Retained Amount from Security Deposit of leased housing property due to cancellation of Lease Deed is assessable under head ‘Income from House Property’: ITAT [Read Order]

The Income Tax Appellate Tribunal (ITAT) Chennai bench held that the retained amount from security deposit of leased housing property due to the cancellation of lease deed is assessable under the head ‘Income from House Property”.

Assessee, GImpex House, is a resident corporate who is engaged in the manufacturing/ export of mineral ores.

Assessee filed the appeal to determine the nature of amount received by the assessee on termination of certain lease agreement.

Assessee leased a house property, M/s Nilgiri Diary Farm Ltd. and received advance amount of Rs.700 Lacs.  Subsequently, the deed was cancelled and the assessee entered into lease cancellation deed as. Assessee refunded the advance of Rs.150 Lacs.  After adjusting lease rent, balance amount of Rs.514.94 Lacs was forfeited out of security deposit / advance amount.

AO held that the assessee was the owner and not tenant. The termination of a contract does not fall under the scope of Sec. 55(2) of the Income Tax Act.  The assessee offered the income under Long Term Capital Gain and said the amount was treated as ‘Income from other sources’ and taxed at normal rates.

Aggrieved by the order, the assessee filed an appeal  before the commissioner of Income Tax (Appeals) [CIT(A)], who dismissed the same.

The CIT(A) observed that amount was waived-off by the assessee and there was no forfeiture or extinguishment of any right in the property. The amount waived by one party would be the income of the other party. The amount waived should only be considered as ‘income from other sources’.

Thereafter the assessee filed another appeal before the tribunal.

Before the bench, D. Anand, counsel for the assessee submitted that the there was extinguishment of right and therefore rightly offered as long term capital gains.

R. Mohan Reddy, Counsel for the revenue,  supported the decision of the lower authorities.

The tribunal during the proceedings, observed that the amount was received as security deposit  from cancellation of deed and a part of the same had been forfeited by the assessee. The security deposit had changed its character upon forfeiture and the same was observed to be clearly an income of the assessee.

Further right to rent is not transferred by the assessee to anyone. Neither this right has been extinguished in any manner. Thus the retained amount could not be assessed as capital gains, the bench further noted.

After considering the facts submitted by both parties, the two member bench of Manoj Kumar Aggarwal (Accountant Member) and  Manomohan Das (Judicial Member) held that retained amount from security deposit of leased housing property due to the cancellation of lease deed is assessable under the head ‘Income from House Property”.

To Read the full text of the Order CLICK HERE

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