Owner Need Not Pay Tax on Rent If Tenant Defaults, Rules ITAT

November 30, 2020: At a time when several renting contracts are being renegotiated and tenants are defaulting on rent given the pandemic, an Income-tax Appellate Tribunal has ruled that landlords need only pay tax if the rental income is actually received.

The case pertains to a Navi Mumbai based leasing company that is into the business of leasing apartments and commercial properties.

As per the details of the case a tenant did not pay rent to a leasing company for a year and paid partially for the next year. The tenant had however deducted tax—tax deducted at source—on the rent amount.

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“The rental income could be brought to tax only when the taxpayer had actually received or was likely to receive or had certainty of receiving (rent) in the near future. In the given case, the taxpayer had no certainty of receipt of any rent. When the taxpayer reached an agreement to settle the dispute, it was equal to satisfying the fourth condition in the Rule 4 of the rules. Therefore, the addition of rent was unjustified and was to be deleted,” the Mumbai Income Tax Appellate Tribunal ruled.

This ruling lays down the principle that rental income could be brought to tax only when the taxpayer has actually received it or is likely to receive or has certainty of receiving it in the near future; and the fact that tax has been deducted by the tenant cannot be the sole reason for taxability of rent. Taxpayers with similar facts may want to evaluate the impact of this ruling to the facts of their case.

The ruling also comes at a time when several tenants have defaulted on rents due to the Covid pandemic and the lockdown, said industry trackers. Many restaurants, shop owners and even house owners had either renegotiated rents or had defaulted on it during the Covid pandemic.

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