2012 (6) TMI 33 - AT - Income Tax

Income from House Property - assessee owner of a house property having ground plus 4 storey building did not declared any income from the said property - assessee contending Municipal Rateable Value (MRV) to be annual value whereas Revenue determining the same to be on the basis of 8.5% returned on the investment made of the property - claim of vacancy allowance in respect of floors vacant during the year - assessee also contended that floors occupied by partnership firm and companies for carrying out business should be excluded - Held that - In case the property is not let out at all during the previous year no vacancy allowance can be given u/s 23(1)(c). Vacancy allowance can be given only when the property is let and vacant for part of the year. See Vivek Jain vs ACIT 2011 (1) TMI 897(HC) - Decided against the assessee. Portion used for business purpose - Held that - Portion of the property used by the partnership firm in which assessee is a partner has to be excluded from the total income. However portion used by the company in which the assessee was share holder and director cannot be considered for exclusion as company has separate and distinct identity and business being carried on by the company can not be considered as business done by share holder or director - Decided partly in favor of assessee. Fair rental value has to be determined on the basis of comparative cases in the locality and other relevant factors. The return on investment may not always be a reliable indicator of fair rent of the property which depends upon market conditions such as demand and supply position in an area. A comparative case in the locality will be the best guide for determination of fair rent. Issue regarding determination of fair ALV restored to the file of AO.

Summary

Issues:
Computation of house property income based on ALV, Allowability of vacancy allowance under section 23(1)(c), Exclusion of area used for business purposes, Method of determination of annual value.

Computation of House Property Income:
The appeal concerned the computation of house property income for the assessment year 2006-07. The AO observed that the assessee owned a property named "Varsha" but had not declared any income from it. The AO proposed adopting market rent as the annual value of the property. The assessee argued that certain floors were vacant while others were used for business, and the ALV should be based on Municipal Rateable Value (MRV). The AO estimated the ALV at Rs. 9,97,726 based on a 8.5% return on investment, resulting in an income of Rs. 6,98,409. CIT(A) upheld this approach, leading to the appeal before the Tribunal.

Allowability of Vacancy Allowance and Exclusion of Business Area:
The dispute centered on whether the vacant portion of the property should be excluded from income computation and if the area used for business purposes should be excluded. The Tribunal noted that no vacancy allowance can be given when the property is not let out at all during the previous year. The property used for business by a partnership firm was to be excluded, following judgments from various High Courts. However, the portion used by a company could not be excluded as the company's business was separate from that of the shareholder or director.

Method of Determination of Annual Value:
The AO determined the ALV based on a return on investment, while the assessee argued for using MRV. The Tribunal referred to a High Court judgment stating that MRV could be considered as ALV but was not binding on the AO. The Tribunal emphasized that fair rent should be determined based on comparative cases in the locality and other relevant factors, rather than solely relying on the return on investment. Therefore, the issue of determining fair ALV required fresh consideration, and the matter was restored to the AO for reevaluation.

In conclusion, the Tribunal partly allowed the appeal, emphasizing the need for a reevaluation of the fair rental value of the property based on local comparative cases and relevant factors rather than a fixed return on investment.