K. Shivashankar Bhat, J.@mdashThe following question requires our consideration under the provisions of the Income Tax Act, 1961 :
"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the provisions of rule 4 were applicable to the assessee''s case when there was no finding that the rents were proved to be lost and irrecoverable and the suit was still alive ?"
2. The year of assessment is 1978-79. The assessee claimed that a sum of Rs. 30,000 being the rent was not recoverable from its tenant, Gem Enterprises. This sum of Rs. 30,000 was the rent not paid during the relevant accounting year. The Income Tax Officer noted that a civil suit has been filed by the assessee for the recovery of the arrears of rent and the suit is still pending and, therefore, it was not established that the rents have become unrealisable. The Commissioner of Income Tax (Appeals) affirmed this order. However, the Appellate Tribunal held that the fact that rent due from the tenant has become irrecoverable would, in a majority of cases, be known only in subsequent years and not the year during which the tenant has remained in occupation. For this, the decision of the Supreme Court in
3. The relevant provision is section 24(1)(x) of the Income Tax Act, 1961, read with rule 4 of the Income Tax Rules. In section 24, the deductions to be allowed while computing the income from house property are stated. One such deduction is the amount in respect of rent from property let to a tenant which the assessee cannot realise. This is subject to the rules. Rule 4 governs this provision and reads thus :
"4. Unrealised rent. - Under clause (x) of sub-section (1) of section 24, deduction shall be allowed of such part of income in respect of which tax is payable under the head ''Income from house property'' as is equal to the amount of rent payable but not paid by a tenant of the assessee and so proved to be lost and irrecoverable where -
(a) the tenancy is bona fide;
(b) the defaulting tenant has vacated or steps have been taken to compel him to vacate the property;
(c) the defaulting tenant is not in occupation of any other property of the assessee;
(d) the assessee has taken all reasonable steps to institute legal proceedings for the recovery of the unpaid rent or satisfies the Income Tax Officer that legal proceedings would be useless; and
(e) the annual value of the property to which the unpaid rent relates has been included in the assessed income of the previous year during which that rent was due and tax has been duly paid on such assessed income :
Provided that the deduction to be allowed on this account shall not exceed the income under the head ''Income from house property'' included in the total income as computed without making any deduction under this rule."
4. In the instant case, the following facts are not in dispute :
(a) bona fides of the tenancy;
(b) steps have been taken to have the tenant vacated;
(c) the tenant is not in occupation of any other property of the assessee;
(d) steps have been taken to institute legal proceedings for the recovery of the unpaid rent; and
Similarly, clause (e) of the rule has been satisfied. But the opening clause of rule 4 requires the assessee to prove that the rent has been lost and irrecoverable. When a suit is filed and is still pending, by itself, it cannot be said that the rent claimed is lost and irrecoverable. That will be known only when the decree is made and the decree could not be executed. There may be cases where an assessee will be in a position to show that, in spite of taking legal proceedings, the rent will be incapable of being recovered and is lost to the assessee either because of the poor financial position of the tenant or for any other reason. But the said fact will have to be established as rule 4 clearly envisages it as a condition for permitting the deduction u/s 24(1)(x) of the Act.
5. Rule 4 is similar to a similar provision found under the previous Income Tax Act; it has stood the test of time and its validity has not been challenged before us. Obviously, rule 4 amplifies the situation when the assessee cannot realise the rent as provided in section 24(1)(x) of the Act; for the deductibility of the unrealised rent, it should be incapable of realisation. In enacting this provision, Parliament certainly considered that, normally, the landlord may wait for some more time to take legal steps to realise the rent and an assessee need not venture into a litigation to recover the rents as and when the rents becomes due. The law of limitation provides a three-year period for the filling of a suit for recovery of the arrears of rent.
6. The income from the house property for the purpose of assessment is based on the annual value referred to in section 22 of the Act read with section 23. Section 23(1)(b) states that the annual value in the case of a leased property is the annual rent received or receivable by the owner. Therefore, the rent receivable during the year in question is the basis for the determination of the annual value. Section 23(1)(b) itself contemplates that though the rent is fixed, still itself receipt may be postponed and thereby becomes receivable by the owner. Even though the rent is only receivable but not yet received, it is the basis for charging the tax. Just because an owner fails to receive the rent for whatever reason, the same cannot be excluded, To claim the deduction, it is necessary to establish that the rent is incapable of realisation. That is why section 24(1)(b) and rule 4 use strong language compelling the assessee to establish the non recoverability of the arrears of rent. The decision of the Supreme Court in
7. The assessee claimed deduction of this unrealised rent which could not be deducted in entirety during any particular assessment year. The question was whether the amount that stood in balance could be claimed during the subsequent year and the claim of the assessee was upheld by the Supreme Court. The principle involved pertains to the rule of "carrying forward" of the unrealised rent. In fact, the observation of the Supreme Court at page 182 to the effect that the rent due from the tenant has become irrecoverable would, in a majority of cases, be known only in subsequent years and not in the year during which the tenant has remained in occupation, is a clear indication that the assessee may not be able to claim deduction of the unrealised rent in the year in which the rents accrued because whether the said rent would become irrecoverable would be known only during the subsequent years. It is the above recoverability that has to be established in terms of rule 4.
8. In the instant case, there has been no proof of such recoverability. The suit is still pending. Nowhere has the assessee shown that the tenant has become incapable of satisfying the decree as and when the court makes a decree. Of course, if, subsequently, it is established that the tenant is incapable of satisfying the decree or making the payment and the rents become irrecoverable, the assessee will be entitled to claim the deduction during those years. In these circumstances, we disagree with the opinion of the Appellate Tribunal.
9. The question referred to us is answered in the negative and against the assessee.
