2020 (4) TMI 685 - AT - Income Tax

Correct head of income - compensation received as per the option agreement - income from house property or income from other sources - HELD THAT - If any income is assessable under the head income from house property, it should be out of property let out or deemed to be let out for the relevant period. In this case, the property is neither let out nor vacant. Receipt by way of an option agreement cannot be assessed under the head income from house property. Once said receipt is not assessable under the head income from house property, and then obviously, it has to be considered under any other head of income, including income from other sources. In this case, the assessee has offered compensation received in pursuance of option agreement under the head from other sources Amount received by the assessee is in the nature of a compensation for not letting out property to any third party for a specified period. The meaning thereby is that by entering into an option agreement, the assessee had renounced its right to market unit No.1 and 2 for a period of 9 months from the date of the option agreement and, because of covenent by way of an option agreement with the party and hence, any amount received in pursuance of said agreement is in the nature of compensation which is assessable under the head income from other sources as rightly considered by the assessee. AO, as well as the ld.CIT (A) was incorrect in coming to the conclusion that the property is deemed to be let out and income from said property needs to be computed u/s 22 - direct the Ld. AO to delete additions made towards income from house property as against, the income offered by the assessee under the head income from other sources. - Decided in favour of assessee.

Summary

Issues:
1. Taxability of compensation received under an option agreement as income from house property or income from other sources.
2. Determination of Annual Lettable Value (ALV) of the property under the Income Tax Act, 1961.

Analysis:

Issue 1: Taxability of Compensation Received
The appeal raised by the assessee contested the taxability of the compensation of ?33,75,000 received under an option agreement. The assessee argued that the compensation was not in the nature of rental income but a capital receipt, hence not chargeable to tax. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) (CIT(A)) determined the income under the head 'Income from house property.' The CIT(A) rejected the argument that the compensation should be assessed under 'Income from other sources.' The Tribunal found that the property was neither let out nor vacant, making the compensation received under the option agreement not taxable as income from house property. The Tribunal held that the compensation was in the nature of a renouncement of the right to lease the property for a specified period, hence assessable under 'Income from other sources.'

Issue 2: Determination of Annual Lettable Value (ALV)
The AO computed the ALV of the property based on prevailing market rent, applying the provisions of section 22 of the Income Tax Act, 1961. The CIT(A) affirmed this determination, rejecting the argument to compute ALV based on Municipal Rateable Value due to the property falling under the Maharashtra Rent Control Act, 1999. The Tribunal disagreed with this approach, stating that since the property was not let out or vacant, the ALV should not have been determined under section 22. The Tribunal directed the AO to delete the additions made towards income from house property and accept the income offered by the assessee under 'Income from other sources.'

In conclusion, the Tribunal allowed the appeal filed by the assessee, directing the AO to delete the additions made towards income from house property and accept the income under 'Income from other sources.'

This comprehensive analysis of the legal judgment highlights the key issues involved, the arguments presented by the parties, and the Tribunal's decision based on the provisions of the Income Tax Act, 1961.