2011 (1) TMI 1491 - AT - Income Tax

Summary

Issues Involved:
1. Determination of Annual Letting Value (ALV) u/s 23(1)(a) vs. 23(1)(b) of the Income Tax Act, 1961.
2. Validity of Assessing Officer's (AO) method in determining ALV by ignoring Municipal valuation.

Summary:

Issue 1: Determination of Annual Letting Value (ALV) u/s 23(1)(a) vs. 23(1)(b)
The primary issue was whether the CIT(A) erred in rejecting the determination of ALV by the AO invoking the provisions of section 23(1)(a) as against the ALV declared by the assessee u/s 23(1)(b) of the Act. The assessee, a company deriving income from house property, capital gain, and other sources, declared its income under the head "income from house property" based on the actual rent received, which was higher than the municipal value. The AO, however, determined the ALV by ignoring the municipal valuation and estimated a significantly higher ALV based on market inquiries.

Issue 2: Validity of AO's Method in Determining ALV
The CIT(A) deleted the addition made by the AO, stating that the AO's computation of ALV at Rs. 48 lakhs was based on unsubstantiated information and hearsay. The AO failed to provide documentary evidence or confront the assessee with the alleged higher rental value during the assessment proceedings.

Tribunal's Decision:
The Tribunal upheld the CIT(A)'s order, referencing the ITAT Mumbai "D" Bench's decision in DCIT vs. Reclamation Reality India Pvt. Ltd., which clarified that the ALV should be based on the municipal valuation unless the actual rent received is higher. The Tribunal emphasized that the charge u/s 22 is not on the market rent but on the annual value, and in the case of property not let out, the municipal value is the proper yardstick for determining the ALV. The Tribunal dismissed the revenue's appeal, affirming that the AO was not justified in ignoring the municipal valuation and that the actual rent received should be the basis for ALV u/s 23(1)(b).

Conclusion:
The appeal of the revenue was dismissed, and the CIT(A)'s order was upheld, confirming that the ALV should be determined based on the actual rent received when it exceeds the municipal valuation, as per section 23(1)(b) of the Act. The Tribunal reiterated that assessment of income tax cannot be based on hearsay and must be supported by evidence.