Section 23, Rule 4 – Amount of rent, as per leave and license agreement, which is not received cannot be considered as forming part of annual value merely on the ground that the assessee has not taken legal steps to recover the rent or that the licensee has deducted tax at source thereon

12. TS-577-ITAT-2020-(Mum.) Vishwaroop Infotech Pvt. Ltd. vs. ACIT,
LTU A.Y.: 2012-13 Date of order: 6^th November,
2020

Section
23, Rule 4 – Amount of rent, as per leave and license agreement, which is not
received cannot be considered as forming part of annual value merely on the
ground that the assessee has not taken legal steps to recover the rent or that
the licensee has deducted tax at source thereon

FACTS

The assessee gave four
floors of its property at Vashi, Navi Mumbai on leave and license basis to
Spanco Telesystems and Solutions Ltd. Subsequently, the licensee company
informed the assessee about slump sale of its business to Spanco BPO Services
Ltd. and Spanco Respondez BPO Pvt. Ltd. and requested the assessee to
substitute the names of these new companies as licensee in its place w.e.f. 1^st
April, 2008.

Due to financial problems
in the new companies, the new companies stopped paying rent from financial year
2010-11 relevant to assessment year 2011-12. As on 31^st March, 2011,
the total outstanding dues receivable by the assessee from these two companies
amounted to Rs. 15.60 crores.

During the previous year
relevant to the assessment year under consideration, the assessee did not
receive anything from the licensee and therefore did not offer the license fee
to the extent of Rs. 3,85,85,341 for taxation. The licensees had, however,
deducted TDS on this amount and had reflected this amount in the TDS statement
filed by them. While the assessee did not offer the sum of Rs. 3,85,85,341 for
taxation, it did claim credit of TDS to the extent of Rs. 38.58 lakhs.

Of the sum of Rs. 15.60
crores receivable by the assessee from the licensee, the assessee, after a lot
of negotiation and persuasion, managed to get Rs 10.51 crores during the
previous year relevant to the assessment year under consideration. Since the
assessee could not recover rent for the period under consideration, it did not
declare rental income for the assessment year under consideration.

The A.O. brought to tax
this sum of Rs. 3,85,85,341 on the ground that the assessee did not satisfy the
fourth condition of Rule 4, i.e., the assessee has neither furnished any
documentary evidence for instituting legal proceedings against the tenant for
recovery of outstanding rent, nor proved that the institution of legal
proceedings would be useless and that the licensees had deducted TDS on
unrealised rent which TDS is reflected in the ITS Data.

Aggrieved, the assessee
preferred an appeal to the CIT(A) who upheld the action of the A.O. on the
ground that the licensee has deducted TDS on unrealised rent.

Aggrieved, the assessee
preferred an appeal to the Tribunal challenging the addition of unrealised rent
receivable from the licensees. It was also contended that the assessee did not
initiate legal proceedings against the licensees because the licensees were in
possession of the premises which were worth more than Rs. 200 crores. Civil
litigation would have taken decades for the assessee during which period the
assessee would have been deprived of the possession of the premises. Civil
litigation would have also involved huge litigation and opportunity costs. It
was in these circumstances that the assessee agreed with the licensees, on 20^th
November, 2011, to give up all its claims in lieu of possession
of the premises.

HELD

The Tribunal observed that
considering the fact that the assessee has to safeguard its interest and
initiating litigation against the big business house that, too, having
financial problems will be fruitless and it will be at huge cost. It is also in
the interest of the assessee if it could recover the rent, for it will be
beneficial to the assessee first. No one leaves any money unrecovered. The
reasons disclosed by the assessee to close the dispute amicably and recovering
the amount of Rs. 10.51 crores from the company, which was having a financial
problem, itself was a huge task.

The Tribunal held that in
its view the situation in the present case amply displays that institution of
legal proceedings would be useless and the A.O. has failed to understand the
situation and failed to appreciate the settlement reached by the assessee. The
Tribunal observed that the A.O. has also not brought on record whether the
assessee is likely to receive the rent in near future; rather, he accepted the
fact that it is irrecoverable. The Tribunal held that the rental income can be
brought to tax only when the assessee has actually received or is likely to
receive or there is certainty of receiving it in the near future. In the given
case, since the assessee has no certainty of receipt of any rent, as and when
the assessee reaches an agreement to settle the dispute it is equal to
satisfying the fourth condition of Rule 4 of the Income-tax Rules, 1962.

The Tribunal said that the
addition of rent was unjustified and directed the A.O. to delete the addition.

The Tribunal noticed that
the assessee has taken TDS credit to the extent of Rs. 38.58 lakhs. It held
that the A.O. can treat the amount of Rs. 38.58 lakhs as income under the head
`Income from House Property’.