CLASSIC MALL DEVELOPMENT COMPANY LIMITED,MUMBAI vs. DCIT CIRCLE 6(1)(1), MUMBAI

PER GIRISH AGRAWAL, ACCOUNTANT MEMBER:

This appeal filed by the assessee is against the order dated 02.03.2026 passed by the ld. CIT(A), NFAC Delhi (hereinafter referred to as “Ld. CIT(A)”) vide DIN ITBA/NFAC/S/250/2025-26/1086780305(1) u/s 250 of the Income-tax Act, 1961 (hereinafter referred to as “the Act”). The appeal arises from the assessment order dated 17.09.2021 passed

ITA 3861/Mum/2026 Classic Mall Development Company Ltd Assessment Year 2018-19 by the National Faceless Assessment Centre u/s 143(3) r.w.s. 144B for Assessment Year 2018-19.

2.1. Ground No. 2 is general in nature and calls for no separate adjudication. The issue in this appeal is thus confined to the disallowance of unrealized rent of Rs. 58,53,826/- claimed under the head ‘income from house property’.

ITA 3861/Mum/2026 Classic Mall Development Company Ltd Assessment Year 2018-19 the first addition and confirmed the second. Only the second addition is before the Tribunal, in the present appeal.

3.1. The unrealized rent of Rs. 58,53,826/- claimed by the assessee as deduction from the rent offered under house property comprises rebate and settlement of Rs. 14,84,922/- and bad debts of Rs. 43,68,904/-. The breakup of the unrealized rent claimed during the year is as under. Particulars Amount claimed Amount claimed under Total (Rs.) under House Profits and Gains from Property (Rs.) Business and/or Profession (Rs.) Rebate & 14,84,922 1,34,676 16,19,598 Settlement Bad Debts 43,68,904 39,992 44,08,896 Total 58,53,826 1,74,668 60,28,494

3.1.1. The amount of Rs. 1,74,668/- claimed under the head profits and gains of business or profession is not in dispute. The dispute relates only to the amount of Rs. 58,53,826/- claimed under house property.

3.2. Ld. Assessing Officer dealt with the claim in para 5 of the assessment order. By notice u/s 142(1) dated 04.01.2021 assessee was asked to give the logical reason for the unrealized rent and to provide evidence supporting the claim and proving its genuineness. Assessee was also asked to furnish evidence that four conditions as prescribed in Rule 4 of the Income-tax Rules, 1962 (the Rules) are fulfilled. These are that the tenancy is bona fide; that the defaulting tenant has vacated or steps have been taken to compel the tenant to vacate; that the defaulting tenant is not in occupation of any other property of the assessee; and that the assessee has taken all reasonable steps to institute legal proceedings for recovery or satisfies the Assessing Officer that such proceedings would be useless. Assessee replied as under.

ITA 3861/Mum/2026 Classic Mall Development Company Ltd Assessment Year 2018-19 “During the relevant year under consideration, the assessee has claimed unrealized rent of Rs. 58,53,826 under the head income from house property. Unrealized rent comprises of two elements ‘rebate and settlement’ amounting to Rs. 14,84,922 and bad debts amounting to Rs. 43,68,904. The assessee has debited Rs. 16,19,598 on account of rebate and settlement in its statement of profit and loss, out of the said amount, Rs. 14,84,922 pertains to income from House Property and accordingly, has been claimed by way of deduction from the rental income offered thereunder. Further, there was a bad debts of Rs. 44,08,896 during the year consideration, which was debited to the Statement of Profit and Loss as provision for doubtful debts in earlier years. Out of the said bad debts, Rs. 43,68,904 pertains to the house property and accordingly, has been claimed by way of deduction from the rental income offered thereunder.”

3.3. Ld. Assessing Officer rejected the claim on two bases. The first is that the particulars were not given as the assessee did not provide any specific evidence to support the claim. The second is that the amounts were not offered as income in earlier years. The relevant observation is extracted below. “On careful perusal of the reply of assessee, the assessing officer is not satisfied with the claim of assessee as the assessee has not made the amount of Rs. 14,84,922/- as part of income in any year and same is the case with the bad debt amount of Rs. 43,68,904/-. According to the assessee itself, the amount claimed as bad debt (unrealized rent) has been debited from P&L account in the earlier years. The assessee has also not provided any specific evidence to support its claim. Therefore disallowance of the same amount is made to remove the effect of deduction claimed by the assessee which was never been made part of the income.”

3.4. Ld. CIT(A) examined the issue from para 5.4.2 onwards. After noting the documents placed in the paper book at pages 28 to 82 and the statutory framework under section 23 and Rule 4 of the Rules, ld. CIT(A) held as under in paras 5.4.2.5 and 5.4.2.7. “5.4.2.5. The evidences on record show issuance of credit notes pursuant to commercial negotiations and waivers. There is, however, no material demonstrating that the tenants had vacated the premises in all such cases, nor is there evidence of legal proceedings initiated for recovery of arrears or proof that recovery had become impossible. The documents reflect negotiated settlements and commercial waivers rather than irrecoverable rent after exhaustion of recovery remedies.

ITA 3861/Mum/2026 Classic Mall Development Company Ltd Assessment Year 2018-19 5.4.2.7. The appellant had failed to submit evidence for recovery, written confirmations and even failed to provide bifurcation as called for by the assessing officer, thereby not fulfilling conditions laid down by Rule 4 of Income Tax Rules 1962. In the absence of evidence satisfying the conditions of Rule 4 of the Income Tax Rules 1962, and in the absence of proof that the tenants had vacated and recovery steps were taken or had become futile, the claim cannot be allowed as unrealized rent. Further, section 24 does not allow bad debt deduction. Unrealized rent exclusion allowed only if Rule 4 satisfied, which is not satisfied in the appellant’s case. Accordingly, the disallowance of Rs.58,53,826/- towards unrealized rent deserves to be sustained.”

3.5. Ld. CIT(A) also framed the key question as whether the amount is unrealized rent or rent waiver or restructuring. It was held that a voluntary rebate or renegotiation of rent does not constitute unrealized rent under Rule 4. Ld. CIT(A) therefore dismissed the appeal. Aggrieved, assessee is in appeal before the Tribunal.

ITA 3861/Mum/2026 Classic Mall Development Company Ltd Assessment Year 2018-19 Access and Basic Life are individually below Rs. 40,000/-. The tenant- wise details of the bad debts as furnished are as under:

Unrealised rent (classified as bad debts) Brand Basis of claim Amount Name/ (Rs.) Tenant Moti Mahal Moti Mahal and China Wall have been making regular 2,12,353 payments to date, except for dues pertaining to the China Wall 3,21,645 period from January 2013 to May 2013 and May 2014, which were billed prior to the commencement of the multiplex. During the initial phase of operations, high operating costs coupled with low sales due to inadequate footfalls. Accordingly, based on the request from the brands, a credit note was issued to the tenants. Levis Levi’s commenced operations in the mall on 23 4,15,053 January 2013. However, due to the noncommencement of the multiplex, footfalls and sales were substantially below expectations, resulting in operating losses. Additionally, delays in the commencement of the mall’s full operations led to losses on account of inventory investments. Accordingly, on the brand’s request and after negotiation, a credit note was issued against Licence Fees for the period from January 2013 to July 2013. Levis Global Levi’s Global commenced operations in the mall on 23 22,06,277 January 2013. However, owing to the noncommencement of the multiplex, footfalls and sales remained significantly below expectations, resulting in operating losses. Further, delays in the commencement of the mall’s full operations led to losses on account of inventory investments. Accordingly, on the brand’s request and after negotiation, a credit note was issued Licence Fees for the period from January 2013 to April 2014. Hidesign Hidesign commenced operations on 23 January 2013; 11,20,741 however, due to the non-commencement of the multiplex and several adjoining stores, footfalls and sales were substantially lower, resulting in operating losses. Consequently, the brand sought a waiver of Licence Fees for the period January 2013 to July 2013. After negotiations, it was agreed that 50% of the Licence Fees would be payable and for the balance 50%, a credit note was accordingly issued. Others Less than Rs. 40,000 92,835 Total 43,68,904

ITA 3861/Mum/2026 Classic Mall Development Company Ltd Assessment Year 2018-19

4.1. In respect of rebate and settlement, credit notes were issued mainly to Zara and Funky Monkey, aggregating Rs. 13,64,884/-. Others including Toni & Guy Levi’s Tommy Hilfiger and Basic Life are individually below Rs. 1,00,000/-. The details are as under:

Unrealized rent (classified as Rebate and Settlement) Brand Name Basis of claim Amount (Rs.) Zara As per the agreement entered between the said 9,07,820 tenant and the appellant, Service Tax @12% levied on Zara has to be borne equally by both the parties. Hence, credit notes was raised against excess service tax billed. Funky Monkey Delay in handing over the premises on the 4,57,064 appellant’s part due to Varadha cyclone. Since brand’s opening got delayed, credit note was issued for period of delay Levis Less than Rs. 1,00,000 1,20,038 Tommy Hilfiger Toni & Guy Basic Life Total 14,84,922

4.2. Copies of credit notes are placed at pages 28 to 82 of the paper book. It was submitted that the above amounts had been offered as rent income in earlier years to which they pertain. The credit notes formed part of the assessment records. Issuance of a credit note is itself a testimony that the tenant was debited and income was booked in the earlier year. The credit notes give effect to reversal of such income. The deduction was therefore claimed from the income offered under house property as the amount became irrecoverable. A claim of unrealized rent does not require a clause to that effect in the rent agreement. What is not payable by the tenant by virtue of the credit note cannot be claimed as an expense by the tenant. There is thus no loss to the revenue.

ITA 3861/Mum/2026 Classic Mall Development Company Ltd Assessment Year 2018-19 4.3. It was further submitted that ld. Assessing Officer invoked Explanation to section 23(1) read with Rule 4 and overlooked the supporting documents. Section 23 charges the amount received or receivable. If an amount is not receivable at all, it cannot be charged to tax. The amounts in the tables above were not chargeable from the tenants. They were charged erroneously or became unrecoverable owing to non-viability of business in the initial phase and were rectified by write off. The income concept as explained in E.D. Sassoon & Co. Ltd. v. CIT [1954] 26 ITR 27 (SC), Godhra Electricity Co. Ltd. v. CIT [1997] 225 ITR 746 (SC) and CIT v. Shoorji Vallabhdas and Co. [1962] 46 ITR 144 (SC) requires receipt, either actual or constructive. No tax can be levied on a hypothetical income entered in the books which does not materialise.

5.1. On the requirement of Rule 4, it was submitted that the tenants are brands operating in a mall. They cannot in reality be compelled to vacate. They occupy only one property of the assessee. The Rule has to

ITA 3861/Mum/2026 Classic Mall Development Company Ltd Assessment Year 2018-19 be applied pragmatically and reasonably. Reference was made to Rule 6DD where the exceptions to the cash payment bar are not read as an exhaustive list. Legal proceedings would be useless as part of the amounts was received and the assessee cannot be expected to litigate every time for non-recovery of rent.

5.2. Ld. Counsel further submitted that the claim of unrealized rent of the same nature has been consistently allowed to the assessee in assessments under section 143(3). Details furnished by the assessee of the unrealized rent claimed and assessed under house property in earlier years and in subsequent years are as under:

A.Y. Deduction of unrealised Income assessed Whether claim rent claimed under House U/s accepted by Property revenue 2015-16 41,11,794 143(1) Yes 2016-17 4,02,051 143(3) Yes 2017-18 5,33,20,044 143(3) Yes 2018-19 58,53,826 143(3) No 2019-20 16,97,248 143(1) Yes 2020-21 71,84,452 143(3) No 2021-22 65,48,072 143(1) Yes 2022-23 4,76,78,063 143(1) Yes 2023-24 5,44,20,929 143(3) Yes 2024-25 23,15,664 143(1) Yes

5.3. It is seen from the above that similar claims were allowed in the assessments u/s 143(3) for AY 2016-17 and AY 2017-18 and also for AY 2023-24. The claims for the other years stood accepted in the processing u/s 143(1). The adverse stance has been taken only in the year under consideration and in AY 2020-21 in the assessments u/s 143(3).

ITA 3861/Mum/2026 Classic Mall Development Company Ltd Assessment Year 2018-19 5.4. Ld. Counsel drew our attention to the assessment order for AY 2023-24 dated 24.03.2025 passed u/s 143(3) r.w.s. 144B which precedes the order of ld. CIT(A) in the year before us. In that year, the assessee claimed unrealized rent of Rs. 5,44,20,929/- comprising rebate and settlement of Rs. 91,33,820/- and bad debts of Rs. 4,52,87,109/-. Ld. Assessing Officer called for documentary evidence by notice dated 22.10.2024 and issued a show cause notice for want of such evidence. The assessee explained that the income was booked in the earlier years and that the provisions for bad debts made in those years were added back in the computation of income of those years. The claim was made only in the year when the amount actually became irrecoverable. The Assessing Officer recorded as under. “In support of the claim, the assessee has provided the complete ledger of the parties with credit notes issued. The assessee has also provided some confirmation from the parties. On examination of the documentary evidences submitted by the assessee, no adverse inference has been drawn on this issue and accordingly, no variation is proposed.”

5.5. Ld. DR relied on the orders of the authorities below.

6.1. Rule 4 prescribes the conditions as under.

ITA 3861/Mum/2026 Classic Mall Development Company Ltd Assessment Year 2018-19

“4. For the purposes of the Explanation below sub-section (1) of section 23, the amount of rent which the owner cannot realise shall be equal to the amount of rent payable but not paid by a tenant of the assessee and so proved to be lost and irrecoverable where,- (a) the tenancy is bona fide; (b) the defaulting tenant has vacated, or steps have been taken to compel him to vacate the property; (c) the defaulting tenant is not in occupation of any other property of the assessee; (d) the assessee has taken all reasonable steps to institute legal proceedings for the recovery of the unpaid rent or satisfies the Assessing Officer that legal proceedings would be useless.”

7.1. The first basis of ld. Assessing Officer that particulars were not given does not survive on the record. The tenant-wise details with the basis of each credit notes are on record as extracted in paras 4 and 4.1

ITA 3861/Mum/2026 Classic Mall Development Company Ltd Assessment Year 2018-19 above. The credit notes are placed at pages 28 to 82 of the paper book. Ld. CIT(A) recorded in para 5.4.2.3 that these documents show waivers and settlements under specific commercial circumstances and did not record any doubt on the genuineness of the credit notes or the bona fides of the tenancies. The finding in para 5.4.2.7 that evidence and bifurcation were not furnished is contrary to the detailed submission reproduced in the same order. Ld. Assessing Officer also did not carry out any enquiry on the credit notes or with the tenants.

7.2. The second basis is that the amounts were not offered as income in earlier years. The assessee has explained that the amounts were billed as license fee and credited to income in the earlier years to which they pertain and that the credit notes reverse that income. Ld. Assessing Officer inferred otherwise only because the assessee described the bad debts as debited to the profit and loss account as provision for doubtful debts in earlier years. A provision is an accounting entry. It does not mean that the underlying rent was kept out of income. In AY 2023-24, assessee explained on the same claim that the provisions were added back in the earlier years in computing income and ld. Assessing Officer accepted the claim. Besides, Rule 4 as it now stands does not contain any condition that the rent should have been included in the assessed income of an earlier year. That condition formed part of the erstwhile rule and was removed when the rule was substituted w.e.f. 01.04.2002. The second basis therefore does not rest on any requirement of the rule.

7.3. The ground on which ld. CIT(A) sustained the disallowance is the non-compliance of Rule 4 as there is no material that the tenants vacated or that legal proceedings were initiated. The rule has to be understood in the context of the transaction. The credit notes relate mostly to the initial phase of the mall when the multiplex had not

ITA 3861/Mum/2026 Classic Mall Development Company Ltd Assessment Year 2018-19 commenced and footfalls were low and to billing that was not in line with the agreement or to a delay in handing over the premises due to a cyclone. The tenants are established brands operating in the mall and some of them as submitted continue to pay regularly. They were given credit notes at their request after negotiation. In such a situation, the owner of a mall cannot be expected to evict the brand or to file a suit against it for the license fee of the initial phase which the owner itself has agreed to reduce. Insisting upon vacation of the premises or upon legal proceedings as a ritual would defeat the object of the Explanation which is to exclude the rent that the owner cannot realise. The conditions in Rule 4 are meant to establish that the rent is lost and irrecoverable. Where the loss of the rent is established by credit notes issued to the tenants on commercial grounds which neither authority has doubted, the rule is to be read pragmatically. Nothing is alleged by either authority that any tenant is in occupation of any other property of the assessee. The assessee also cannot be expected to initiate proceedings each time rent is not recovered. Legal proceedings would be useless when the amount stands reduced by the owner itself.

7.4. Whether the amounts are viewed as rent which the owner cannot realise under the Explanation or as rent which ceased to be receivable on issue of the credit notes, the result is the same. The amounts do not form part of the actual rent received or receivable. The distinction drawn by ld. CIT(A) between unrealized rent and rent waiver is therefore, not a ground to tax the amounts which were offered to tax in the earlier years and are not realised by the assessee. Taxing them again would amount to taxing an income which has not resulted, as explained in the decisions relied on by the assessee.

ITA 3861/Mum/2026 Classic Mall Development Company Ltd Assessment Year 2018-19 7.5. We also take note of the consistent treatment of the same claim by the Revenue. As seen from the table in para 5.1, the claim of unrealized rent has been allowed in the assessments u/s 143(3) for AY 2016-17 and AY 2017-18 and for AY 2023-24. It stands accepted in the processing for the other years except AY 2020-21. The nature of the claim and the documents furnished are the same in all these years. The assessment for AY 2023-24 was completed on 24.03.2025, before the order of ld. CIT(A) in the present year. Ld. Assessing Officer in that year examined the ledger of the parties with the credit notes and the confirmations and accepted the claim of a much larger amount. Revenue has not pointed out any change in facts or any reason for a different stand in this year. Ld. DR relied on the orders of the authorities below without bringing any contrary material.

7.6. In view of the above, we hold that the disallowance of Rs. 58,53,826/- made by the ld. Assessing Officer and confirmed by ld. CIT(A) is not sustainable. We delete the disallowance and allow the deduction of Rs. 58,53,826/- from the income from house property. Ground No. 1 raised by the assessee is allowed.

Order pronounced in the open court on 22 October, 2026.

Sd/- Sd/- Saktijit Dey Girish Agrawal Vice President Accountant Member Mumbai, Dated: 22.10.2026 MP, Sr.P.S.

ITA 3861/Mum/2026 Classic Mall Development Company Ltd Assessment Year 2018-19 Copy to: The Appellant The Respondent The PCIT / CIT (Judicial); The DR, ITAT; and Guard file. //True Copy// By Order ABHINAV ANANT Digitally signed by ABHINAV ANANT GAVANDE GAVANDE Date: 2026.10.28 13:39:03 +05'30' Dy/Asstt. Registrar, ITAT, Mumbai