Ita/335/2007 Of Commissioner Of Income Tax V v. R.j.wood P.ltd

Signature Not Verified Digitally Signed By:AMULYACertify that the digital file andphysical file have been compared andthe digital data is as per the physicalfile and no page is missing. CORAM:ItrON'Btr,E MR. JIISTICE [A.K. ] I{ON'ELE MR.. JUSTNCE [M.I-,. ] 1. Whether Reporters of Locaipapers may be allowedto see the Judgment?2. To be referred to the Reporter or3. Whether the Judgment [should]reported in the Digest?A.K. SIKR.I. J. (Oral)1. One common issue [arises ][in ][these ][app]except in ITA No.363/2007.However, even in that appeal shadow [of ][ear]er appeals falls. Moreover, [all]these appeals except ITA [No.3 ][6312007 ][ati]out of same [judgment, ][though]these appeals relate to different [assessment]i.e., assessment [years ]1996-97 to Lggg-2000 [(ITA ][No.363/2007 ][pertai]to assessment year 2000-01).The issue relates to,the Annual [Letting Value]ALV), which is to be [arrived ][at]under Section 23 of the Income-Tax [Act ][(]inafter referred to as the 'Act').The issue has arisen in [the ][same ][factual]casting its reflection on ailthese years. This would become [amply ][cl][ ar ][when ][we ][take stock ][of ][the] factual premise in [which the ][issue ][has alise]The assessee is the owner [of]7 1-72,Nevu' Markers [Chamber-IV, Nariman]oint. lYlumbai. He had [let ][out] f Page L of L1 ITA Nos.260 /2007 etc. @ these premises in [the. ][relevant ][assessment]vears to five tenants. [Lease]erein rent to be received [bY ][the]:agreements [were ][entered ][into ][in ][this behalf ][w]assessee from those tenants [was ][specified.]e tenancies became oPerativewith effect frirm October, 1992. [Rent ][was,]thus, contractual rent mutuallYvment of said rent. [The. said]0greed [upon. ][However, ][dispute ][arose about]premises are in a multi-storied [buiiding ][and]intenance charges [are ]PaYableby the occupier [to ][the ][agency/builder ][mai]the building. ['fhe ][tenants]claimed that the rent [payable ][by ][them ][to]assessee included maintenancecharges and therefore, it [was ][the ][obligati]of the assessee to [paY ][the]maintenance charges., The [assessee, ][on ][the]hand" wanted these [tenants]' to pay the rnaintenance charges exclusive oftractual rent. Because of [this]dispute, the tenants filed [a ][suit ][in ][Small ][Caus]Courl for' f,txation' of standardrent. In that case, the Small [Causes ][Court]sed'an interim order tn 1994fixing the rent at Rs.30,000/- [per ][month, ][w]h was less than the [contractual]rent agreed upon between [the ][parties ][in ][the][ rent agreement. ][Since ][the ][rent]was fixed on lump sum basis [at ]Rs.30,000/[per month, ][the ][assessee ][had to]pay the tnaintenance charges, whichclaimed as deduction. TheAssessing Offi.cer disallowed [the claim ][on]e ground that as per the leaseagreeinent these rhaintenance charges [were]be borne by the t6nants. ['Ihc]CIT(A), however, allowed this [claim which]iew of the CI I(A) was affirrnedby the Tribunal as well.2. In so far as the rentals are concerned, [t][ e ][assessee ][kept ][on ][receiving ][the]interirn rent of Rs.3010001- per month fixedthe Small Causes Court frorn1994. The suit was finally decided in Nember, 1999 as per which, thecontractual rent as agreed upon betweenassessee and the tenants wasITA Nos.260/2OO7 etc.Page 2 of LL fixed as the standard rent [by ][the ][Court. ][Si]during the pendency of [the ][sr-rit]assessee got the rent [at ][lesser ][rate than ][the]tractuai rate because of [the]aforesaid decision of [the Small ][Causes]in the financial [year ]1999-2000(cortesponding to assessment [year ][2000-200]) [the ][assessee ][receivecl ][arreai's]'of rent for earlier [pbriods ][as ][well.]3. In the income-tax return [filed for ][the]ssessment year 1996-97, [1999-]2000, the assessee had [shown ][th'e ] [as]Section 23 of the Act [on ][the]basis of Rs.30,000/- [per ]month [which ][was]ived by it under the interimorders of the Cour1. On [that ][basis, ][as]ents were comPleted [and]assessfitent orders were [passed ][for ][these ][asses]ent years. fixed as the standard rent [by ][the ][Court. ][Si]during the pendency of [the ][sr-rit]assessee got the rent [at ][lesser ][rate than ][the]tractuai rate because of [the]aforesaid decision of [the Small ][Causes]in the financial [year ]1999-2000(cortesponding to assessment [year ][2000-200]) [the ][assessee ][receivecl ][arreai's]'of rent for earlier [pbriods ][as ][well.]3. In the income-tax return [filed for ][the]ssessment year 1996-97, [1999-]2000, the assessee had [shown ][th'e ] [as]Section 23 of the Act [on ][the]basis of Rs.30,000/- [per ]month [which ][was]ived by it under the interimorders of the Cour1. On [that ][basis, ][as]ents were comPleted [and]assessfitent orders were [passed ][for ][these ][asses]ent years. 4.After the orders of the Small [Cause$ ][Cour1, ][the ][Assessing ][Officer]issued. notice under Section [148 ][of ][the ][Actlin ][respect ][of ][these ][assessment]years thereby seeking to reopen [the ][assess]on the ground that the ALVwas wrongly fixed at [a'lessqr ][rate ][as ][the ][rent ]lpayable [was ][higher, ][which ][was,]in fact, received by the [assessee ][and ][theref]the ALV should have [been]fixed at the contractual rent. [The ][additions ]lon [this ][basis ][were ][made ][by ][the]Assessing Officer after [re-assessment ][relatinq ][to ][assessment ][yeals ][1996-97 ][to] year 2000-2001. Irt this retum, the asse'ssee [pisclosed ]receiving [of ][arrcars ][of]rent and appended a note stating [that ][this ][am][ unt ][was ][not ][taxable ][in this ][year.]In the asp€ssment ordel [passed,]the Assessig Office accepted this positionand did rnot tax the said receiptpertainingarrears of rent albeit on theJITA Nos.260/2007 etc.Page 3 of LLrent and appended a note stating [that ][this ][am][ unt ][was ][not ][taxable ][in this ][year.]In the asp€ssment ordel [passed,]the Assessig Office accepted this positionand did rnot tax the said receiptpertainingarrears of rent albeit on theJITA Nos.260/2007 etc.Page 3 of LL 6L' ground thpt in respect of this receipt notice uSection 148 for the relevantyears had already been issued. Corningto the re-assesstnent [qua]assessment year 1996-97 to 1999-2000, theessee cllallenged the order ofthe A,ssessing Officei by filing appeal whichallowed by CIT(A) and there-assessment was set aside. The Tribunalimpugned order has confirmedthe order of the CIT(A). According toe Tribunal, even when thecontractual rent was higher, because of the inim order of the Srnall CausesCourt"passed undel Section 11(5) of the Act,ich was a speciai enactment,the assessee was forced to accept lesser teritfixed thereby. There was noprovision of appeal and thus, the assessee hno option but to receive thatrent., Therefore, this became the rent receiable as per the provisions ofSection 23 of the Act and was rightly made thbasis of fixing the ALV whilepassing the original assessment orders.ile doing so, the Tribunalconcumed with the view taken by the CIT(A)t arrears of rent had becomepayable to the assessee pursuant to the final: passed by the court in theaccounting year relevant to the assessment y'2000-01, which could not betaxed in the assessment [year ]1996-97 to [1]-2000. In respect of theseassessmenr years, therefore, the cluestion of l{w that arises fol considerationIand on which appeals are admitted is as under:f " Whether the ITAT wasorrect in law in holdingthat the arrears of rent relting to assessment year1996-97 to 1999-2000 areot to be included in theincome of the assessee andhus. not taxable?" this question of law'also and 6.We have finally heard the arguments otherefore, proceed to answer the same as well.therefore, proceed to answer the same as well. Page 4 of 11 ITA Nos.260 /2007 etc. @ " Whether the ITAT wasorrect in law in holdingthat the arrears of rent relting to assessment year1996-97 to 1999-2000 areot to be included in theincome of the assessee andhus. not taxable?" this question of law'also and 6.We have finally heard the arguments otherefore, proceed to answer the same as well.therefore, proceed to answer the same as well. Page 4 of 11 ITA Nos.260 /2007 etc. @ 7. Before we take note of [the]submins of learned counsel for [the]Rev.enue, we would like [to ][take ][note]of cerjudgments, some of which are:refehed to by the Tribunal in [the ][imirugned]rder,'because of the reason [that],the learned counsel for the Revenue has venred to argue that those [cases are]distinguishable and would not [apply to ][the]t case.8. The first case which [needs ][to ][be refet]to is the [judgment ]of CalcuttaHigh Court in Harruilton & Co. [Pvt. ][Ltd. ][v-]T, 194 ITR 391 (Cal.). Thatwas a case where the assessee/landlordreceiving rent on the basis ofagreement between the [assessee ][and the]t. This rent was received [at ][a]later date but with'retrospective [effect.]a result. the assd'ssec receivedarrears of rent for prior [years ]in [the ][accounti]year 198I-82. ['fhe ]AssessingOfficer taxed the said receipt of [arreals]rent for . [prior ][years ][in ][the]accounting year in which it was receivedthe head "Income fi'otn othersources", as arears of rent [was ]not [chargea]le under Sections 22 and [23 ][tn]the ,1 year of areceipt. The question [was ][as ][to ][w]ther this receipt could be taxedlunder the head "Income from otherThe Couft answered thequestion in the negative. Though that wasot the issue before it, the High;,Courl specifically spelled out that [the ]Triblonul [pro.eeded ][on ][the ][implicit]t.'premise that the arrears of rent could not bp roped in by the provisions ofSections 22 and23 andthe Revenue had [also][rot [filed ][any cross-objections ][on]Ithis particular issue as to whether the arreai's [of ][rent relating ][to ][past ][years]ireceived in a later vear of account [could ][be]part of actual rent for su.qh laterlw4^'#flgltsyear in terms of Explanation I beliw Section 23 o'f the Act,i whichdefines annual rent. [' ]However, the Court was of the opinion thal [this]particular issue was an inherent aspectlof thc question falling for.lIITA Nos.260/2007 etc.Page 5 of 1.L @ as well. It is for this well. It is for this It is for this is for this this [[reason]] determination and therefore, [addressed ][the]as well. It is for this well. It is for this It is for this is for this this [[reason]]that this [judgrnent ]of the [Calcutta High]urt becomes relevant for [our]purposes.The Courtlanswered [the ]aforesaidpect as under:- t'The Lquestion is whetheranears of rent relatingto'another previous Year [i]taxable as income fiomhouse property of [the]previous year in whichthey were received. Ifarrears of rent of [past]years are not part of therent of the [year ]ofaccount in which such [a]ars are received, then theonly rational inferenced be that the annualrent or annual rents of'past year or years towhich they pertain can [be]ught to charge only inthe assessment [years ]relant to such past years ofaccount. The receipt ofof rent camot, byany stretch, of imaginatibe said to have shed. [their ][character ][as ][rent ][fr]m property and to have.'ceased to be liabie to teas income from houseproperty. The simple [ca]is that the rent of a [past]vear increased retroelv shall be the annualrent of such [past ]Year [or]years but not the annuairent of the [year ]in,whichit is received consequentupon subsequent increase. 9. This [judgtnent ]wasfollowed by thee High Courl in f{ope [(India)]Ltd. v. CIT. 238 ITR740 (Cal.).the same question fell 'forconsideration directly. After [quoting]Hamilton and Co. Pvt. [Ltd.](supra), the Court put a stamp of approval onlthe [position ][of ][law ][stated ][vi0-a-]'lvis Sections 22 and 23 of the Act.' [We may ]floint [out ][here ][thal ][as ][per ][Section]23(1)(b), the rent received or receivable, [*hli.h"u.r ][is ][higher, ][would ][be ][the]Ibasis of calculating the ALV. The [entire ][displute ][relates ][to the meaning ][which]is to be attributed to the word "receivabll", [as ][according ][to ][the ][leamed]Icounsel for the Revenue, the contractual [renlr, ][which ][was ][higher ][of ][the two,]was leceivable and therefore, that should [be ][tfeated ][as ][ALV. ][In ][llope ][(Inctia)]tl iiIIITA Nos.260 /2007 etc.Page 6 of LL I,td. (supra)the Court considered the mattqlanner:- and answeled in the following ITA Nos.250/2007 etc. "With a [yiew ]to cider the question involved [in]t[is reference it is profile to note the meaning of [the]word "receivable" as [de]ed in Blaclc's Law Dictionary,sixth edition, 1,268 [and] Stround's'Judicial [DictionarY,]fourth edition, 2280, whiate: "Black's Law. Di-That [which ][is ][due ][and]owrng a person or compy (e.g., acbount receivable). Inbook keeping the name [o]an account which reflects [a ][debt]due. Stroud's Judicialictionary.-(1) 'I rnyself shouldhave held that the words ['][ receivable" ][and ]["payable" ][were]the same thing, and thatth were equivalent to "vested",but I am happy to findat the [judgment ]of the M.R. [in]Hayward v. James [(29 ]L.[. ]Ch. [822) ][expresses ][exactlY the]same conclusion' [(per ]Mins V.C., West v. Miller [1986.1Lr.6 Eq. 59): See furtheratson Eq. (2"o Ed.) 1228. 'Receivable'be construed as ['received'](2) (Wms.'Exs. (12th ed.), 6, [citing ][Re Dodgson, ] [Drew.]440). In that case therea gift over if any tnelnber of [a]class died 'before recei ng' his [share ]; [held, that ][that]phrase meant 'before beientitled to receive' (3)Under seOtiof the Income-tax Act, [1918](c. 40) :see ,IRC v. P, [96 ] [882 ][(CA),]affirmed(i928) AC 2s2 (HL); Leigh v. IRC, 43 528;',(c. 40) :see ,IRC v. P, [96 ] [882 ][(CA),]affirmed(i928) AC 2s2 (HL); Leigh v. IRC, 43 528;', The apex court inD. Sassoon and Co. Ltd. v. CITthe occasion to consider [the]U9541 [26 ] [27, ][had]meaning of the words"accrue", "arises", and ["is]received" in the contextthe definition of income. Theapex court held (page 50) "Now what is income?lThe term is nowhere [defined]in the Act ... In theof a statutory definitionwe must take itsdictionary meaning - 'that*iti"h comes in asperiodical produce of one'swork, business; landsinvestments (considered inreference to its amoun{ [and ][commonly ][expressed tn]terms of money) ['; ]afrnual or [periodical ][receipts]accruing ['to ]a persotr or corporatibn' [(Oxford]Dictionary). The wor{ clearly irnplies [the ideal ][of]receipt, actual or constriuctive. The [policy ][of ][the ][Act]is to make the amounlt taxable [when ]it [is ][paid ][or]received either actually or constructively. ['Accrue',] Page 7 of 1L "Now what is income?lThe term is nowhere [defined]in the Act ... In theof a statutory definitionwe must take itsdictionary meaning - 'that*iti"h comes in asperiodical produce of one'swork, business; landsinvestments (considered inreference to its amoun{ [and ][commonly ][expressed tn]terms of money) ['; ]afrnual or [periodical ][receipts]accruing ['to ]a persotr or corporatibn' [(Oxford]Dictionary). The wor{ clearly irnplies [the ideal ][of]receipt, actual or constriuctive. The [policy ][of ][the ][Act]is to make the amounlt taxable [when ]it [is ][paid ][or]received either actually or constructively. ['Accrue',] Page 7 of 1L 'arises' and 'is receiv' are thred distinct tenns. Sofar as receiving of [.in]is concemed there can beno difficulty; itvevs a clear and definiterneaning, and I canink of no expression whichmakes its meaning plathan the word 'receiving'itself. The words '' and 'arise' also are notdefined in the Act.The ordinary dictionarymeanings of these wohave got to be taken as themeanings affachingthem. 'Accruing' issynonymous with 'aring' in the sense of springingas a natural growth orult. The three expressions'accrues','arises' andis received' having been usedin the section, strictlypeaking 'accrues' should notbe taken as synonymwith 'arises' but in thedistinct sense of growup by way of addition orincrease or as an acaion or advantage; while theWord 'arises' meanses into existence or noticeor presents itself. Theer connotes the idea of agrowth or accumulatioand the latter of the growthor accumulation withtangible shape so as to bereceivable. It is diffiIt to sav that this distinctionhas been throughoutintained in the Act andperhaps the two wordsto denote the same ideaor ideas very similar,d the difference only lies inthis that one is more aropriate than the other whenapplied to particuiarIt is clear, however, aspointed out by Fty.,.J., in Colquhoun v. Brooks[i888] [21 ]QBD [s2, ][s]fthis [part ][of ][the ][decision not]having been affectedthe reversal of the decisionby the House of Lords[1889] [14 ] [4931 ][that ][both]the words are used inadistinction to the word'receive' and india right to receive. T'heyrepresent a state antetto the point of time whenthe income becomes receivable and connote [a]character of the inwhich is more or lessinchoate." 10. Aftel taking note of many other [ju{ernents touching upon ][various]issues, the Court answered the question for$ulated by it [(which ]is squarelytl1e question $ the instant case as well) in the fiollowing manner: i "In the instant casef as indicated hereinbefore,the Goverrunent Departrnpnts agreed to enhance therent with retrospective eff$ct fiom 1982, and thus, theparlies were not ad idem !n their mind as regards theactual quantum of rent Raflable to the assessee by its ITA Nbs.260 /2007 etc. 10. Aftel taking note of many other [ju{ernents touching upon ][various]issues, the Court answered the question for$ulated by it [(which ]is squarelytl1e question $ the instant case as well) in the fiollowing manner: i "In the instant casef as indicated hereinbefore,the Goverrunent Departrnpnts agreed to enhance therent with retrospective eff$ct fiom 1982, and thus, theparlies were not ad idem !n their mind as regards theactual quantum of rent Raflable to the assessee by its ITA Nbs.260 /2007 etc. tenants .ffid, thus, theactual amount was notascertainable. Fairin [view ][the], [keeping ]irrovisions [of ][the West B]I Prernises Tenancy Act,ascertainable. Fairin [view ][the], [keeping ]irrovisions [of ][the West B]I Prernises Tenancy Act,has to be determinedtill such fair rent isdetermined, actual rentto be paid by the tenants.Although the said provisihave no application incase the Government istenant the rent has to bepaid on the basis of theeement entered into by theAlthough the said provisihave no application incase the Government istenant the rent has to bepaid on the basis of theeement entered into by theparties. A claim made bylandlord for enhancementof rent cannot, thus,said to be an amountof rent cannot, thus,said to be an amountreceivable within the ming of section 23(I) of theAct. A claim or a demd by itself does not coffiewithin the purview of theord "incotne received orAct. A claim or a demd by itself does not coffiewithin the purview of theord "incotne received orreceivable" and keepingn view the provisions ofsection 5 of the Income-Act there cannot be anydoubt whatsoever such i come either received ordoubt whatsoever such i come either received ordeemed to be received.or arose or is deemedto accrue or arise to him oaccrues or arises in Indiaor accrues or arises outsiIndia during the previousyear.to accrue or arise to him oaccrues or arises in Indiaor accrues or arises outsiIndia during the previousyear. An agreement agreement ent An agreement agreement entinto between theparlies in terms whereofquantum of rent isdetermined with retrosive effect, in ourconsidered view, does notme within the purview. of ayy of the provons of section 5aforementioned." 11,At this [juncture, ]we would also like tofer to an order passed by theAuthority for Advance Rulings (AAR) iJugtarSingh Purewsl v.Commissioner of Income-Ttx, fohndhar213ITR 512. That wasIalso a case where al:rears of rent were receive{ in subsequent years and AARruled that these were neither assessable undef Section 23 nor assessable asincome fiom other sources. The AAR had foillowed the judgment of Calcutta.tHigh Court in Humilton & Co. Fvt. Ltd. (supra) while corring to thisconclusion. In fact,.there may not be any necepsity to even take note of theseIjudgments as amendment made in the Incorneftax Act by Finance Bill 2000with the insertion of Sectio n 258 of the Act ulould ciinch the issue. SectionI 1(D 25B reads r.o^J. as ^- [rr-lo*.]under:-ITA Nos.260/2007 etc.Page 9 of LLITA Nos.260/2007 etc.Page 9 of LL of arrears or or rent *?SB.Special,provisionof arrears or or rentqeceived.-Where the assiis the owner of anYconsisting of any(u) buildings or lands [a]t thereto which hasbeen let to a tenant; [and]qeceived.-Where the assiis the owner of anYconsisting of any(u) buildings or lands [a]t thereto which hasbeen let to a tenant; [and] has received anYreceived anYanY(b) (b) has received anYreceived anYanYunt, by wayofarrears ofrent from such [propertY, ][n]t chargedto income-tax for any previous Year, the amount so received, [a]deducting a sum equalto thirty per cent of suchount. shall be deemed [to]be the income chargeablunder the head 'Incotnefrom house property' [a]'accordingly charged toincome-tax as the incornof that previous [year ]inwhich such rent is receiv. whether the assessee [is]the owner of that [proPertY]that year or not." @ J has received anYreceived anYanY(b) (b) has received anYreceived anYanYunt, by wayofarrears ofrent from such [propertY, ][n]t chargedto income-tax for any previous Year, the amount so received, [a]deducting a sum equalto thirty per cent of suchount. shall be deemed [to]be the income chargeablunder the head 'Incotnefrom house property' [a]'accordingly charged toincome-tax as the incornof that previous [year ]inwhich such rent is receiv. whether the assessee [is]the owner of that [proPertY]that year or not." @ J 12. No dou'bt, it has [come ]into [effect ][fi'o]1.4.200I. However in ts.M..Gupta and Sons (HUF) v..A.ssistantioner of Income-Tox,299 ITR410 (Del.), this Court has made [it ][clear ][that]said provision is clarificatorYin nature. In that [case, ][the ][question ][whiclr]for consideration is [posed ][in]tfre following terms:- [i,] n,c'Whether the arreafs of rent relating to theearlier year(s) could b{ brought to [tax ][as ][income]from house ploperly lof the [previous ][yeaf ][in]which these are actuallV received?."'lthe arreafs of rent relating to theearlier year(s) could b{ brought to [tax ][as ][income]from house ploperly lof the [previous ][yeaf ][in]which these are actuallV received?."'l I13. It is held in that case that Section [ZjB ][of ][the ][Act ][only ][clarifies ][the]lrvgrLrvrr posrtron tnat 1r !rre! .: ^^ , -any arrears of rent [are ][receivfA ]-- f t.\[-- --- ][i" ][subsequent ]- L [year, ]J[the ][same]will be taxed in the year of receipt. Onc{ [we ][proceed ][on ][this ][basis, ][the]Iobvious conclusion would be [that ][the ][allreals of ][. ][rent ][received ][in ][the]Iassessment year 2000-01 would not relate [to ][ne [previous ][years and ][are ][to ][be]taxed in that year. For this reason, [as ][far]as these assessfiIent yeats areconcerned, the Tribunal was right in holdihgthat the arrears of rent received ITA Nos.26012007 eIc.Page L0 of L1 in the assessment [year ]2000-01 [could not ][be]spread over the [previotts ]Years,r.e., 1996-97'to 1999-2000. [The question ][of]w, thus, fiamed is [answered ][in]favour of the assessee [and against the Re] 14. In view of the [aforpsaid ][and ][having]to the provisions of Section258 of the Act. the amount received [as]s of rent could be taxed [at ][the]hands of the assessee in [the ][assessment]2000-01. Horvever, [the]Assessing Officer chose [not ][to ][include ][the]id arrears'in the income of [the]assessee in the said [assessment ][year- ][Ther]in this year this [question ][has]not even fallen for consideration. [Had ][the is]e been alive for this assesstnentyear, we could have given the directionsthe amount received should [be]exigible to tax in this [year. ]In [the ][absence ][o]any such issue, we cannot [pass]any directions. 15.' In so far as other issue, which [arises ][i]these appeals is concerned, thatrelates to the maintenance and [other]paid by the assessee whilecomputing the ALV of the property. Sinthis amount was.paid by the'assessee, it was rightly held to be deductiblfrom the rent while computingthe ALV. On this aspect we are of the opinin that no question of law arises.These appeals are accordingly dismissed. rl ,. (;h-WAY(kffiJIJDGE./-2:O'----(44''(M.L. IVIEIIT'A)JIJDGEPage 1L of 11 JANUAR.Y 25,ZOTITdP.ITA Nos.260 /2O07 etc.