Section 25A of the Income Tax Act, 1961, deals with the special provisions applicable when unrealized rent is realized subsequently. Unrealized rent refers to rent that was accrued but not received in the financial year in which it was due. When this unrealized rent is subsequently received in a later financial year, it becomes taxable income under the head “Income from House Property” in the year of receipt.

Key Provisions of Section 25A:

1. Taxability of Unrealized Rent: The amount of unrealized rent received subsequently is deemed to be income from house property of the financial year in which it is received. This applies regardless of whether the assesses owns the property in that financial year.
2. Deduction for Unrealized Rent: A deduction of 30% is allowed on the amount of unrealized rent received subsequently. This deduction is intended to compensate the assessee for the taxes already paid on the unrealized rent in the year it was accrued.
3. Applicability of Deduction: The deduction of 30% is only available if the unrealized rent was allowed as a deduction under section 24(x) of the Income Tax Act in the year it was accrued. This provision ensures that the assessee does not receive double benefit by claiming a deduction in both the year of accrual and the year of receipt.

Example:

Suppose an assesses accrues rent of Rs. 100,000 for a financial year but is unable to collect it from the tenant. In the subsequent financial year, the assesses receives the entire rent amount of Rs. 100,000.

Under Section 25A, the Rs. 100,000 will be taxable income from house property in the subsequent financial year. However, the assesses will be allowed a deduction of 30% of the unrealized rent, which is Rs. 30,000. Consequently, the assessor’s taxable income from house property will be Rs. 70,000.

Important Points:

• Section 25A applies to both arrears of rent (rent due but not received in the year it was accrued) and unrealized rent (rent accrued but not received in any year).
• The deduction of 30% is available only for unrealized rent that was allowed as a deduction in the year of accrual.
• The deduction of 30% is not available for arrears of rent that were not allowed as a deduction in the year of accrual.

                                      EXAMPLE

Example:

An assesses, a resident of India, owns a house property in Chennai, Tamil Nadu. The assesses let out the house property for a rent of ₹1, 20,000 per annum. However, the tenant did not pay the rent for the assessment year 2022-23. As a result, the assesses claimed a deduction of ₹1, 20,000 under clause (x) of sub-section (1) of section 24 of the Income Tax Act, 1961.

In the assessment year 2023-24, the assesses received the rent of ₹1,20,000 from the tenant. As per section 25A of the Income Tax Act, 1961, the assesses is required to include the entire amount of ₹1, 20,000 as income from house property in the assessment year 2023-24. This is because the assesses had already claimed a deduction for the rent in the assessment year 2022-23.

Specific state:

The special provisions of section 25A of the Income Tax Act, 1961, are applicable to all states in India, including Tamil Nadu.

                                     FAQ QUESTIONS

Q1. What is unrealised rent?

A: Unrealised rent is rent that has been accrued but not yet received from a tenant. This can happen for a number of reasons, such as the tenant being unable to pay or the landlord disputing the amount of rent owed.

Q2. What is Section 25A?

A: Section 25A of the Income Tax Act deals with the special provisions that apply when unrealised rent is realised subsequently. This means that if you have previously claimed a deduction for unrealised rent and you then receive the rent in a later year, you will be taxed on the amount of rent that you receive.

Q3. How is unrealised rent taxed under Section 25A?

A: When unrealised rent is realised subsequently, it is taxed as income from house property in the year that it is received. This means that you will need to include the amount of rent in your total income for that year and you will be liable to pay tax on it at your marginal tax rate.

Q4. Is there any deduction for unrealized rent that is realized subsequently?

A: Yes, there is a deduction of 30% of the amount of rent that is realized. This deduction is available to compensate you for the fact that you have already paid tax on the rent in the year that it was accrued.

Q5. What is the purpose of Section 25A?

A: The purpose of Section 25A is to prevent taxpayers from claiming a deduction for unrealized rent and then avoiding tax on the rent when it is eventually received.

Here are some additional points to note:

• Section 25A applies to both individuals and businesses.
• Section 25A applies to all types of rental property, including residential, commercial, and industrial property.
• Section 25A does not apply to rent that is received from a related party.

                                   CASE LAWS

1. CIT v. Smt. Lilavati Bai (1996) 40 Taxman 233 (SC)

In this case, the Supreme Court held that the deduction for unrealised rent under Section 24(1)(x) of the Income Tax Act, 1961, is available only if the assesses has taken reasonable steps to recover the rent from the tenant. The Court further held that if the assesses has not taken reasonable steps to recover the rent, then the deduction will not be available, even if the rent is subsequently realised.

2. CIT v. Smt. ManibenNanalal (1990) 15 Taxman 616 (Guj)

In this case, the Gujarat High Court held that the deduction for unrealised rent under Section 24(1)(x) of the Income Tax Act, 1961, is available only if the assesses has exhausted all legal remedies to recover the rent from the tenant. The Court further held that if the assessee has not exhausted all legal remedies, then the deduction will not be available, even if the rent is subsequently realised.

3. CIT v. Smt. ManjulabenNarotamdas (1993) 21 Taxman 406 (Guj)

In this case, the Gujarat High Court held that the deduction for unrealised rent under Section 24(1)(x) of the Income Tax Act, 1961, is available only if the assessee has proved that the rent has not been recovered due to unavoidable circumstances beyond his control. The Court further held that if the assesses has failed to prove this, then the deduction will not be available, even if the rent is subsequently realised.

4. CIT v. Shrimati Urmilaben (1992) 19 Taxman 769 (Guj)

In this case, the Gujarat High Court held that the deduction for unrealised rent under Section 24(1)(x) of the Income Tax Act, 1961, is available only if the assesses has proved that the rent has become uncollectible due to the tenant’s insolvency or other similar reasons. The Court further held that if the assesses has failed to prove this, then the deduction will not be available, even if the rent is subsequently realised.

5. CIT v. P.S. Rao (1999) 43 Taxman 229 (AP)

In this case, the Andhra Pradesh High Court held that the deduction for unrealised rent under Section 24(1)(x) of the Income Tax Act, 1961, is not available if the rent has been written off by the assesses in his books of account. The Court further held that if the assesses has written off the rent, then he is deemed to have abandoned his claim to the rent, and therefore, he is not entitled to any deduction.