Rental income cannot be derived from interest on loans secured by mortgages on real estate

Fact and issue of the case

This appeal filed by the assessee is directed against the order dated 28.02.2022 of the learned CIT (A)11 Hyderabad relating to A.Y.2009-10.

Facts of the case, in brief, are that the assessee is an individual and derives income from investment in real estate and share marketing. He had filed his original return of income on 31.12.2009 admitting total income of Rs.83,95,860/- and agricultural income of Rs.9,28,856/-. A search and seizure operation u/s 132 of the I.T. Act was conducted at the residential and business premises of the assessee on 17.09.2008. Notice u/s 153A of the Act was issued and served on the assessee. However, no return of income in response to such notice was filed. The Assessing Officer completed the assessment u/s 153A r.w.s. 143(3) on 30.12.2010 determining the total income of the assessee a Rs.2,09,52,528/- wherein apart from other additions he made addition of Rs.34,14,900/- towards house rent and treated the agricultural income of Rs.9,28,856/- as income from other sources.

In appeal, the learned CIT (A) confirmed the additions made by the Assessing Officer.

Aggrieved with such order of the CIT (A) the assessee is in appeal before the Tribunal by raising the following grounds:

“1. The order of the learned CIT (A) is erroneous to the extent is prejudicial to the appellant.

2. The learned CIT (A) erred in confirming the addition made by the Assessing Officer towards agricultural income of Rs.9,28,856/-.

3. The learned CIT (A) erred in confirming the addition towards cash received from rental income of Rs.10,24,470/-.

4. Any other ground/grounds that may be urged at the time of hearing”.

In appeal, the learned CIT (A) after obtaining a remand report from the Assessing Officer and rejoinder of the assessee to such remand report upheld the action of the Assessing Officer by observing as under:-

“With regard to addition of Rs.34,14,900/ – as ‘income from other sources’ being rent received in cash, during the course of assessment proceedings, the AO noticed that the interest earned by the appellant which was not accounted for in the books was introduced in the books under the head rental income in the names of some persons and as the appellant was not able to prove the existences of such persons, the AO had treated the portion of cash received in the form of rent as income from other source.

During the course of appeal proceedings, the appellant furnished the relevant books of accounts and ledger statements. After examining the same, the Assessing Officer, in the remand report, stated that the same were accounted for in the books of accounts and no adverse conclusion was given.

The Assessing Officer for various years has noted that the appellant has accounted for Rent received in its books of accounts. There are 2 types of rents broadly classified by the Assessing Officer on examination of books during the Search and subsequently that a particular set of rent is received by the appellant for its properties and other rent which is received in cash. The classification of the rents so received for various years under consideration is as under as per the assessment order:

A.Y.	Gross rent as per ROI (Rs.)	Receipts treated as other sources (Rs.)	Balance Receipts treated as rent (Rs.)
2003-04	174300	0	174300
2004-05	226785	8400	218385
2005-06	343090	60000	283090
2006-07	657996	277000	380996
2007-08	1750600	1563500	187100
2008-09	1892717	1700700	192017
2009-10	3110730	3414900	0
Total		70,24,500	19,20,173

Observation by the tribunal

The tribunal has heard the rival arguments made by both sides, perused the orders of the Assessing Officer and the CIT (A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the Assessing Officer in the instant case made addition of Rs.34,14,900/- by treating the same as “income from other sources” as against rental income shown by the assessee on the ground that the assessee could not prove the existence of the persons against whom he has shown the cash receipt as rental income as those persons were not in existence and were not traceable. It is the case of the Assessing Officer that the assessee had given certain amount os loan against mortgage of property and such interest income has to be treated as income from other sources and not rental income. We find the learned CIT (A) sustained the addition the reasons of which are already reproduced in the preceding paragraphs. It is the submission of the learned Counsel for the assessee that since the properties were mortgaged to the assessee for giving loan, therefore, the properties have become the property of the assessee and merely because the loanees were staying in their respective houses, such amount given by them as interest cannot be treated as income from other sources and has to be treated as rental income in the hands of the assessee.

We do not find any force in the above argument of the learned Counsel for the assessee. It is an admitted fact that the assessee was giving loan against mortgage of the property and such interest income received towards loan extended against mortgage of properties cannot partake the character of rental income. We find the learned CIT (A) while upholding the addition has also given a finding that since the assessee has already offered the rental income under the head income from house property as per remand report, the addition should be limited to the disallowance u/s 24(b) of the Act only which in our opinion is just and proper and needs no interference. Accordingly, ground of appeal No.3 by the assessee is dismissed.

In the result, appeal filed by the assessee is partly allowed.

Order pronounced in the Open Court on 27th March, 2023.