1982 (3) TMI 110 - AT - Income Tax

Summary

Issues Involved:
1. Taxability of rents receivable from tenants against whom ejectment suits have been filed.
2. Applicability of Sections 23 and 24 of the West Bengal Premises Tenancy Act, 1956.
3. Determination of income accrual based on mercantile accounting system.
4. Legal relationship between landlord and tenant during pending eviction suits.
5. Treatment of deposited rent in court as taxable income.

Issue-wise Detailed Analysis:

1. Taxability of rents receivable from tenants against whom ejectment suits have been filed:
The primary issue in dispute is whether the rents receivable from tenants, against whom the assessee has filed ejectment suits, can be taxed based on the principle of accrual. The assessee argued that the tenancy ended with the service of the notice of ejection and the filing of suits, thus no rent could be deemed to have accrued. The Income Tax Officer (ITO) did not accept this plea and included the income from such rents in the assessee's taxable income. However, the Commissioner of Income Tax (Appeals) [CIT(A)] accepted the assessee's contention, stating that the income could not be considered accrued until the court's decision.

2. Applicability of Sections 23 and 24 of the West Bengal Premises Tenancy Act, 1956:
The Tribunal's earlier orders directed the ITO to reconsider the case after taking into account Sections 23 and 24 of the West Bengal Premises Tenancy Act, 1956. The ITO concluded that these sections were not relevant for income tax purposes, as the rent deposited by tenants with the Rent Controller still constituted income for the assessee. The CIT(A), however, interpreted these sections to mean that the acceptance of rent does not constitute a waiver of the landlord's right to evict the tenant, and thus, the rent could not be considered accrued income until the court decided the eviction suits.

3. Determination of income accrual based on mercantile accounting system:
The ITO noted that the assessee maintained its accounts on a mercantile basis, meaning income is recorded when it is earned, not necessarily when it is received. Therefore, the ITO included the rent deposited with the Rent Controller as accrued income. The CIT(A) disagreed, stating that for income to accrue, there must be both a legal and physical source of income, which was not present due to the ongoing legal disputes.

4. Legal relationship between landlord and tenant during pending eviction suits:
The CIT(A) observed that the legal relationship of landlord and tenant was in question during the pendency of the eviction suits. The assessee could not accept rent without jeopardizing its eviction cases, and thus, no income could be considered accrued. The Tribunal upheld this view, noting that the continuation of the landlord-tenant relationship during the court proceedings could not be assumed, and any rent received would be considered damages, not income.

5. Treatment of deposited rent in court as taxable income:
The ITO argued that the rent deposited in court by tenants should be included in the assessee's taxable income, as the tenants were still in possession of the premises. The CIT(A) and the Tribunal disagreed, stating that the right to receive rent would only vest in the assessee upon the court's decree. Until then, the relationship and the status of the tenants were under dispute, and thus, no income could be considered accrued.

Conclusion:
The Tribunal upheld the CIT(A)'s decision, concluding that the income from the disputed rents could not be considered accrued until the court's decision. The appeals by the revenue were dismissed, affirming that the amounts deposited as rent would only become assessable income once the court decreed them as such.