DCIT CIRCLE-13(1), NEW DELHI vs. JAH DEVELOPERS PVT LTD, NEW DELHI

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: H: NEW DELHI BEFORE SHRI CHANDRA MOHAN GARG, JUDICIAL MEMBER AND DR. B.R.R. KUMAR, ACCOUNTANT MEMBER ITA Nos.5377 & 8764/Del/2019 Assessment Years: 2015-16 & 2016-17 The DCIT, Circel-13(1), New Delhi M/s JAH Developers Pvt. Ltd., 118, JP House, Shahpur Jat, New Delhi vs. 110016 PAN AABCJ 8428 R (Appellant) (Respondent) For Revenue : Shri Amit Katoch, Sr. DR For Assessee : Shri Ramesh Goel, CA Date of Final Hearing : 20.07.2023 Date of Pronouncement : 06.09.2023 ORDER PER CHANDRA MOHAN GARG, J.M. These appeals have been filed by the Revenue against the order of CIT(A)-5, New Delhi dated 28.03.2019 & 16.08.2019 for AYs 2015-16 & 2016-17 respectively. 2. As agreed by ld. Representative of both the sides the facts and circumstances of AY 2015-16 are similar and identical to the appeal of Revenue for AY 2016-17 and for the sake of convenience and brevity we take ITA No. 5377/Del/2019 as lead case for adjudication of sole grievance of assessee for both the years. The grounds raised by the Revenue for AY 2015-16 are as follows:- 1. Whether on the facts and in law, the Ld. CIT(A) was right in deleting the disallowance of Rs. 1,92,60,000/- made by the AO, on account of composite rental income? 2. Whether on the facts and in law, the Ld. CIT(A) was right in party allowing the disallowance up to Rs. 5,00,000/- out of the total disallowance of Rs. 19,05,709/- made on account of Tour & Travelling expenses?

ITA Nos.5377 & 8764/Del/2019 3. The ld. Senior DR supporting the action of the Assessing Officer submitted that during assessment proceedings it was found that the assessee in the computation of income has not declared any income from leasing out of the property viz the hotel naming Jaisal Villa along with all furniture, fixture and fittings for three years which was leased out to M/s. SRM Heritage Jaisalmer on the monthly rental of Rs. 15 lac per month. Therefore the Assessing Officer rightly inferred that the assessee has received composite rental income of Rs. 1,92,60,000/- from the said property which was not declared in the computation of income and thus rightly treated as undisclosed income of the assessee. The ld. Senior DR pointed out that the ld. CIT(A) has granted relief to the assessee without any justified reason and basis therefore the first appellate order may kindly be set aside by restoring that of the Assessing Officer. 4. Replying to the above, the ld. AR submitted that the identical issue was raised by the Assessing Officer for AY 2015-16 and the ld. CIT(A) after considering the explanation supported by documentary evidence of assessee vide order dated 28.03.2019 deleted the addition. He further submitted that the ld. CIT(A) has followed the order of AY 2015-16 for deletion of addition which cannot be alleged as unsustainable and thus no interferences required therein. The ld. AR submitted that the Assessing Officer was not correct in holding that the assessee has received composit rental income from the said property which the assessee has not included in the computation and return of income because the assessee did not received any rent from the lessee during financial year 2014-15 and the assessee had to file a case before Rent Controller Authority Jaisalmer Rajasthan for recovery of arrears of rent and taking vacant possession of leased property from the tenant M/s. SRM Heritage Jaisalmer. The ld. AR drawing our attention towards pages 12 to 64 of his paper book submitted that said the assessee could not recover arrears of rent and after long litigation could be able to get possession through court order on 24.05.2018 therefore no addition on account notional rental income could have been made in the hands of assessee and the ld. CIT(A) was right in deleting the baseless addition.

ITA Nos.5377 & 8764/Del/2019 5. On careful consideration of above submissions, first of all, from relevant part of first appellate order we note that the ld. CIT(A) granted relief to the assessee for appellate order AY 2015-16 with following observations and findings:- 5.1 In ground No. 1, the appellant challenged the addition of Rs.1,92,60,000/-. This addition was made by the AO looking to the agreement signed between the appellant company and M/s SRM Heritage, Jaisalmer for the composite rent on notional basis, as the appellant has given its hotel at Jaisalmer, Rajasthan named as Hotel Jaisal Villas. During assessment proceedings, it was contended by appellant that no rental income has been received and the tenant has disputed the agreement, which is under litigation and thus not enforceable. The rent. was remained unrealized, however the AQ has made this addition, considering the rent agreement, where appellant was supposed to have received this income as composite rent, falling within the head "Income From Other Sources". Therefore, the composite rental income of Rs.1,92,60,000/- (16,05,000/- per month) has been treated as income. 5.2 During appellate proceedings it is contended by the appellant, as reproduced above, that there is no actual rent has been received by the appellant due to the litigation and the company has not booked any income in its books of accounts. It is further stated that AO has taken this income on the basis of agreement and treated the entire amount on notional basis as per mercantile system of accounting. 5.3 The appellant has stated to have filed a suit before the rent controller, Jaisalmer, Rajasthan for the recovery of entire rent and substantiated that no such rent have been received. It is also stated that steps have been taken to vacate the premises which was ultimately vacated through order dated 24.05.2018. 5.4 It is also contended that since no rent has been received actually for the period under consideration, therefore, no real income has been received and in view of the ratio laid down in decisions by various jurisdiction, including Hon'ble Apex Court, no such income can be taxable for the year under consideration. 5.5 I have considered the submission of appellant and facts and circumstance of this case. 5.6 It is undisputed that during the period under consideration, no actual rent has been received and the addition has been made by the A0, looking to the agreement for rent on notional basis. The appellant has duly demonstrated that there is a dispute towards the rental income, for which the suit has been filed. The AO has taken this notional income under the head income from other sources as it is a composite rent for the property given along with all the assets. 5.7 As per Rule 4 of the Income Tax Rules, it is stated that:- "Unrealised rent. For the purposes of the Explanation below sub-section (1) of section 23, the amount of rent which the owner cannot realize 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;

ITA Nos.5377 & 8764/Del/2019 (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." 5.8 It is clear from the above Rule that in certain circumstances the rent is considered irrecoverable and thus not to be taxed as such. Further, as per explanation below section 23(1), the amount of actual rent received or receivable by the owner shall not include, subject to such rules as made in this behalf, the amount of rent, which the owner cannot realize. 5.9 In the case of appellant the tenancy was bona fide as arising out of an agreement, for which rent has been received by appellant in the earlier year. Steps have been taken to vacate the property, which was subsequently vacated through the order of court. Nothing on record to say that the said tenant is in the occupation of any other property of the appellant and due to the dispute, the appellant has initiated legal proceedings to realize this rent. Therefore, the conditions envisaged in the rules are duly fulfilled. 5.10 Further, it has been held in the case of CIT vs. Vimla D.Sonwane, 212ITR 489(Bom.) that "the amount which is under real and substantial dispute in the court cannot be included as income on accrual basis". The ratio in other decisions relied upon by the appellant also applicable to the case of applicant where no rent has been received actually and in dispute, pending litigation cannot be treated as rental income. 5.11 Therefore, considering the facts and circumstances of this case and in law, where the actual rental income is not received and not to be taxed with reference to explanation below section 23(1), r.w. Rule 4 of the IT Rules and considering the discussions made in the foregoing paragraphs and the case laws relied upon, it is held that this addition towards notional rental income, treated as income from other sources is not tenable and hence directed to be deleted. This ground of appeal is allowed. 6. In view of above, undisputedly facts and circumstances on the issue in AY 2015- 16 are quite identical and similar to the facts of present case pertaining to AY 2016-17. From the relevant part of first appellate order for AY 2015-16, as has been reproduced by the ld. CIT(A) of impugned order, we further note that the identical issue under similar facts and circumstances (for both the years) has been adjudicated by the ld. CIT(A) in favour of the assessee deleting the addition by observing that where the actual rental income is not received and not to be taxed with reference to explanation below to sec 23(1) of the Act r.w.r. 4 of the I.T Rules 1962 then the addition on account of notional rental income under the head income from other sources is not tenable. We are unable to see any valid reason to interfere with the findings arrived by

ITA Nos.5377 & 8764/Del/2019 the ld. CIT(A) as by way of filing order of the Rent Controller Jaisalmer Rajasthan it is clearly discernable that the assessee had filed suit/case before the said authorities for recovery of entire rent and vacation of leased the premises but no such rent was received and the assessee only could get vacant possession of the hotel on 24.05.2018 during AY 2019-20. Therefore when no real rental income has been earned and received by the assessee then no such income can be held as taxable in the hands of assessee on account of notional rental income under the head income from other sources. We are unable to see any ambiguity perversity or any other valid reason to interfere with the findings arrived by the ld. CIT(A) for AY 2015-16 on the identical issue in favour of the assessee deleting the addition made by the Assessing Officer on account of notional rental income. Accordingly, sole ground of revenue being devoid of merits is dismissed. 7. Since undisputedly facts and circumstances of AY 2015-16 are similar and identical to the facts and circumstances of AY 2016-17 on the issue of addition on account of notional rental income and thus the ld. CIT(A) has followed his own order for AY 2015-16 for granting relief to the assessee for subsequent AY 2016-17 therefore our findings for AY 2015-16 would apply mutatis mutandis to the Revenue appeal for AY 2016-17 . Accordingly, sole ground of Revenue for AY 2016-17 is also dismissed. 8. In the result, the appeals of revenue are dismissed. Order pronounced in the open court on 06.09.2023.

Sd/- Sd/- (DR. B.R.R. KUMAR) (CHANDRA MOHAN GARG) ACCOUNTANT MEMBER JUDICIAL MEMBER

Dated: 06th September, 2023. NV/- Copy forwarded to : 1. Appellant 2. Respondent 5

ITA Nos.5377 & 8764/Del/2019 3. CIT 4. CIT(A) 5. DR // By Order //

Asstt. Registrar, ITAT, New Delhi