Section 56 read with sections 22 and 23 – Compensation received under an agreement entered into with a tenant granting him an option to take on lease other units which belonged to the assessee is taxable under the head Income from Other Sources

10.
[2020] 116 taxmann.com 223 Redwood
IT Services (P) Ltd. vs. ITO(10)(2)(2), (Mum.) ITA No.
1309(Mum) 2018 A.Y.:
2011-12 Date of
order: 28^th February, 2020

Section 56 read with sections 22 and 23 –
Compensation received under an agreement entered into with a tenant granting
him an option to take on lease other units which belonged to the assessee is
taxable under the head Income from Other Sources

FACTS

The assessee acquired an immovable property which was divided into four
units of which two units, viz. Unit Nos. 3 and 4, were let out. In terms of the
agreement entered into by the assessee with the tenant, the assessee had
granted an option to the tenant to take the other two units, viz. Units 1 and 2,
on lease. Under the option agreement, the assessee agreed to lease the property
in future and restrained itself from leasing it to any other person during the
period for which the option was granted. In consideration of such a covenant,
the assessee received from the tenant a compensation of Rs. 33,75,000 which was
offered by him under the head Income from Other Sources.

The A.O. considered
the two units in respect of which option was granted to be deemed let-out units
and charged tax on their market rent, and after allowing the standard deduction
taxed a sum of Rs. 76,64,328 under the head ‘Income from House Property’.

Aggrieved, the
assessee preferred an appeal to the CIT(A) who confirmed the action of the A.O.

HELD

The Tribunal held that for income to be assessable under the head Income
from House Property, it should be out of the property let out or deemed to be
let out for the relevant period. In this case the property is neither let out
nor vacant. The compensation cannot, therefore, be assessed under the head
Income from House Property.

The amount received
by the assessee is in the nature of compensation for not letting out property
to any third party for a specified period. The meaning thereof is that by
entering into an option agreement, the assessee had renounced its right to let
out Unit Nos. 1 and 2 for a period of nine months from the date of the option
agreement and any amount received in pursuance of the said agreement is in the
nature of compensation which is assessable under the head Income from Other
Sources.

The Tribunal held
that the A.O. as well as the CIT(A) were incorrect in coming to the conclusion
that the property is deemed to be let out and income from the said property
needs to be computed u/s 22 of the Act.

The Tribunal directed
the A.O. to delete the additions made towards Income from House Property.