Supposedly in a lease what will happen if the lessee does not vacate the property for some reason and still retains possession and continues to pay rent to the lessor bereft an agreement? What will be the tax implications in such a scenario? Let’s visit Sec. 116 of the Transfer of property act, 1882 (TOP) talks of a concept called “holding over” to understand this better. The section reads as under -

Sec. 116 of TOP act, 1882

Sec. 116. Effect of holding over.—If a lessee or under-lessee of property remains in possession thereof after the determination of the lease granted to the lessee, and the lessor or his legal representative accepts rent from the lessee or under-lessee, or otherwise assents to his continuing in possession, the lease is, in the absence of an agreement to the contrary, renewed from year to year, or from month to month, according to the purpose for which the property is leased, as specified in section 106.

Illustrations

(a) A lets a house to B for five years. B underlets the house to C at a monthly rent of Rs. 100. The five years expire, but C continues in possession of the house and pays the rent to A. C’s lease is renewed from month to month.

(b) A lets a farm to B for the life of C. C dies, but B continues in possession with A’s assent. B’s lease is renewed from year to year. COMMENTS Tenant at sufferance A person who is a tenant at sufferance has no estate or interest in the leasehold property. A tenant holding after the expiry of his term is a tenant at sufferance, which is a term useful to distinguish a possession rightful in its inception but wrongful in its continuance from a trespass which is wrongful both in its inception and in its continuance. A co-owner can maintain a suit by himself in ejectment of a trespasser or a tenant at sufferance; B. Valsala v. SundramNadarBhaskaran, AIR 1994 Ker 164.

Effect

The effect of the above section means that the lessee is a tenant in sufferance and he continues to occupy the property more so like a trespasser. How will the income be taxed in such a case is the discussion arising out of this section.

A recent case of Kolkata ITAT in the case of The Cardboard Material & Printing Co. Private Limited v ITO [TS-5278-ITAT-2016(KOLKATA)-O] I.T.A. No. 1101/KOL/ 2015/AY 2006-07/ITAT Kolkata/Dated 18th March 2016 had to consider the above provisions while deciding the case, which is discussed here in.

Facts

Assessee private limited company received rental income by sub-leasing a property.

The property was leased from one M/s. Martin Burns for 40 years.

Original owner of the property was one PetrosHyrapict Crete whose whereabouts were not known.

The 40 year tenure expired in 1980. A suit of eviction by Martin Burns for assessee’s disputed occupation post 1980 was dismissed by the high court.

Since the topic was sub judice in dispute on the extension of the lease tenure the assessee paid the rent for the lease post lease period to rent controller.

M/s. Martin Burns themselves had also lost their rights as a lessor due to lapse of time.

Legal rights of the parties all fell outside limitation law as well.

Since assessee earned rental income from sub-lease he had declared it as business income and claimed expenses as well on the same.

AO show caused as to why the income should not be treated as income from house property, assessee pleaded that he was not the owner of the property and was neither a tenant nor a sub-lessee post 1980.

Above was not accepted by the AO and thus held it as house property income also upheld by the CIT (A). The expenses were also disallowed in the re-characterization of income and instead allowed the statutory deductionapplicable for a house property. The contention of the AO was that assessee was the beneficial/de facto owner of the property or more so a deemed to be owner by virtue of its "adverse possession" of the property.

Aggrieved by the house property reading the assessee appealed to ITAT.

Decision

The ITAT discussed briefly what is possession and adverse possession as under – 

• Every possession is permissive unless proved to the contrary.
• Adverse possession is also possession of course due to happening of certain events.
• Adverse possession in one sense also goes on a presumption that the owner has abandoned the property to the adverse possessor.
• In the case of S.M. Karim v. Mst .BibiSakina AIR 1964 SC 1254 the Supreme Court has laid down thatthe adverse possession must be adequate in continuity, in publicity and extent and a plea isrequired at the least to show when possession becomes adverse.

But in this case there is no adverse possession but it was possession by holding over. Since in the Transfer of property act, 1882 in the case of holding over the person holding over neither is an owner, nor a lessee but is in a situation called tenant by sufferance, more so a role of a mere trespasser, so the income should be assessed as income from business. Thus held the ITAT applying the above provision from TOP act, 1882.

In the words of the ITAT –

“The provisions of section 116 of the Transfer of Property Act, 1882 deal with the effect of "holding over", which means to retain possession as tenant of property leased, after the end of the term. A distinction is drawn between a tenant continuing in possession after the determination of the lease, without the consent of the landlord, and a tenant doing so with the landlord's consent. The former situation as is obtained in the present case is called a tenant by sufferance, who is no better than a mere trespasser and keeping in view this legal position, I am of the view that the assessee-company in the present case, who is no better than a mere trespasser, cannot be treated as a deemed owner in view of the provisions of section 27(iiib) read with section 269UA(f), which are clearly not applicable.”

In this case the assessee had let out the sub-lease as a part of his normal business which is why it was assessed as a business income, in any other case it might have been income from other sources.

The above decision and the facts are one off which is why discussing it makes a good read.