INCOME TAX ACT, 1961

Section 4

Income - Chargeability - Assessee received discounted value of total lease rent payable for 30 years at the time of execution of lease deed - Year of taxability

Assessee-lessor entered into an agreement of lease for lease rent of Rs. 7,500 lakhs excluding security deposit of Rs. 500 lakhs for entire lease period of 30 years in sugar crushing season. Considering the immediate requirement of funds of lessor, i.e. assessee and upon the permission of the Government, lessee agreed to pay to assessee Rs. 1,500 lakhs in one lump sum at the time of execution of the lease agreement which was equivalent to Rs. 4,504.71 lakhs after discounting total lease rent payable for 30 years at the rate of 10 per cent. Balance lease rent, i.e., Rs. 2,995.29 lakhs was payable by lessee to the lessor as per various dates and amounts as per lease deed. Lessee paid Rs. 1,500 lakhs in financial year 2009-10 and deducted tax at source of Rs. 1,04,14,474. Assessee claimed refund of same but as per assessee, amount of Rs. 1,500 lacs was not taxable in relevant year. AO alleged that amount of Rs. 1,500 lacs was taxable in full in relevant year itself. CIT(A) held that amount of Rs. 1,500 lacs was receipt of advance rental and since, assessee was following mercantile system of accounting advance rental could not be brought to tax in relevant year. CIT(A) held that amount of Rs. 1,500 lacs should be taxed in 30 years @ Rs. 50 lacs in each year plus the annual rent receivable as per lease deed. CIT(A) also held that credit of tax deducted at source should be restricted to proportionate amount of income. Held: In principle, Tribunal agreed with CIT(A) that only proportionate amount of Rs. 1500 lacs should be brought to tax in each of these 30 years but regarding the working of CIT(A) that Rs. 50 lacs should be taxed in each of these 30 years, Tribunal did not agree with CIT(A). Tribunal opined that since the total agreed lease rent for 30 years was Rs. 7,500 lacs, amount of lease rent for each year was Rs. 250 lacs. From that amount of lease rent for each year, part amount was receivable in the respective year and the balance amount was received in advance after discounting the same @ 10%. Thus, in each year, the amount to be brought to tax should be the actual amount receivable in the year and the discounted value of the balance amount. In the first year, the actual amount receivable was Rs. 89.86 lacs in addition to the discounted value received in one lump sum. Thus, the discounted value of the balance amount, i.e., Rs. 160.14 lacs (Rs. 250 lacs less Rs. 89.86 lacs) in the first year will be the same amount Rs. 160.14 lacs because, the discounted value of the amount receivable in the present year has to be equal. In this manner, the amount to be brought to tax in the relevant year being the first year was Rs. 250 Lacs. In remaining 29 years, actual amount receivable in each year was noted in the lease deed. The same should be brought to tax in the respective year and in addition to that, the balance amount should be worked out and thereafter, the discounted value thereof should be computed @ 10% and the total of these two amounts, i.e., actual amount receivable in that year plus the discounted value of the balance amount should be brought to tax in each year.

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