Waiver of rent payable by tenant amounts to application of income and taxable- ITAT

Waiver of rent payable by tenant amounts to application of income and therefore taxable. It cannot be construed as overriding title – ITAT

ABCAUS Case Law Citation:
ABCAUS 3137 (2019) (09) ITAT

The assessee had appealed against the order of the Commissioner of Income Tax (Appeals) in confirming the taxation of rent waived.

The assessee was a Private Limited Company, which had let out a vacant industrial shed to its subsidiary company for a rent. Howver, the assessee did not offer the rental income to tax.

Before the Assessing Officer (AO), the assessee explained that the subsidiary company to whom the premises was let out was incurring  persistent losses. Therefore, the rent could not be recovered.

It was explained that since the assessee could not recover the rent from the subsidiary company, it was decided to waive the rent by a resolution and even the rent relatable to earlier period was transferred to share capital account so that the rent payable by the subsidiary company may be treated as capital contribution by the assessee.

However the AO was not convinced by the submission of the assessee and brought to tax the amount of rent. CIT(A) confirmed the addition.

The Tribunal noted that a factory premises was let out to the subsidiary company / joint venture company. It was not in dispute that the subsidiary company / joint venture company was persistently incurring losses. Therefore, the assessee could not recover the rent from the said company.

The Tribunal also noted that the assessee had to pay service tax on the said rent to the Government. The earlier period rent was transferred to the capital account and it was treated as capital contribution by the assessee.

The question for consideration before the ITAT was when the tenant could not pay the rent or the assessee could not recover the rent, can landlord waive the rent payable by the tenant? And whether such rent is assessable in the hands of the assessee or not?

The Tribunal opined that when the assessee let out the property for payment of rent, merely because the tenant which happened to be subsidiary company / joint venture company was incurring persistent loss and the rent was waived, could not be a reason not to tax the amount due from tenant.

Waiver of rent payable by tenant amounts to application of income

The Tribunal explained that in other words, the rent payable by the tenant by waiver would amount to application of income and it could not be construed as overriding title. It was passed on to the tenant.

The Tribunal pointed out that on accrual basis, the rental income was accrued to the assessee. It was upto the assessee either to treat as capital contribution or otherwise. However, the assessee was liable to pay income-tax on such receipt /accruals.

Accordingly, the Tribunal confirmed the order of the lower authority and the appeal filed by the assessee was dismissed.

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