Rent received during Eviction of Tenants on a Property Purchased for Setting Up of Project is not Taxable: ITAT [Read Order]

Hyderabad bench of Income Tax Appellate Tribunal (ITAT) has held that rent received during eviction of tenants on a property purchased for setting up of project is not taxable as ”income from house property” under the provisions of the Income Tax Act, 1961 as the same constitute “capital receipt”.

Assessee in the instant case is a company incorporated for the purpose of development and construction of a commercial complex and filed its returns during the assessment year declared the total income of Rs. 1,66,630. The main issue in this case is whether the rental income received during the period of project completion is taxable or not, and if so under what head.

During the course of assessment proceedings the Assessing Officer (AO) noted that the assessee has credited the work-in-progress account with various amounts totaling to Rs. 24,99,733 and also noticed that the assessee has taken a contrary stand as the rental income from one party was offered as ‘income from house property’ but did not include another party.

The assessee contended that they were purchased the property from another two companies and an individual for setting up an industrial park. These properties were tenanted at the time of registration of the property and the company has spent a lot of money for evicting them. During these proceedings the company received rentals from the tenants. The rentals were collected in course of evicting the tenants; hence they were credited to work-in- progress account as “capital receipts”. But the AO was of the opinion that the rent received should be treated under the head ‘income from other sources’ and accordingly he assessed the amounts under the said head.

The Tribunal bench of Accountant Member B. Ramakotaiah has observed that while getting vacant pocession for completing the project the assessee had taken steps to evict tenants and also paid compensation to them. And the rental receipts received by the assessee during the period have to be set off to the cost of project. So the receipts are to be considered as capital receipts only. Hence it cannot be treated under the head ‘income from other sources’ and the assessee has rightly treated them as ‘capital receipts’ and also set off to work-in-progress.

The bench further relied up on the decisions by the Honorable Supreme Court in similar issues, the bench has declared that rent received during eviction of tenants on a property purchased for setting up of project is not taxable.