G.R. Brothers Vs ITO (ITAT Agra)
Rent Escalation That Never Accrued Cannot Be Taxed: Agra ITAT Deletes ₹12.14 Lakh Addition
The Agra Bench of the Income Tax Appellate Tribunal (ITAT) has deleted an addition of ₹12,14,100 arising from application of a lease agreement’s rent-escalation clause, holding that the enhanced amount never accrued to the assessee and represented only notional income.
In G.R. Brothers v. ITO, Ward 2(2)(1), Firozabad, ITA No. 566/Agr/2026, pronounced on 4 November 2026, the Tribunal accepted that the assessee received annual rent of ₹63 lakh, which it had offered to tax under Section 44AD.
The dispute concerned Assessment Year 2023-24 and reduced rental payments following the COVID-19 disruption.
Background: Commercial Building Leased to Vishal Mega Mart
The assessee, a partnership firm, engaged in construction, running, maintenance and letting out of commercial properties.
It leased its commercial building at Firozabad to Airplaza Retail Holdings Pvt. Ltd., operating as Vishal Mega Mart, for twelve years from 12 December 2017.
The agreement prescribed monthly rent of ₹5,44,500, with a 15% increase every three years.
For AY 2023-24, the assessee filed its return on 29 July 2023, declaring total income of ₹14,21,891.
Its case was selected for scrutiny following a mismatch concern involving amounts reflected in Form 26AS and the rental value disclosed in the return.
Rent Reduced Following COVID-19 Disruption
The assessee explained that the tenant changed its rental-payment arrangement after the pandemic affected retail business.
Through correspondence dated 3 March 2021, the rent was reduced to ₹5,25,000 per month.
According to the assessee, the tenant continued paying that amount without escalation until 31 March 2025. For financial year 2022-23, the resulting annual receipts were ₹63 lakh.
The assessee maintained that these receipts were supported by its bank account, Form 26AS, AIS and the tenant’s confirmation.
It argued that applying the original escalation clause without considering the parties’ subsequent conduct would create income that had not materialised.
Assessing Officer Applied Original Escalation Clause
The Assessing Officer noted that the March 2021 communication specified reduced rent for one year, from February 2021 to February 2022.
It also indicated that rent after that period would be payable under the original agreement.
The officer therefore applied the contractual 15% escalation to the original monthly rent of ₹5,44,500, arriving at ₹6,26,175 per month.
On that basis, annual rent was calculated at ₹75,14,100, against the ₹63 lakh disclosed.
The difference of ₹12,14,100 was added as under-reported business receipts. The officer reasoned that rent was taxable on accrual and that the assessee had not established an effective reduction covering the disputed year.
CIT(A) Confirmed the Addition
The CIT(A), National Faceless Appeal Centre, agreed with the Assessing Officer.
It found that the correspondence supported reduced rent only up to February 2022 and that the assessee had not furnished a further agreement extending the reduction to financial year 2022-23.
The appellate authority consequently upheld the contractual computation and sustained the addition.
The assessee then approached the Tribunal, challenging the treatment of the differential amount as taxable business income.
Assessee Relied on Actual Conduct and Tenant Confirmation
Before the ITAT, the assessee argued that the original escalation clause had not been acted upon during the relevant period.
It relied on the tenant’s consistent payment of ₹5.25 lakh per month, year-wise receipt statements, banking records and an affidavit from a partner.
The assessee also referred to the tenant’s email dated 8 April 2025, confirming that nothing remained outstanding up to 31 March 2025.
According to its submissions, a fresh 10% increase, taking monthly rent to ₹5,77,500, became effective only from 1 April 2025.
It therefore contended that the earlier contractual increase could not mechanically be treated as accrued income.
Tribunal Held Enhanced Rent Was Not Real Income
The Tribunal noted that the Assessing Officer had not disproved the assessee’s statement that it received only ₹5,25,000 per month, without escalation, including during financial year 2022-23.
It accepted, in the circumstances, that the enhanced ₹12,14,100 never accrued.
The undisputed receipts were ₹63 lakh, and the assessee had offered that amount to tax under Section 44AD.
The Tribunal therefore held that the differential computed by applying the original escalation clause was notional rent rather than real income taxable in the assessee’s hands for that year.
Addition Deleted; Appeal Allowed
The ITAT deleted the entire ₹12,14,100 addition and allowed the appeal.
The ruling turns on its finding of non-accrual, supported by the actual payment pattern and surrounding material. It does not establish that every unpaid contractual amount escapes taxation merely because it remains uncollected.
Here, the Tribunal accepted that the additional rent itself had not accrued. The decision accordingly distinguishes an enforceable receipt remaining unpaid from a hypothetical enhancement that, on the facts examined, never became real income.
FULL TEXT OF THE ORDER OF ITAT AGRA
This appeal is directed against the impugned order dated 22.05.2026 passed in appeal No. NFAC/2022-23/10465367 by the ld. Commissioner of Income Tax(Appeals), National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as the “CIT(A)] u/s. 250 of the Income Tax Act, 1961 (hereinafter referred to as the “Act”) for the A.Y. 2023-24, wherein ld. CIT(A) has dismissed assessee’s appeal.
2. Brief facts of the case: The assessee is a firm incorporated on 01.04.2015. During the year, it was engaged in the business of construction, running, maintenance and letting out of commercial properties. The assessee firm filed its return of income on 29.07.2023 declaring total income at Rs.14,21,891/-. The case was picked up for scrutiny under CASS on the following reason:
“(1) Amount credited in Form 26AS is significantly more as compared to the rent/annual lettable value as shown in Return of Income.”
2.1 During the course of assessment proceedings, it emerged that the assessee had let out its commercial building at Firozabad and leased it to M/s. Airplaza Retail Holdings Private Limited (Vishal Mega Mart) for 12 years from 12.12.2017 at monthly rent of Rs.5,44,500/- with 15% escalation every three years. The assessee submitted before the AO that post Covid-19, the lessee unilaterally moved to revenue-linked rent and by letter dated 03.03.2021 reduced the rent to Rs.5,25,000/- per month and paid only Rs.5,25,000/- per month without any escalation upto 31.03.2025. The AO noted that during the year, the assessee received rental receipts of Rs.63,00,000/- (every month’s rent of Rs.5,25,000/-).
The AO upon noting the agreement dated 12.12.2017 entered into between both the parties, noted that the rate of rent was agreed at Rs.33/- per sq. ft. tentatively to be Rs.5,44,500/- per month. The AO also noted that besides this, an increment of rent on the effective date was also agreed at 15% increase on expiry of every three years. Vide notice u/s. 142(1) of the Act dated 11.01.2025 and 23.01.2025, the AO asked the assessee to furnish computation of monthly rent, after accounting for increments and annual lettable value of the property. According to the AO, there was no response from the assessee and in terms of the agreement, the AO proposed to estimate the effective date of leased agreement i.e., 12.12.2017 and accordingly applied the increment of 15% applicable for F.Y. 2022-23. Thus, the AO worked out the monthly rent at Rs.6,26,175/- and according to the AO, the gross receipts for F.Y. 2022-23 and for the assessment year 2023-24 should be Rs.75,14,100/-. Accordingly, the AO issued a show cause notice on 05.02.2025 proposing a variation of Rs.12,14,100/- (Rs.75,14,100 – Rs.63,00,000/-).
2.2 The assessee explained before the AO that all things were good between both the parties (lessor and lessee) until the wide spread of Covid-19 pandemic, which continued for almost two years. The assessee also explained that after the outbreak of Covid 19, the lessee M/s. Airplaza Retail Holdings Private Limited had implemented new policy for payment of rent on the basis of percentage of revenue achieved by them.
It was further submitted that due to low revenue achieved by the retail market, the lessee enforced the rescheduled monthly rent w.e.f.
February, 2021 and the lessee reduced the rent to Rs.5,25,000/- and calculated the said amount as gross receipts of Rs.63,00,000/- u/s. 44AD of the Act and filed its return of income and paid the due taxes accordingly.
2.3 The AO did not accept the above plea of the assessee and upon perusal of the details filed by the assessee, it was noted that an agreement for reduction of rent was agreed on 03.03.2021 and noted that as per the said agreement, the amount payable was Rs.5,25,000/- for the period commencing from Feb. 2021 till Feb. 2022 for one year and post February, 2022, the rent payable shall be as per agreement, which hereby pertains to the F.Y. 2022-23. Further, the assessee also furnished copy of email dated 17.12.2023 stating that since the rent paid by the lessee was at the rate less than the agreement and thus requested the lessee to pay arrears. The AO further noted that in this regard, the assessee had brought agreement on record, which states that rent payable to the assessee had been reduced to Rs.5,25,000/- for F.Y. 2022-23. The AO also noted that notwithstanding the above, the rent is taxable on accrual basis and not on the basis of actual receipts and also noted that no documentary evidence was furnished by the assessee for reduced rental income to be received from the lessee for F.Y. 2022-23.
The AO also noted that the communication trail clearly stated that the rent shall be payable as per agreement post Feb. 2022 and accordingly observed that the contention of the assessee regarding the receipt of reduced rent could not accepted. Accordingly, the AO computed the lease rent based on the details furnished by the assessee to be at Rs.6,26,175/- and determined gross receipts of the assessee for F.Y. 2023-24 at Rs.75,14,100/-. The AO also held that since the expenses have already been claimed by the assessee for its business and accordingly, the assessee had under reported the business receipts of Rs.12,14,100/- and accordingly taxed the same as its business income.
2.4 Aggrieved with the said order, the assessee filed an appeal before the learned CIT(A) who dismissed the appeal of the assessee. The learned CIT(A) agreed with the findings of the AO and the relevant extract of the order of ld. CIT(A) in para 6.1 is reproduced as under:
“6.1. During the course of appellate proceedings the assessee stated that the rent was reduced by the ease and the assessee firm was left with no option to accept the same as there was no one in the market to offer such an amount of rent to the appellant. Further, the assessee during the appellate proceedings failed to furnish the rental agreement held between the assessee-firma and the other party of reducing the rental income. The assessee stated that the copy of the emails held with the party regarding the reduction of rental income was submitted. However, on going through the same it can clearly be seen that the agreement for reduction as per the email trails was agreed on 03.03.2021 which clearly stated that the amount payable shall be Rs.5.25,000/- for the period from February 2021 till February 2022 and after that the rent shall be payable as per the agreement. Further, it can be seen that the assessee during the assessment as well as appellate proceedings failed to submit the agreement which stated that the rent payable to the assessee had been reduced to Rs.5.25,000/- for the F.Y 2022- 23. Further, it can clearly be seen from the emails that it has been mentioned that the rent shall be payable as per the agreement post February 2022. In view of this fact, the AO has correctly estimated the rent received by the assessee at Rs.6,26,175/- and calculated the rent amounting to Rs.75,14,100/-for the F.Y. 2023-24. In view of this fact, I do not find any excuse to take a divergent view from the findings of the AO and therefore confirm the addition made by the AO on account of business income amounting to Rs.12,14,100/-. Accordingly, the Grounds of appeal raised by the assessee vide Nos. 2 to 4 are hereby dismissed.”
3. Aggrieved with the said order, the assessee filed an appeal before us by filing 10 grounds of appeal. Further, during the course of hearing, the assessee filed concise grounds of appeal, which are reproduced as under:
“CONCISE GROUNDS OF APPEAL
1. That the order dated 22.05.2026 passed under section 250 of the Income-tax Act, 1961 (“the Act”) by the learned Commissioner of Income-tax (Appeals), NFAC, Delhi [“the learned CIT(A)”], confirming the assessment order dated 10.03.2025 passed under section 143(3) read with section 144B of the Act, is erroneous, arbitrary and excessive, both on the facts of the case and in law.
2. That on the facts and in the circumstances of the case and in law, the learned CIT(A) has grossly erred both on facts and in law in confirming the addition of Rs. 12,14,100/- made by the learned Assessing Officer on account of alleged under-reporting of business receipts, which addition is founded purely on notional, hypothetical and estimated income computed by mechanically applying the 15% escalation clause of the lease agreement dated 12.12.2017 without appreciating the confirmation of the lease, affidavit of the partner of the appellant firm solely on lessee’s letter dated 03.03.2021. (Original Ground Nos. 2,3,4 & 5) 3. That on the facts and in the circumstances of the case and in law, the learned Authorities below have erred both on facts and in law in ignoring that the actual rent received by the appellant during the year under consideration was only Rs. 63,00,000/- (Rs. 5,25,000/- per month), which stands fully corroborated by Form 26AS, AIS, bank statement of the appellant, and the lessee’s own confirmation and no material to the contrary have been brought on record.
4. That on the facts and in the circumstances of the case and in law, the learned CIT(A) has erred both on facts and in law in confirming the addition without appreciating that the appellant had declared its income under the presumptive taxation scheme of section 44AD of the Act on the basis of actual gross receipts/turnover of Rs. 63,00,000/-.
5. That on the facts and in the circumstances of the case and in law, the learned CIT(A) has erred both on facts and in law in confirming the addition despite the fact that the learned Assessing Officer failed to make any enquiry or seek any verification whatsoever from the lessee, M/s Airplaza Retail Holdings Pvt. Ltd., regarding the actual rent paid or the operation of the escalation clause, and the addition made without any such enquiry and without bringing any clinching or cogent material on record is based on mere surmises, conjectures and presumptions, and deserves to be deleted.
6. That on the facts and in the circumstances of the case and in law, the impugned order of the learned CIT(A) is a non-speaking order passed in violation of the principles of natural justice, inasmuch as the learned CIT(A) has merely reiterated the findings of the learned Assessing Officer without independently considering and adjudicating upon the cogent evidence and material placed on record by the appellant.
7. That the appellant craves leave to add, alter, amend, modify or withdraw any or all of the above grounds of appeal before or at the time of hearing of the appeal.”
4. At the time of hearing, the learned AR filed a synopsis for hearing, which is reproduced as under:
“SYNOPSIS FOR HEARING
ISSUE
Whether the addition of Rs. 12,14,100/- made u/s 143(3) r.w.s. 144B, and confirmed by the Ld. CIT(A), NFAC vide order dated 22.05.2026, by notionally applying the 15% escalation clause of the Lease Agreement dated 12.12.2017 (monthly rent estimated at Rs. 6,26,175/- against actual rent of Rs. 5,25,000/-), is sustainable when the said escalation was admittedly never acted upon and the amount was neither received by, nor ever accrued to, the appellant.
FACTS IN BRIEF
The appellant firm’s sole business is letting out its commercial building at Firozabad, leased to M/s Airplaza Retail Holdings Pvt. Ltd. (“Vishal Mega Mart”) for 12 years from 12.12.2017 at Rs. 5,44,500/- p.m. with 15% escalation every 3 years. (Lease Agreement PB Page Nos. 25-48) Post Covid-19, the lessee unilaterally moved to revenue-linked rent (PB Page No. 55) and, vide letter dated 03.03.2021, reduced rent to Rs. 5,25,000/- p.m. (PB Page No. 59) In consistent conduct, it paid only Rs. 5,25,000/- p.m., without any escalation, up to 31.03.2025;
(F.Y. 2020-21 receipts: Rs. 33,77,195/- (PB Page No. 68); F.Y. 2021-22 receipts: Rs. 56,70,000/- (PB Page No. 69) and F.Y. 2022-23 receipts : Rs. 63,00,000/-) The first escalation (10% of Rs. 5,25,000/- to Rs. 5,77,500/- p.m.) took effect only from 01.04.2025, and the lessee’s e-mail dated 08.04.2025 confirms that nothing was outstanding up to 31.03.2025. (PB Page No. 70) For A.Y. 2023-24 the appellant received actual rent of Rs. 63,00,000/- (corroborated by Form 26AS/AIS, TDS (PB Page No. 72) and bank statement (PB Page Nos. 13-15)) and offered it u/s 44AD, declaring business income of Rs. 14,11,001/-(PB Page No. 81). Reconciliation of rent received and credited in the bank account is attached.
The learned AO, without any enquiry from the lessee, taxed notional rent of Rs. 75,14,100/- (Rs. 6,62,175 pm. (15% escalation on Rs. 5,44,500/- rent as per agreement dated 12.12.2017 less disclosed rental income of Rs. 5,25,000/- pm.) and added Rs. 12,14,100/-as deemed business income.
The Ld. CIT(A) confirmed the addition relying solely on the letter dated 03.03.2021 (PB Page No. 59), without dealing with the uncontroverted Affidavit of the partner dated 28.07.2025 (PB Page Nos. 65-71), the lessee’s confirmation dated 08.04.2025 (PB Page No. 70), the year-wise rent statements and the e-mail trail on record in respect of communication 17.12.2023 (PB Page No. 64).
SUBMISSIONS WITH LEGAL CITATIONS
I. No real income; hypothetical income not taxable. Under section 5 of the Income Tax Act. 1961, only income received or accrued is chargeable. Income embodies a right to receive; a mere claim under a clause never enforced creates no accrual. In E.D. Sassoon & Co. Ltd. v. CIT (1954) 26 ITR 27 (SC), the Hon’ble Supreme Court held that income accrues or arises only when the assessee acquires a legal, enforceable right to receive it, creating a corresponding debt due from another party.
CIT v. Shoorji Vallabhdas & Co. (1962) 46 ITR 144 (SC), Supreme Court held that income-tax is a levy on real income, and hypothetical or book-entry income that never materializes cannot be taxed.
Godhra Electricity Co. Ltd. v. CIT [1997] 225 ITR 746 (SC), The Apex Court ruled that income-tax is a levy on real income. If income does not result or materialize at all, it cannot be taxed merely because bookkeeping entries were made CIT v. Excel Industries Ltd. (2013 358 ITR 295 (SC), the Hon’ble Supreme Court held that income under the Income Tax Act, 1961, does not accrue upon a mere entitlement or bookkeeping entry, but only when a real, enforceable right to receive it arises.
II. Business income head admits no notional rent. The rental receipts are business income (Chennai Properties & Investments Ltd. v. CIT [2015] 373 ITR 673 (SC); Rayala Corporation Pvt. Ltd. v. ACIT [2016] 386 ITR 500 (SC); Karanpura Development Co. Ltd. v. CIT [1962] 44 ITR 362 (SC)), a position accepted by the AO himself. Unlike section 23 (annual lettable value), the PGBP head contains no deeming fiction permitting taxation of rent not received; u/s 44AD, “turnover or gross receipts” means actual receipts. The Revenue having accepted that the source and the head of income cannot notionally deem a business income / turnover.
III. Addition rests on conjecture; no enquiry made. The Authorities below made no verification from the lessee u/s 133(6)/131 despite full details on record. An assessment cannot rest on suspicion, surmise or guesswork. Dhakeswari Cotton Mills Ltd. v. CIT (1954) 26 ITR 775 (SC); Umacharan Shaw & Bros. v. CIT (1959) 37 ITR 271 (SC).
IV. Uncontroverted evidence ignored. The sworn Affidavit of the partner deposing the month-wise rent actually received stands uncontroverted and could not be brushed aside without cross-examination or contrary material. Mehta Parikh & Co. v. CIT (1956) 30 ITR 181 (SC).
The lessee’s confirmation dated 08.04.2025 (no dues up to 31.03.2025) and the parties’ consistent conduct conclusively negate any accrual of the differential of Rs. 12,14,100/-.
V. The Ld. CIT(A) misread the letter dated 03.03.2021. Post- February 2022 the contractual rent was never in fact, paid or escalated, and the subsequent conduct of the parties (reduced rent till 31.03.2025 with a fresh 10% escalation only from 01.04.2025) governs the real income of the year.
PRAYER
It is accordingly prayed that the addition of Rs. 12,14,100/- be deleted, the consequential interest and penalty proceedings be quashed, and the returned income of Rs. 14,21,891/- be accepted.” 5. On the other hand, the learned Sr. DR supported the orders of the authorities below.
6. We have heard both the parties and perused the material on record. In this case, the assessee received a rent of Rs. 63,00,000/- in its bank account from M/s Airplaza retail holding Pvt. Ltd. (Vishal Mega Mart) in respect of letting out its commercial building property at Firozabad to the said party @ Rs 5,25,000/- per month. The AO noted that the said property was let out by the assessee vide agreement dated 12.12.2017 which provided rent @ Rs. 5,44,500/- per month with 15% escalation every 3 years. However, the assessee submitted before the AO that M/s Airplaza retail holding Pvt. Ltd (Vishal Mega Mart) intimated vide letter dated 03.03.2021 (placed at page no. 55 of the paper book) to the assessee referring to the covid-19 lockdown period unilaterally reduced the rent to revenue link and the rent was reduced to Rs. 5,25,000/- vide letter dated 03.03.2021 (placed at page no. 59 of the paper book). It was further submitted that it paid only Rs. 5,25,000/- per month without escalation up to 31.03.2025. This fact that the submission of the assessee that it received only Rs. 5,25,000/- per month from M/s Airplaza retail holding Pvt. Ltd. (Vishal Mega Mart) without escalation up to 31.03.2025 including during the F.Y. 2022-23 has not been proved to be incorrect by the AO. However, the AO noted that in the letter dated 03.03.2021 (placed at page no. 59 of the paper book) it was stated that the reduced rent of Rs. 5,25,000/- per month was payable from February 2021 for a period of one year till February 2022 and post February 2022 the rent shall be payable as per the agreement. The AO also noted that rent was taxable on accrual basis and no documentary evidences was furnished by the assessee seeking arrears from Airplaza retail holding Pvt. Ltd. (Vishal Mega Mart). Accordingly, the AO calculated the rent at Rs. 6,26,175/- with an escalation of 15% of the original rent of Rs. 5,44,500/- as agreed upon in the rent agreement dated 12.12.2017 and calculated the gross rent for the year at Rs. 75,14,100/- and taxed the difference of Rs. 12,14,100/- (Rs. 75,14,100 – 63,00,000/-). However, in the given facts of the case, we agree with the submission of the assessee that the enhanced rent of Rs. 12,14,100/- never accrued to the assessee and it is undisputed that during the year the assessee received a sum of Rs. 63,00,000/- only which has been offered to tax by the assessee u/s 44AD of the Act. Therefore, the enhanced rent of Rs 12,14,100/- is only a notional rent and not the real income which can be brought to tax during the year in the hands of the assessee. Accordingly, the addition of Rs. 12,14,100/- is not sustainable in the case of the assessee and the same is deleted. Therefore, the appeal of the assessee is liable to be allowed.
7. In the result, the appeal of the assessee is allowed.
Order pronounced in the open court on 04 /11 /2026.
