2019 (2) TMI 2086 - AT - Income Tax

Addition of fair rental income - Income from house property - rate of rent to be charged from the related parties - assessee is the owner of a building consisting of some floors for which declared the gross rent only under the head house property - Revenue alleges that the actual rent received/receivable is less than the reasonable expected rent - HELD THAT - As rent should be decided on the basis of the sum which can be reasonably expected from the letting out the property during the year or the actual rent received/receivable, whichever is higher. CIT (A) has determined the fair rent of the property at Rs. 248/- per Square feet on the basis of the rent received by the assessee from the bank of Baroda in the assessment year 2011-12 as increased by 5% p.a. As no dispute that the bank vacated the property on 30th June 2010. Assessee claimed that the fair rent for the property under consideration is of the same amount received by it from its associated enterprises. Thus once the assessee has disputed the fair rent, then the lower authorities are under the obligation to reject the contention of the assessee with cogent reasons. As such the authorities below were under the obligation to determine the fair rent of the property in the manner as discussed. But the authorities below have not determined the fair rent without considering the procedures prescribed under the law. The rent charged by the assessee from the bank of Baroda cannot be the basis for determining the fair rent of the properties as property was rented out by the assessee to the bank of Baroda in the year 1998, and in every rental agreement, there is an escalation clause for enhancing the amount of rent. Rent charged by the assessee from the bank was based on the agreement which was made in the year 1998. Rent charged by the assessee from the bank in the year, 2010 was not based on the fair market rent. There is a time gap of 1 year 9 months when the assessee received the last rent from the bank of Baroda and the year of consideration. As such there can be certain factors which can affect the fair market rate in any manner which have not been considered while determining the fair market rent. The issue on hand needs to be examined in the manner as discussed above - restore this issue to the file of AO as stipulated above. Thus, the ground of appeal of the assessee is allowed for statistical purposes.

Summary

Issues:
1. Disallowance of fair rental income by AO and confirmation by CIT(A)
2. Determination of fair market rent for a property rented to related parties

Analysis:
1. The appeal was filed against the CIT(A)'s order confirming the disallowance of fair rental income made by the AO. The AO observed that the rent charged from related parties was below fair market rate, leading to an addition of Rs. 34,05,000. The assessee contended that the rent was reasonable due to various factors. The CIT(A) partly confirmed the AO's order based on rent charged from Bank of Baroda in 2011-12, increasing it by 5% annually.

2. The issue revolved around determining the fair market rent for the property. The AO and CIT(A) used the rent charged from Bank of Baroda as a basis, but the assessee disputed this, claiming the fair rent was similar to that charged from associated enterprises. The Tribunal noted that the authorities did not follow the prescribed procedures to determine fair rent. Factors like escalation clauses and time gaps were not considered. The Tribunal held that the issue needed reexamination as per the law and restored it to the AO's file.

Conclusion:
The Tribunal allowed the assessee's appeal for statistical purposes, emphasizing the need for a proper determination of fair market rent based on legal provisions and factors affecting the rental value. The case highlighted the importance of following due process in assessing fair rental income, especially when dealing with related parties.