Taxability of Advance rent received

This query is : Resolved

Nirmit Desai (Querist)
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02 July 2010 A client of mine has received rent for the next FY 2010-11 also.On the basis of accrual concept,the same has been taxed in this financial year i.e., FY 2009-10. I would like to noe whether the treatment given by me is right? also wht will be the effect of TDS deducted on the above received advance rent?will that be claimed in the current year or the next FY?....kindly give reference or supportings to the ans if possible

Thank you.

Aditya Maheshwari

Aditya Maheshwari (Expert)
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02 July 2010 Not correct treatment. Accrual concept states recognise the income of the period not of current year also. And with regards TDS claim there is circular for advance rent reproduced here.

Problems faced by assessees in getting due credit for tax deducted at source - Number of representations have been received by the Board pointing out the problems being faced by the assessees in getting due credit for tax deducted at source under the provisions of section 199 in respect of tax deducted in terms of section 194-I of the Act. Such problems in getting due credit for tax deducted at source mainly relate to the following situations :

(a) Tax is deducted at source under the provisions of section 194-I of the Act on advance rent pertaining to more than one financial year to be adjusted against future rent.

(b) Subsequent to the deduction of tax at source on advance rent pertaining to one or more financial years :

(i) Rent agreement gets terminated/cancelled resulting into refund of balance amount of advance rent to the tenant.

(ii) Rented property is transferred by way of sale, lease, gift, etc., with tenant in occupation or otherwise resulting into refund of balance amount of advance rent to the transferee or the tenant, as the case may be.

In the situation mentioned at (a) in para above, difficulty in getting due credit for tax deducted arises because the entire amount of advance rent does not accrue to the assessees as income in one financial year since the income from the property is taxed on the basis of annual letting value whereas the tax is deducted at source on the entire amount of advance rent pertaining to more than one financial year. Therefore, credit for entire amount of tax deducted at source is not allowed in terms of section 199 of the Act because the credit is to be given for the assessment year for which such income is assessable. Thus, the assessees do not get credit for the entire amount of tax deducted at source in the first assessment year, in which part of the advance rent is offered as rental income, on the basis of the certificate furnished under section 203 of the Act. Further there is a difficulty in claiming the credit in the remaining assessment years to which balance of advance rent relates in the absence of the certificate for tax deducted at source for these years.

In the situation as at (b) mentioned above, difficulty in getting due credit for tax deducted at source arises because rental income ceases to accrue to the assessees on account of termination/cancellation of rent agreement or transfer of the rented property subsequent to the deduction of tax at source on advance rent pertaining to one or more financial years. The credit is not given in the hands of the assessees in whose names certificate for tax deduction at source stands because there is no relatable rental income and, further credit for tax is not allowed to any person other than the person in whose name certificate for tax deducted at source has been issued. Thus, in such cases, even though tax has been deducted at source and paid to the Government, due credit for such tax deducted is not allowed.

The matter has been considered by the Board and it has been decided that credit for tax deducted at source shall be allowed to the assessees on whose behalf such tax has been deducted and to whom certificate for tax deducted at source has been furnished under section 203 as under :

(i) In such cases as referred to in (a) above where advance rent is spread over more than one financial year and tax is deducted thereon, credit shall be allowed in the same proportion in which such income is offered for taxation for different assessment years based on the single certificate furnished for tax so deducted on the entire advance rent.

(ii) In respect of the situation as at (b), credit for the entire balance of tax deducted at source, which has not been given credit so far, shall be allowed in the assessment year relevant to the financial year during which the rent agreement gets terminated/cancelled or rented property is transferred and balance of advance rent is refunded to the transferee or the tenant, as the case may be.—Circular : No. 5/2001, dated 2-3-2001.