellant received arrears of rent amounting to Rs. 38,55,827.40 during the financial year 1999-2000. The appellant argued that this amount was actually damages and mesne profits received in a compromise settlement with an insurance company, not rent. The Commissioner of Income Tax and the Income Tax Appellate Tribunal disagreed with the appellant's contention, asserting that the income was taxable under the head "income from house property."

Nature of Income Received:
The appellant claimed that the sum received was in the nature of mesne profits and not arrears of rent, contending that it should not be taxed under the head "income from house property." However, the tribunal held that the income becomes taxable upon accrual, and as per the agreement between the parties, the appellant acquired the right to additional income, making it taxable under Section 5(1)(a) of the Income Tax Act 1961.

Applicability of Section 25(B) of the Income Tax Act:
The appellant argued that Section 25(B) did not apply to the assessment year under consideration and could not apply retrospectively. The respondent contended that the provision was clarificatory and aimed at taxing arrears of rent received in a subsequent year in the year of receipt.

Interpretation of CIT Vs. Ms. Sadhna Chadha [2004] 270 ITR 534:
The appellant relied on this judgment to support their case that arrears of rent should be assessed in the year to which they relate, not in the year of receipt. However, the court clarified that the judgment did not imply that arrears of rent are not taxable at all.

In conclusion, the High Court dismissed the appeals, upholding the view that the arrears of rent were taxable under Section 5(1)(a) of the Income Tax Act. The judgment emphasized that the order of the Tribunal did not raise a substantial question of law warranting further appeal under Section 260-A of the Income Tax Act.