Delhi High Court

The Commissioner Of Income-Tax-V vs R.J. Wood Pvt. Ltd. on 25 January, 2011

Author: A.K.Sikri

               IN THE HIGH COURT OF DELHI AT NEW DELHI

+                       ITA Nos.260, 261, 262, 335 and 363/2007

%                                                 Date of Decision: 25.01.2011


The Commissioner of Income-Tax-V                     ....Appellant

                                       Through:    Ms. Rashmi Chopra

                             VERSUS

R.J. Wood Pvt. Ltd.                      .....Respondent

                                       Through: Mr. Ajay Vohra with Ms.Kavita

CORAM:
   HON'BLE MR. JUSTICE A.K. SIKRI
   HON'BLE MR. JUSTICE M.L. MEHTA

       1.      Whether Reporters of Local newspapers may be allowed
               to see the Judgment?
       2.      To be referred to the Reporter or not?
       3.      Whether the Judgment should be reported in the Digest?

A.K. SIKRI, J. (Oral)

1. One common issue arises in these appeals except in ITA No.363/2007.

However, even in that appeal shadow of earlier appeals falls. Moreover, all

these appeals except ITA No.363/2007 arise out of same judgment, though

these appeals relate to different assessment years, i.e., assessment years 1996-

97 to 1999-2000 (ITA No.363/2007 pertains 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 (hereinafter referred to as the ‗Act').

The issue has arisen in the same factual backdrop casting its reflection on all

these years. This would become amply clear when we take stock of the

factual premise in which the issue has arisen. The assessee is the owner of

71-72, New Markers Chamber-IV, Nariman Point, Mumbai. He had let out

these premises in the relevant assessment years to five tenants. Lease

agreements were entered into in this behalf wherein rent to be received by the

assessee from those tenants was specified. The tenancies became operative

with effect from October, 1992. Rent was, thus, contractual rent mutually

agreed upon. However, dispute arose about payment of said rent. The said

premises are in a multi-storied building and maintenance charges are payable

by the occupier to the agency/builder maintaining the building. The tenants

claimed that the rent payable by them to the assessee included maintenance

charges and therefore, it was the obligation of the assessee to pay the

maintenance charges. The assessee, on the other hand, wanted these tenants

to pay the maintenance charges exclusive of contractual rent. Because of this

dispute, the tenants filed a suit in Small Causes Court for fixation of standard

rent. In that case, the Small Causes Court passed an interim order in 1994

fixing the rent at Rs.30,000/- per month, which 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 maintenance charges, which were claimed as deduction. The

Assessing Officer disallowed the claim on the ground that as per the lease

agreement these maintenance charges were to be borne by the tenants. The

CIT(A), however, allowed this claim which view of the CIT(A) was affirmed

by the Tribunal as well.

2. In so far as the rentals are concerned, the assessee kept on receiving the

interim rent of Rs.30,000/- per month fixed by the Small Causes Court from

1994. The suit was finally decided in November, 1999 as per which, the

contractual rent as agreed upon between the assessee and the tenants was

fixed as the standard rent by the Court. Since during the pendency of the suit

assessee got the rent at lesser rate than the contractual rate because of the

aforesaid decision of the Small Causes Court, in the financial year 1999-2000

(corresponding to assessment year 2000-2001) the assessee received arrears

of rent for earlier periods as well.

3. In the income-tax return filed for the assessment year 1996-97, 1999-

2000, the assessee had shown the ALV as per Section 23 of the Act on the

basis of Rs.30,000/- per month which was received by it under the interim

orders of the Court. On that basis, assessments were completed and

assessment orders were passed for these assessment years.

4. After the orders of the Small Causes Court, the Assessing Officer

issued notice under Section 148 of the Act in respect of these assessment

years thereby seeking to reopen the assessment on the ground that the ALV

was wrongly fixed at a lesser rate as the rent payable was higher, which was,

in fact, received by the assessee and therefore, the ALV should have been

fixed at the contractual rent. The additions on this basis were made by the

Assessing Officer after re-assessment relating to assessment years 1996-97 to

1999-2000.

5. When the matter was still at the stage of notice under Section 148

pertaining to the aforesaid assessment year, the assessee filed its return for the

year 2000-2001. In this return, the assessee disclosed receiving of arrears of

rent and appended a note stating that this amount was not taxable in this year.

In the assessment order passed, the Assessing Office accepted this position

and did not tax the said receipt pertaining to arrears of rent albeit on the

ground that in respect of this receipt notice under Section 148 for the relevant

years had already been issued. Coming back to the re-assessment qua

assessment year 1996-97 to 1999-2000, the assessee challenged the order of

the Assessing Officer by filing appeal which was allowed by CIT(A) and the

re-assessment was set aside. The Tribunal by impugned order has confirmed

the order of the CIT(A). According to the Tribunal, even when the

contractual rent was higher, because of the interim order of the Small Causes

Court passed under Section 11(5) of the Act, which was a special enactment,

the assessee was forced to accept lesser rent as fixed thereby. There was no

provision of appeal and thus, the assessee had no option but to receive that

rent. Therefore, this became the rent receivable as per the provisions of

Section 23 of the Act and was rightly made the basis of fixing the ALV while

passing the original assessment orders. While doing so, the Tribunal

concurred with the view taken by the CIT(A) that arrears of rent had become

payable to the assessee pursuant to the final order passed by the court in the

accounting year relevant to the assessment year 2000-01, which could not be

taxed in the assessment year 1996-97 to 1999-2000. In respect of these

assessment years, therefore, the question of law that arises for consideration

and on which appeals are admitted is as under:-

― Whether the ITAT was correct in law in holding that the arrears of rent relating to assessment year 1996-97 to 1999-2000 are not to be included in the income of the assessee and thus, not taxable?‖

6. We have finally heard the arguments on this question of law also and

therefore, proceed to answer the same as well.

7. Before we take note of the submissions of learned counsel for the

Revenue, we would like to take note of certain judgments, some of which are

referred to by the Tribunal in the impugned order, because of the reason that

the learned counsel for the Revenue has ventured to argue that those cases are

distinguishable and would not apply to the present case.

8. The first case which needs to be referred to is the judgment of Calcutta

High Court in Hamilton & Co. Pvt. Ltd. v. CIT, 194 ITR 391 (Cal.). That

was a case where the assessee/landlord was receiving rent on the basis of

agreement between the assessee and the tenant. This rent was received at a

later date but with retrospective effect. As a result, the assessee received

arrears of rent for prior years in the accounting year 1981-82. The Assessing

Officer taxed the said receipt of arrears of rent for prior years in the

accounting year in which it was received under the head ―Income from other

sources‖, as arrears of rent was not chargeable under Sections 22 and 23 in

the year of receipt. The question was as to whether this receipt could be taxed

under the head ―Income from other sources‖. The Court answered the

question in the negative. Though that was not the issue before it, the High

Court specifically spelled out that the Tribunal proceeded on the implicit

premise that the arrears of rent could not be roped in by the provisions of

Sections 22 and 23 and the Revenue had also not filed any cross-objections on

this particular issue as to whether the arrears of rent relating to past years

received in a later year of account could be part of actual rent for such later

previous year in terms of Explanation I below Section 23 of the Act, which

defines annual rent. However, the Court was of the opinion that this

particular issue was an inherent aspect of the question falling for

determination and therefore, addressed the same as well. It is for this reason

that this judgment of the Calcutta High Court becomes relevant for our

purposes. The Court answered the aforesaid aspect as under:-

―The question is whether the arrears of rent relating to another previous year are taxable as income from house property of the later previous year in which they were received. If the arrears of rent of past years are not part of the annual rent of the year of account in which such arrears are received, then the only rational inference should be that the annual rent or annual rents of the past year or years to which they pertain can be brought to charge only in the assessment years relevant to such past years of account. The receipt of arrears of rent cannot, by any stretch of imagination, be said to have shed their character as rent from property and to have ceased to be liable to tax as income from house property. The simple case is that the rent of a past year increased retrospectively shall be the annual rent of such past year or years but not the annual rent of the year in which it is received consequent upon subsequent increase.‖

9. This judgment was followed by the same High Court in Hope (India)

Ltd. v. CIT, 238 ITR 740 (Cal.). There the same question fell for

consideration directly. After quoting from Hamilton and Co. Pvt. Ltd.

(supra), the Court put a stamp of approval on the position of law stated via-a-

vis Sections 22 and 23 of the Act. We may point out here that as per Section

23(1)(b), the rent received or receivable, whichever is higher, would be the

basis of calculating the ALV. The entire dispute relates to the meaning which

is to be attributed to the word ―receivable‖, as according to the learned

counsel for the Revenue, the contractual rent, which was higher of the two,

was receivable and therefore, that should be treated as ALV. In Hope (India)

Ltd. (supra) the Court considered the matter and answered in the following

manner:-

―With a view to consider the question involved in this reference it is profitable to note the meaning of the word ―receivable‖ as defined in Black's Law Dictionary, sixth edition, 1268 and Stround's Judicial Dictionary, fourth edition, 2280, which are:

―Black's Law Dictionary.--That which is due and owing a person or company (e.g., account receivable). In book keeping the name of an account which reflects a debt due.

Stroud's Judicial Dictionary.-(1) ‗I myself should have held that the words ―receivable‖ and ―payable‖ were the same thing, and that both were equivalent to ―vested‖, but I am happy to find that the judgment of the M.R. in Hayward v. James (29 L.J. Ch. 822) expresses exactly the same conclusion' (per Malins V.C., West v. Miller [1986] Lr. 6 Eq. 59): See further Watson Eq. (2nd Ed.) 1228.

(2) ‗Receivable' may be construed as ‗received' (Wms. Exs. (12th ed.), 689, citing Re Dodgson, I Drew.

440). In that case there was a gift over if any member of a class died ‗before receiving' his share ; held, that that phrase meant ‗before being entitled to receive'.

(3) Under section 5 of the Income-tax Act, 1918 (c. 40) : see IRC v. Pakenham, 96 LJKB 882 (CA), affirmed (1928) AC 252 (HL); Leigh v. IRC, 43 TLR

528.‖ The apex court in E.D. Sassoon and Co. Ltd. v. CIT [1954] 26 ITR 27, had the occasion to consider the meaning of the words, ―accrue‖, ―arises‖, and ―is received‖ in the context of the definition of income. The apex court held (page 50) :

―Now what is income? The term is nowhere defined in the Act ... In the absence of a statutory definition we must take its ordinary dictionary meaning - ‗that which comes in as the periodical produce of one's work, business, lands or investments (considered in reference to its amount and commonly expressed in terms of money) ; annual or periodical receipts accruing to a person or corporation' (Oxford Dictionary). The word clearly implies the ideal of receipt, actual or constructive. The policy of the Act is to make the amount taxable when it is paid or received either actually or constructively. ‗Accrue',

‗arises' and ‗is received' are three distinct terms. So far as receiving of income is concerned there can be no difficulty; it conveys a clear and definite meaning, and I can think of no expression which makes its meaning plainer than the word ‗receiving' itself. The words ‗accrue' and ‗arise' also are not defined in the Act. The ordinary dictionary meanings of these words have got to be taken as the meanings attaching to them. ‗Accruing' is synonymous with ‗arising' in the sense of springing as a natural growth or result. The three expressions ‗accrues', ‗arises' and ‗is received' having been used in the section, strictly speaking ‗accrues' should not be taken as synonymous with ‗arises' but in the distinct sense of growing up by way of addition or increase or as an accession or advantage; while the word ‗arises' means comes into existence or notice or presents itself. The former connotes the idea of a growth or accumulation and the latter of the growth or accumulation with a tangible shape so as to be receivable. It is difficult to say that this distinction has been throughout maintained in the Act and perhaps the two words seem to denote the same idea or ideas very similar, and the difference only lies in this that one is more appropriate than the other when applied to particular cases. It is clear, however, as pointed out by Fry., L.J., in Colquhoun v. Brooks [1888] 21 QBD 52, 59 [this part of the decision not having been affected by the reversal of the decision by the House of Lords [1889] 14 AC 493] that both the words are used in contradistinction to the word ‗receive' and indicate a right to receive. They represent a state anterior to the point of time when the income becomes receivable and connote a character of the income which is more or less inchoate.‖

10. After taking note of many other judgments touching upon various

issues, the Court answered the question formulated by it (which is squarely

the question in the instant case as well) in the following manner:

―In the instant case, as indicated hereinbefore, the Government Departments agreed to enhance the rent with retrospective effect from 1982, and thus, the parties were not ad idem in their mind as regards the actual quantum of rent payable to the assessee by its

tenants and, thus, the actual amount was not ascertainable. Fair rent, keeping in view the provisions of the West Bengal Premises Tenancy Act, has to be determined and till such fair rent is determined, actual rent has to be paid by the tenants. Although the said provisions have no application in case the Government is the tenant the rent has to be paid on the basis of the agreement entered into by the parties. A claim made by a landlord for enhancement of rent cannot, thus, be said to be an amount receivable within the meaning of section 23(1) of the Act. A claim or a demand by itself does not come within the purview of the word ―income received or receivable‖ and keeping in view the provisions of section 5 of the Income-tax Act there cannot be any doubt whatsoever such income either received or deemed to be received, accrued or arose or is deemed to accrue or arise to him or accrues or arises in India or accrues or arises outside India during the previous year.

An agreement entered into between the parties in terms whereof the quantum of rent is determined with retrospective effect, in our considered view, does not come within the purview of any of the provisions of section 5 aforementioned.‖

11. At this juncture, we would also like to refer to an order passed by the

Authority for Advance Rulings (AAR) in Jagtar Singh Purewal v.

Commissioner of Income-Tax, Jalandhar (Punjab), 213 ITR 512. That was

also a case where arrears of rent were received in subsequent years and AAR

ruled that these were neither assessable under Section 23 nor assessable as

income from other sources. The AAR had followed the judgment of Calcutta

High Court in Hamilton & Co. Pvt. Ltd. (supra) while coming to this

conclusion. In fact, there may not be any necessity to even take note of these

judgments as amendment made in the Income-tax Act by Finance Bill 2000

with the insertion of Section 25B of the Act would clinch the issue. Section

25B reads as under:-

―25B. Special provision of arrears or rent received.--Where the assessee -

(a) is the owner of any property consisting of any buildings or lands appurtenant thereto which has been let to a tenant; and

(b) has received any amount, by way of arrears of rent from such property, not charged to income- tax for any previous year, the amount so received, after deducting a sum equal to thirty per cent of such amount, shall be deemed to be the income chargeable under the head ‗Income from house property' and accordingly charged to income-tax as the income of that previous year in which such rent is received, whether the assessee is the owner of that property in that year or not.‖

12. No doubt, it has come into effect from 1.4.2001. However in B.M.

Gupta and Sons (HUF) v. Assistant Commissioner of Income-Tax, 299 ITR

410 (Del.), this Court has made it clear that the said provision is clarificatory

in nature. In that case, the question which arose for consideration is posed in

the following terms:-

―Whether the arrears of rent relating to the earlier year(s) could be brought to tax as income from house property of the previous year in which these are actually received?.‖

13. It is held in that case that Section 25B of the Act only clarifies the

position that if any arrears of rent are received in subsequent year, the same

will be taxed in the year of receipt. Once we proceed on this basis, the

obvious conclusion would be that the arrears of rent received in the

assessment year 2000-01 would not relate to the previous years and are to be

taxed in that year. For this reason, as far as these assessment years are

concerned, the Tribunal was right in holding that the arrears of rent received

in the assessment year 2000-01 could not be spread over the previous years,

i.e., 1996-97 to 1999-2000. The question of law, thus, framed is answered in

favour of the assessee and against the Revenue.

14. In view of the aforesaid and having regard to the provisions of Section

25B of the Act, the amount received as arrears of rent could be taxed at the