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Income Tax Appellate Tribunal, “B” BENCH, MUMBAI
AadoSa / O R D E R महावीर स ुंह, न्याययक दस्य/ PER MAHAVIR SINGH, JM: This appeal filed by the Revenue is arising out of the order of Commissioner of Income Tax (Appeals)-56, Mumbai [in short CIT(A)], in appeal No. CIT(A)-56/ITO(IT)-2(3)(1)/13-N, dated 28.12.2016. The Assessment was framed by the Income Tax Officer (International Taxation), Circle-2(3)(1), Mumbai (in short ITO/ AO) for the A.Y. 2013-14 2 vide order dated 29.03.2016, under section 143(3) of the Income-tax Act, 1961 (hereinafter ‘the Act’).
2. The only issue in this appeal of Revenue is against the order of CIT(A) deleting the addition made by AO on account of compensation received for loss of future rent due to cancellation of contract. For this Revenue has raised the following three grounds: - “1. Whether on facts and circumstance of the case, the Ld. CIT(A) erred in stating that the Rs. 2,82,50,000/- is not in the nature of Income from Other Sources but Income from House property, when the revenue receipt of Rs. 2,82,50,000/- was in the nature of compensation for loss of future rent and other losses due to early cancellation of contract, both of which can be taxed as per inclusive definition of section 2(24) of the IT Act r.w.s. 56(1)?
Without prejudice to the above, whether on facts and circumstance of the case and in law, even if it has to be accepted that the revenue receipt of Rs. 2,82,50,000/- is in the nature of income from house property, the Ld. CIT(A) has erred in not taxing the entire sum of Rs. 2,82,50,000/-, being actual rent received, as Income from house property and wrongly relied on lettable value on an agreement which stands terminated during the year under consideration, as section 23(1) clearly states that if actual rent (clause (b)) received is higher than the clause (a) of section 23, income from house property shall be actual rent received?
3. Without prejudice to above, Whether on facts and circumstance of the case and in law, even it has 3 to be accepted that the revenue receipt of Rs. 2,82,50,000/- is in nature of income for house property, the Ld. CIT(A) has erred in not taxing the entire sum of Rs. 2,82,50,000/- and stating that for the balance amount of Rs. 1.74 crores the computation mechanism fails, as the advance receipt rent, in view of the order of the arbitrator dated 25.03.2013, ought to be taxed in respective year and not be foregone?.”
Briefly stated facts are that the assessee is deriving income from the house property and income from other sources. During the year under consideration the assessee received a sum of ₹ 2,85,50,000/- by way of forfeiture of security deposit, which he wrongly offered to taxation under the head income from house property in the return of income. Subsequently by way of computation of income the assessee rectified the mistake and claimed the same as exempt from tax. The assessee claimed during the assessment proceedings that such forfeiture is a capital receipt. The AO rejected the plea of the assessee stating that only one of modified return income is through revised return, which cannot be made during the course of assessment. The facts discuss are not in dispute that the assessee entered into agreement to rent a Flat No. 3305, The Imperial, Tardeo, Mumbai to Forbes Aquatech Ltd. for a period of 6 years with lock-in period of 5 years by an agreement dated 31.12.2007 and a supplementary agreement was also entered into March 2009 specifying possession and modifying other terms. During the FY 2012-13, in April, 2012 Forbes Aquatech Ltd. decided to terminate the agreement of the assessee and assessee declined to refund the security deposit of ₹ 2,82,50,000/-. Accordingly, both the parties went into arbitration and therefore, the assessee allowed forfeiture of the security deposit and nothing was to be refunded by him. The AO during the course of 4 assessment proceedings held that the security deposit forfeited by the assessee in the nature from income from other sources. The assessee made detailed submissions as to why the income in the first place not being capital receipt is not taxable, however, even if it is taxable it should be taxed in the manner the assessee has treated i.e. income from house property being unpaid rent. But the AO treated the amount of ₹ 2,82,50,000/- as income from other sources by observing as under: - “Hence, the income ₹ 28250000/- received by the assessee by forfeiting the security deposit is assessed under the head income from other sources and the benefit of sec 24(a) of ₹ 8475000/- on account of repair and maintenance is not allowed.”
Aggrieved, assessee preferred the appeal before CIT(A). The CIT(A) after considering the submissions of the assessee and case records as well as various authorities partly allowed the claim of the assessee and partly assessed the income as income from house property and the relevant portions of the CIT(A) order are as under: - “Thus while assessing the income under the head House property what is includible in the hands of the assessee is the annual value of property which in turn means the sum for which a property might be expected to be let out or the actual rent received or receivable by the owner, where the property or any part thereof is let. The receipt relatable to rent of the property are includible in the hand of the owner of the property under the head income from house property.”
5 4. Finally, the CIT(A) consider only lettable value of this property at ₹ 1,08,00,000/- and directed the AO to tax the same as income from house property after allowing deductions as per the provisions of the Act, the balance amount of ₹ 1,74,50,000/- was held to be capital receipt not taxable. The CIT(A) decided this issue as under: - “In view of the above, only the annual value of the said property i.e. ₹ 1,08,00,000/- being 9 lakhs for 12 months is chargeable to tax as “Income from House Property” after deduction under section 24(a) @ 30% for repairs and maintenance as well as the interest expenses. For balance amount of ₹ 1,74,50,000/- (₹ 2,82,50,000/- Minus ₹ 1,08,00,000/- ) the computation mechanism fails and therefore is not taxable.
In view of the above, ground number 2 and 3 are partly allowed and the addition made by the AO is deleted. However, receipt to the extent of ₹ 1,08,00,000/- is taxable under the head “Income from House Property” after the providing the deductions available to the appellant.”
Aggrieved, now Revenue is in appeal before Tribunal.
Now, the only issue before us is whether the balance of amount of ₹ 1,74,50,000/- is a capital receipt not taxable in the hands of the assessee being computation mechanism fails. We noted that the assessee had leased his under construction property to Forbes Aquatech Limited (licensee) via leave and license agreement dated 31.12.2007 for a period of 6 years with a lock-in-period of 5 years from the date of possession at a monthly compensation of 9 lakhs. The assessee and the licensee agreed for a security deposit of Rs.1,08,00,000/-. The property 6 was not completed by the agreed date and therefore they entered into a supplementary deed and enhanced the security deposit by Rs.81,00,000/-. The Property was made available for lease from the month of May 2010 and accordingly the period of 5 years lock-in would have completed on May 2015. In the meanwhile, assessee requested for additional security deposit of Rs.93,50,000/- making the total security deposit to Rs.2,82,50,000/-. The said security deposit was refundable on completion of the lock-in period or the agreement i.e. after 6 years. Also there was a clause in the agreement that the licensee had no right to terminate the contract. Thereafter, in the month of March, 2012, the licensee vide a letter dated 12th March, 2012, stated that they would like to terminate the contract and also requested for refund of security deposit. The assessee didn't agree to refund the security deposit. The matter was then referred to the Arbitration tribunal and it decided in the favor of the assessee strictly based on the agreement. Accordingly, security deposit was not refunded to the licensee or was forfeited pre- mature termination of the agreement. The assessee treated the said receipt of income by way of forfeiture of security deposit while filing the return of income as Income from House Property whereas now the assessee has claimed that the said receipt is not taxable at all. Or if taxable is taxable under the head Income from House Property.
We noted that this issue is covered by the decision of Hon’ble Supreme Court in the case of CIT vs. D.P. Sandu Bros. Chembur P. Ltd.
(2005) 273 ITR 1 (SC), wherein it is held that the tenancy right was a capital asset and surrender of tenancy right was a transfer and consideration received there from was a capital receipt within the meaning of section 45 of the Act. But Hon’ble Supreme Court held that it is not open for the department to impose tax on such capital receive by the assessee under any other head since income derived from a source 7 falling under a specific head has to be computed under the appropriate section and not other. It was observed by the Hon’ble Supreme Court that tenancy right is a capital asset and its surrender would attract section 45 and the gain derived would be assessable under the head capital gain. But it cannot be treated as income from other sources being casual and non recurring receipts and be subjected to tax under section 56 of the Act. If the income cannot be taxed under section 45 of the Act it cannot be taxed at all. Similarly, the Tribunal of co-ordinate Bench in the case of ACIT vs. Rama Leasing Co. (P) Ltd. (2009) 20 SOT 505 (Mum-Trib) following the Pune Bench Tribunal decision in the case of Data & Co. vs. ITO (2006) 67 TTJ 546 (Pune – Trib) observed in Para 22 to 24 as under: - “22. The Pune Bench of Tribunal in Datar & Co.’s case (supra) had on similar fact held as under: — "It is well settled legal position that income of the assessee has to be computed under various heads specified in Chapter IV. If any receipt does not fall under any specific head, then it has to be assessed under the residuary head "income from other sources", but if any receipt falls under a specific head, but the same cannot he computed under that head, then it can not be assessed as income of the assessee under any other head and would escape the taxation. This principle has been laid down by the Apex Court in the case of Nalinikant Ambalal Mody v. S.A.L Narayan Row, CIT [1966] 61 ITR 428 (SC) and was applied by the Bombay High Court in the 8 case of T.P. Sindhwa (supra). In the present case, the compensation arises out of the agreement of letting out immovable property and therefore, assumes the nature of the income from house property. Therefore, in our opinion, such receipt would fall under the head ‘income from house property’. However, it is only annual value which can be assessed under the head ‘income from house property’. Any other receipt other than the annual value cannot be computed as income under this head. Therefore, following the decision of the Bombay High Court in the case of T.P. Sidhwa (supra) and the decision of Supreme Court in the case of N.A. Mody (supra), it is held that the compensation received by the assessee can not be taxed."
The Ld. DR for the revenue had relying on the judgment of Hon’ble Supreme Court in Shriyans Prasad Jain’s case (supra) stated that compensation received for premature termination of employment was taxable in the hands of the recipient. In view of the specific provisions of the Act, the ratio laid down by the Hon’ble Supreme Court is not applicable to the facts of the present case wherein the receipts arising from the property are not includible in the hands of the assessee as income from property in view of the restricted meaning of the minimum ‘annual value’ under section 23 of the Income-tax Act.
9 24. Respectfully following the ratio laid down by Pune Bench of Tribunal in Dattar & Co.’s case (supra), we hold that the compensation received by the assessee on premature termination of lease agreement is not chargeable to tax though it is a Revenue Receipt. We confirm the order of CIT(A) in holding that the said compensation amount is a non- taxable receipt in the hands of the assessee.
C.O. No. 173/Mum/2001
The cross objection raised by the assessee are in respect of capitalization of bill discounting charges amounting to Rs. 53,04,643 on the ground that the borrowed funds were utilized for the work in progress and also capitalizing the travelling expenses of Rs. 2,73,368. The Ld. AR for the assessee fairly conceded that the expenditure is to be capitalized to work-in-progress and allowed as an expenditure in the succeeding year when the income is taxed on the completion of the project. We are in conformity with the contention of the Ld. AR for the assessee and direct the Assessing Officer that the expenditure in question be merged with the work- in-progress of the year under consideration and be allowed as deduction in the succeeding year, when the said project is completed and the receipts there from are offered for taxation. The cross objections raised by the assessee are thus allowed for statistical purposes.
In the result, the appeal of the revenue is dismissed and Cross Objection of the assessee are allowed for statistical purposes.”