Addition for rental income on accrual basis deleted as court case was pending

Addition for rental income on accrual basis deleted as assessee was pursuing a civil case against the tenant

In a recent judgment, ITAT Agra has deleted addition of rental income holding that it was not justified when the assessee was pursuing a civil case against the tenant, the addition was made by the AO on the ground that assessee followed mercantile system of accounting, the rent receivable was also liable to be taxed

ABCAUS Case Law Citation:
5097 (2026) (04) abacus.in ITAT

The Assessing Officer (AO) on the basis of information available came to know that the assessee company had received large amount of rent which was not disclosed in the ROI. Accordingly, the notice u/s 148 of the Act was issued u/s 148A(d) of the Act. In response, the assessee filed the return of income declaring the original income filed u/s 139(1) of the Act.

During proceedings, the assessee was asked to explain on non-declaration of the rental income. In response, the assessee submitted that it had neither earned nor received the alleged rental income for the relevant Assessment Year.  

It was submitted that the assessee had entered into the rental agreement for providing a temporary parking facility for a period of three years. After the execution of the aforesaid rent agreement, the tenant disputed the amount of rent and never paid any rent to the assessee.

It was stated that the assessee had filed a civil suit in the Court of Hon’ble Civil Judge, for the recovery of the rent. With the above submissions, it was submitted that the assessee was not clear title to receive any rental income from the tenant, therefore it had not declared the same.

The AO rejected the submissions and proceeded to make the addition with the observation that the assessee follows mercantile system of accounting u/s 145(1) of the Act, the income receivable is also liable to be shown in the books.

The AO observed that the agreement as well as email sent by the assessee to the tenant IT WAS clearly stated that the rent was due to the assessee. A similar addition was made in a preceding AY on the same ground. Accordingly, he made the addition to the total income of the assessee.

The CIT(A) sustained the addition by observing that it was not the case of the assessee that it was not following the mercantile system of accounting. As per section 145(1) of the Income-tax Act, when accounts are maintained on the mercantile system, income is taxable on the basis of accrual, ie, when it becomes due, whether or not it is actually received Therefore, if the assessee was following mercantile system, then income is taxable when the right to receive arises, irrespective of actual receipt.

The CIT(A) further observed that the filing of suit by the company before the civil court reaffirmed the view that assessee itself considered the existence of valid and enforceable agreement between the parties. The fact that the tenant had defaulted in payment or that the matter was pending before the Civil Court did not change the position that the income had already accrued to the appellant. Thus, unless there is a fundamental uncertainty, accrual cannot be denied.

The Tribunal observed that the lower authorities proceeded to make the addition on the basis of assessee, being a company, has to follow mercantile system of accounting and, there is a liability created against the debtor, therefore, the assessee should have declared the income.

The Tribunal noted that no doubt there was a rental agreement on record but the assessee had not received any rental income and does not foresee to receive any rent in the near future. The Various courts have held that there has to be certainty of receipt of income.

The Tribunal held that the addition made by the Assessing Officer on presumption of right of receipt was not justified and directed the Assessing Officer to delete the proposed addition and the assessee was directed to declare the same as and when it receives the same as rent in the year of receipt.  

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