Rent received as per option agreement is taxable as other income

Redwood IT Services P. Ltd. Vs ITO (ITAT Mumbai)

The issue under consideration is that whether the rent received as per the option agreement is chargeable to tax under the head ‘ Income from house property‘ or under the head ‘ Income from Other sources‘?

The option agreement was neither a rental agreement nor a lease agreement, but an agreement to lease out premises at a future point of lime, constraining the appellant to lease out to any third party and consequently, the consideration received is chargeable to tax under the head “Income from other sources” till the date, the property is actually leased out consequent to the agreement.

In this legal background, if you examine facts of present case, one has to see whether the AO was right in determining ALV of the property in accordance with provisions of section 23, when the property in question was let out and was under a covenent during the year under consideration. As per the claim of the assesee, the property was not let out, but was under covenent by an option agreement between the parties, as per which the assessee has given an option to the existing tenant of unit No.3 & 4 to take on rent unit No.1 and 2 within a period of 9 months on mutually agreed rate of rent. Further, as per the said agreement, option was valid for a period of 9 months, for which the assessee has received a compensation of Rs.33, 75,000/-. In these facts, we need to examine, whether a particular receipt is taxable as rental income assessable under the head income from house property or compensation assessable under the head income from other sources. As we noted in earlier part of this paragraph, if any income is assessable under the head income from house property, it should be out of property let out or deemed to be let out for the relevant period. In this case, the property is neither let out nor vacant. Therefore, the receipt by way of an option agreement cannot be assessed under the head income from house property. Further, once said receipt is not assessable under the head income from house property, and then obviously, it has to be considered under any other head of income, including income from other sources. In this case, the assessee has offered compensation received in pursuance of option agreement under the head from other sources. As we noted in earlier paragraph, the amount received by the assessee is in the nature of a compensation for not letting out property to any third party for a specified period. The meaning thereby is that by entering into an option agreement, the assessee had renounced its right to market unit No.1 and 2 for a period of 9 months from the date of the option agreement and, because of covenent by way of an option agreement with the party and hence, any amount received in pursuance of said agreement is in the nature of compensation which is assessable under the head income from other sources as rightly considered by the assessee. Therefore, we are of the considered view that the Ld. AO, as well as the ld.CIT (A) was incorrect in coming to the conclusion that the property is deemed to be let out and income from said property needs to be computed u/s 22 of the I.T.Act, 1961. Hence, we direct the Ld. AO to delete additions made towards income from house property as against, the income offered by the assessee under the head income from other sources. In the result, appeal filed by the assessee is allowed.

FULL TEXT OF THE ITAT JUDGEMENT

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