2007 (5) TMI 348 - AT - Income Tax

Computation of Income from house property - Determination of annual letting value (ALV) - scope of clause ( c ) of sub-section 23(1) - Deemed rental income - vacant property - Interpretation of the words property is let - whether actual letting out is must for a property to fall within the purview of this clause ( c ) by satisfying the requirement of words property is let present in this clause - CIT(A) restricted the ALV to 8.5 per cent of the investment cost - HELD THAT - Section 23(1) was amended and substituted by new provision with effect from 1-4-2002 by Finance Act, 2001. The impugned assessment year is 2003-04 and therefore the amended section of 23 is applicable to the present case and the amended section 23(1) contains three clauses dealing with different situations to compute the annual value of any property. These three clauses are independent clauses and deals three type of situations. Having applied these three situations to the facts of the case, we are of the view that assessee s case falls within third situation and annual value of the property is to be computed as per sub-clause ( c ) of the Act because the property remained vacant for the whole year. We feel that the words property is let are used in this clause to take out those properties from the ambit of the clause in which property are held by the owner for self-occupation i.e., self-occupied property (i.e. SOP) because even income on account of SOP, excluding one such SOP of which annual value is to be adopted at nil , is also to be computed under this head as per clause ( a ) of section 23(1) if we see the combined reading of sub-sections (2) and (4) of section 23. We find from the memorandum of association that the assessee is entitled to purchase the property for its let out and to earn rental income. Copies of resolutions of Board of Directors are also placed before us in both the cases where from it is evident that one of the Director was authorized to take necessary steps to let out the property in question. They have also fixed the monthly rent and the security deposits of both the properties. Consequent to the resolutions, the assessee has approached to various Estate and Finance Consultants for letting out the properties and the request was also duly acknowledged by the Estate and Finance Consultants. The series of correspondence are placed before us to demonstrate the efforts made by the assessee for letting out of its properties, but, unfortunately during the year under appeal, assessee could not get the suitable tenant on account of hefty rent and security deposits. The correspondence exchanged between the assessee and the different property consultants are placed on record. From this correspondence, it is, noticed that the assessee has approached various property consultants to let out its properties and during the year, it could not get a suitable tenant. From a careful perusal of these documents, it has become evident that during the whole year, assessee made its continuous efforts to let out the properties and under these circumstances, this property can be called to be let out property in terms of our observations. Since the property has been held to be let out property, its annual letting value can only be worked out as per sub-clause ( c ) of section 23(1) of the I.T. Act and according to this clause, the rent received or receivable during the year is NIL and as such the same be taken as the annual value of the property in order to compute the income from house property. We, therefore, order accordingly. In the result, appeals of the assessee are allowed.

Summary

Issues Involved:
1. Determination of Annual Letting Value (ALV) of a property that remained vacant for the entire year.
2. Applicability of section 23(1)(c) of the Income Tax Act for computing ALV.
3. Interpretation of the term "property is let" under section 23(1)(c).

Issue-wise Detailed Analysis:

1. Determination of Annual Letting Value (ALV):
The primary issue in these appeals is the determination of the ALV of a property that remained vacant for the entire year. The Assessing Officer (AO) initially computed the ALV based on the standard rent at 8.5% of the property's cost, resulting in an ALV of Rs. 42,087. However, the AO adopted an ALV of Rs. 53,25,000 based on the rent received by a sister concern for a similar property. The CIT(A) later reduced the ALV to 8.5% of the investment cost, amounting to Rs. 42,03,062. The assessee contested this determination, arguing that the ALV should be computed as per section 23(1)(c) of the Income Tax Act, which would result in an ALV of NIL since the property remained vacant for the entire year.

2. Applicability of Section 23(1)(c):
The assessee argued that the property remained vacant for the entire year, and thus, the ALV should be computed under section 23(1)(c) of the Income Tax Act. This section was amended by the Finance Act, 2001, effective from 1-4-2002, introducing clause (c) to address situations where a property remains vacant for the whole or part of the year. The lower authorities, however, did not consider this clause and focused on clauses (a) and (b) of section 23(1), which pertain to properties that are either not let out or are let out with actual rent received or receivable. The Tribunal noted that the lower authorities failed to examine the scope of clause (c) despite the assessee's specific plea during the assessment proceedings.

3. Interpretation of "Property is Let" under Section 23(1)(c):
A significant dispute arose regarding the interpretation of the term "property is let" in clause (c) of section 23(1). The revenue argued that clause (c) applies only if the property was actually let out during the relevant previous year or any prior year. The Tribunal rejected this interpretation, stating that it is not workable as it would exclude properties that remain vacant for the entire year despite efforts to let them out. The Tribunal emphasized that the term "property is let" should be interpreted to include properties held with the intention to let out, coupled with efforts made to let them out, even if they were not actually let out in the relevant year. This interpretation ensures that properties intended for letting but remaining vacant due to the lack of a suitable tenant are covered under clause (c).

Conclusion:
The Tribunal concluded that the assessee's property falls within the scope of section 23(1)(c) as the property was held for letting out, and continuous efforts were made to find a tenant. The Tribunal noted that the assessee provided substantial evidence of efforts made to let out the property, including correspondence with various property consultants. Consequently, the ALV of the property should be computed as NIL under section 23(1)(c) since no rent was received or receivable during the year. The Tribunal allowed the appeals of the assessee, setting aside the determinations made by the lower authorities.