In the ITAT, Mumbai Bench, ‘A’

Additional Commissioner of Income-tax, Special Range 3, Mumbai

v.

Rama Leasing Co. (P.) Ltd.

G.E. Veerabhadrappa, Vice President

and Ms. Sushma Chowla, Judicial Member

IT Appeal No. 1891 (Mum.) of 2001

c.o. no. 173 (Mum.) of 2001

[Assessment year : 1997-98]

October 29, 2007

Section 22, read with sections 23 and 56, of the Income-tax Act, 1961 - Income from house property - Chargeable as - Assessment year 1997-98 - Premises owned by assessee-company was leased out to company ‘I’ for a period of three years - Lessee desired early termination of lease agreement and as per deed of surrender paid certain compensation on account of early termination of lease - Whether compensation received by assessee though related to property would not be exigible to tax as such income could not be termed as annual value of property under section 23 - Held, yes - Whether said receipts would also not be taxed as ‘income from other sources’, as it fell within another head of income i.e., ‘income from house property’ - Held, yes - Whether therefore, in view of decision of Tribunal Pune Bench in Datar & Co. v. ITO [IT Appeal No. 1134 (Pune) 1991 dated 25-6-1999] compensation received by assessee on premature termination of lease agreement was not chargeable to tax though it was a revenue receipt - Held, yes

Facts

The assessee-company, was engaged in the business of finance and investment. During the assessment year 1997-98 the assessee had also started the business of developing property. It had let out its office premises to a company ‘I’ vide a lease agreement dated 14-12-1994. The lease of the said premises as per lease agreement was for a period of three years but the lessee after a period of two years desired to terminate the lease agreement. Thus, the lease was terminated with effect from 1-9-1996 and in terms of deed of surrender executed between the parties, the assessee received certain amount of compensation and termination of service charges for early termination of lease agreement. In addition the assessee also received the arrears of rent for the unexpired period upto 1-9-1996 and same were offered for taxation. The assessee also entered into a new lease agreement with a company on 6-9-1996 in respect of the said premises. The assessee claimed that the compensation received an account of early termination of lease of house property, from Company ‘I’ was not taxable as the same was not chargeable under any head of income. The Assessing Officer relying on the judgment of Supreme Court in Emil Webber v. CIT [1993] 200 ITR 483/67 Taxman 532 observed that the receipt is not only value of the property but compensation for premature termination of contract and so the character of receipt was not from property but of compensation for breach of contract; these receipts flowed from the original lease agreement and subsequent surrender deed. He further observed that the compensation received by the assessee was a revenue receipt and the character of receipt was not in nature of income from house property but was chargeable under the head income from other sources. On appeal, the Commissioner (Appeals) held that the income in the instant case was received in respect of the house property which was owned by the assessee and the compensation received by the assessee was in view of the future rent and, therefore, the receipt retain the character of being derived from house property but as such income could not be termed as ‘annual value’ of the property in terms of section 23 it would not be taxable under the head income from house property. He further held that such receipts would also not be taxed as income from other source in view of fact that it fell within another head of income i.e. income from house property and, therefore, the said income did not fall within the computation provision and was not taxable in the hands of the assessee.

On revenue’s appeal :

Held

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 receipts relatable to rent of the property are includible in the hands of the owner of the property under the head income from house property. [Para 13]

The question for consideration in the instant case was as to whether the compensation received by the assessee on prermination of a lease agreement would be includible in the hands of the assessee or would not be exigible to tax being capital receipt. [Para 14]

The Supreme Court in the case of   B.C. Srinivasa Setty [1981] 5 Taxman 1/128 ITR 294 (SC) has held that the charging section and the computation provisions together constitute an integrated code. When there is a case to which the computation provisions cannot apply at all, it is evident that such a case was not intended to fall within the charging section. [Para 19]

In the instant case the assessee had received the compensation for surrender of lease of property of which he was the owner. The ownership, rights bring the receipts from such property under the ambit of specific head of income on account of property. It is an established rule of law that once the receipt is taxable under a specific head of income the same has to be included under such head of income and the same cannot be brought to tax under the residuary head of income. The assessee in addition to arrears of rent had received compensation for pre-mature surrender of lease by the lessee. The compensation was relatable to pre-mature vacation of the property. The lessor  i.e., assessee had exercised the option of releasing the lessee before the determination of lease agreement subject to the condition of payment of compensation in lieu thereof. The assessee had received the rent upto 1-9-1996 and, thereafter received rent from the new tenant. The annual value of the property which was includible as income under the head income from property was the rent received by the assessee from company ‘I’ upto 1-9-1996 and from company ‘M’ with effect from 6-9-1996. The compensation received by the assessee though related to the property was not exigible to tax in view of the definition of annual value of the property under section 23. Such receipts were also not includible as income from other source in view of the fact that it fell within another head of income, i.e. income from house property. Once a receipt falls under a specific head of income the same cannot be included under residuary head. [Para 21]

The Pune Bench of the Tribunal in Datar & Co. v. ITO [IT Appeal No. 1134 (Pune) 1991 dated 25-6-1999] has held that if any receipt does not fall under any specific head, then it has to be assessed under residuary head “income from other sources”, but if any receipt falls under a specific head, but same cannot be computed under that head, then it cannot be assessed as income of assessee under any other head and would escape taxation. [Para 22]

In view of the ratio laid down by Pune Bench of Tribunal in Dattar & Co.’s case (supra) it was to be held that the compensation received by assessee on premature termination of lease agreement was not chargeable to tax though it was a revenue receipt. Thus, the order of the Commissioner (Appeals) in holding that the said compensation amount was a non taxable receipt in the hands of the assessee, was to be confirmed. [Para 24]

Case review

Datar & Co. v. ITO [IT Appeal No. 1134; (Pune 1991 dated 25-6-1999] (para 24) followed.

Cases referred to

Nalinikant Ambalal Mody v. S.A.L. Narayan Row, CIT [1966] 61 ITR 428 (SC) (para 4), CIT v. Smt. T.P. Sidhwa [1981] 6 Taxman 91/[1982] 133 ITR 840 (Bom.) (para 4), Emil Webber v. CIT [1993] 200 ITR 483/67 Taxman 532 (SC) (para 5), CIT v. B.C. Srinivasa Setty [1981] 5 Taxman 1/128 ITR 294 (SC) (para 8), Datar & Co. v. ITO [IT Appeal No.1 134 (Pune 1991 dated 25-6-1999] (para 8), Shriyans Prasad Jain v. ITO [1993] 204 ITR 616/70 Taxman 290 (SC) (para 8) and P. Arunachalam v. CIT [2000] 241 ITR 827 (Mad.) (para 8).

Shishir Srivastava for the Appellant. Ms. J.D. Mistry for the Respondent.