2013 (1) TMI 18 - AT - Income Tax

Computation of Income from House property - Vacancy allowance - applicability of Sec. 23(1)(c) or Sec. 23(4)(b) - CIT(A) applied the standard rate of MCD in determining the annual letting value - Held that - A perusal of section 23(1)(c) clearly shows the unambiguous requirements of the said section that where the property was vacant during the year and due to such vacancy the actual rent received or receivable in respect thereof is less than the sum for which the property might reasonably be expected to be let from year to year the amount so received or receivable shall be deemed to be the annual value of such property. On the other hand as per section 23(4) where the property consists of more than one house the annual value thereof shall be determined as if such house had been let. As per Section 23(1)(c) if any part of the property was let out and was vacant during the year or any part thereof and due to such vacancy the annual rent received or receivable was less than the sum for which the property might reasonably be expected to let from year to year the lesser of the two amounts i.e. the amount received or receivable is to be the annual value of the property. Section 23(4) on the other hand refers to property where it consists of more than one house as in the present case. As per this Section the annual value of such property shall be determined as if the property has been let. Now the provisions of Section 23(4)(b) are very clear that where the property consists of more than one house the annual value thereof shall be determined u/s 23(1) as if such property had been let. This re-directs us to Section 23(1). Applying Section 23(1) to the facts of the present case it is Section 23(1)(c) which shall again come into play inasmuch as it remains undisputed as observed hereinabove that the property was let but was vacant during the year due to which vacancy the actual rent received or receivable by the assessee in respect of such property was nil. Nil rent then it cannot be gainsaid is evidently less than the sum for which the property might reasonably be expected to let from year to year. On this score itself the grievance of the department loses whatever force it could have had if any. Reverting back to Section 23(4) it makes reference to property referred to in sub-section (2) of Section 23. Section 23(2) talks of the property and the only difference is that whereas Section 23(2) talks of a house or a part of a house and Section 23(4) considers property consisting of more than one house. As per Section 23(4)(a) the concession will be available to the assessee only with regard to one of the houses constituting the property and the ALV of the remaining houses shall have to be determined in case all the houses are in the occupation of the assessee. In the present facts this is not the case and the two houses as discussed were let earlier but were lying vacant during the year. As such Section 23(4)(a) is not applicable. Section 23(4)(b) is applicable as considered and it leads back to Section 23(1). So the situation is back to square one. Undoubtedly it was to cure the inequity of taxing vacant properties under a notional charge that Section 23(1)(c) was brought on the statute book by virtue of the Finance Act of 2001 w.e.f. 01.04.2002 as rightly contended on behalf of the assessee in order to provide simplified determination of annual value of property on allowing deductions in computing the ALV itself on account of vacancy and unrealized rent. Thus looked at from any angle it is the provisions of Section 23(1)(c) which are applicable hereto and none other. Accordingly CIT(A) was correct in applying the said Section to the present case - against revenue.

Summary

Issues Involved:
1. Application of Section 23(1)(c) for property at A-6A, Maharani Bagh.
2. Ignoring Section 23(4)(b) for multiple properties owned by the assessee.
3. Selective application of Sections 23(1)(c) and 23(4)(b).
4. Determination of annual letting value (ALV) using MCD rates versus previous higher rents.
5. Reliance on the decision in Kamal Mishra v. ITO.

Issue-wise Detailed Analysis:

1. Application of Section 23(1)(c) for property at A-6A, Maharani Bagh:
The department contended that the CIT(A) erred in applying Section 23(1)(c) since the property was never let out during the year. The assessee argued that due to the expiry of the lease with the previous tenant, the property remained vacant, and hence, the ALV should be nil as per Section 23(1)(c). The Tribunal agreed with the assessee, noting that Section 23(1)(c) applies when a property remains vacant, and the actual rent received is less than the expected rent. Since the property was vacant, the ALV should be nil.

2. Ignoring Section 23(4)(b) for multiple properties owned by the assessee:
The department argued that the CIT(A) failed to apply Section 23(4)(b), which mandates that the assessee should specify one property for self-occupation, and the ALV for the other properties should be determined as if they were let out. The Tribunal, however, noted that Section 23(4)(b) redirects to Section 23(1), and since the properties were vacant, Section 23(1)(c) would apply, resulting in an ALV of nil.

3. Selective application of Sections 23(1)(c) and 23(4)(b):
The department contended that the CIT(A) selectively applied Section 23(1)(c) to one property and Section 23(4)(b) to another. The Tribunal clarified that Section 23(4)(b) leads back to Section 23(1), and since the properties were vacant, Section 23(1)(c) was correctly applied by the CIT(A) to both properties.

4. Determination of annual letting value (ALV) using MCD rates versus previous higher rents:
The department argued that the CIT(A) erred in using the MCD rates to determine the ALV, ignoring the higher rents previously received. The assessee countered that the properties were vacant, and the MCD had inspected and fixed the rental values. The Tribunal agreed with the CIT(A) and the assessee, noting that the AO did not provide evidence to dispute the MCD's valuation or to show that the properties were not vacant. The ALV should be based on the MCD's rates, resulting in lower values.

5. Reliance on the decision in Kamal Mishra v. ITO:
The department claimed that the CIT(A) wrongly relied on Kamal Mishra v. ITO, which had distinguishable facts. The Tribunal found that the CIT(A) correctly followed Kamal Mishra, as the facts were similar, and the provisions of Section 23(1)(c) were applicable. The Tribunal also noted that Kamal Mishra was followed in other cases, reinforcing its applicability.

Conclusion:
The Tribunal upheld the CIT(A)'s order, applying Section 23(1)(c) to determine the ALV of the vacant properties as nil. The department's appeal was dismissed, affirming that the CIT(A) correctly interpreted and applied the relevant provisions of the Income Tax Act.