2016 (9) TMI 961 - AT - Income Tax

Charge to income tax in respect of a house property - deemed income - annual value - Held that - The basis of the charge to income tax in respect of a house property, not occupied by its owner for the purpose of business or profession carried on by him, is its annual value; its income potential, as reflected in its fair rental value (FRV), i.e., the rent at which it may reasonably be expected to be let from year to year. This is irrespective of whether the property is actually let or not. The exception to taxing the FRV of a house property under the Act is provided in respect of one house property which the owner could not, by reason of his employment or business/profession, occupy, provided it is not actually let and no other benefit has been availed of by him during the relevant year, in which case the AV is taken at nil. The position in law is clear; in fact, stands enunciated by a number of decisions by the higher courts of law (refer paras 4,5.1). The fact of letting assumes significance only where the property is actually let and the rent received/receivable exceeds the fair rental value, so that the enhanced sum substitutes the FRV as the AV. A further exception is drawn where on account of vacancy this rent falls even below the FRV, in which case it is this reduced amount which is to be adopted as the AV. The property being let, though unable to fetch the rent due to vacancy, the amount actually realized/realizable is taken as the AV, whether lower or higher than the FRV. That is, where the property is let, the actual rent is made the basis for AV in preference to the notional (fair) rent provided the decline in rent (w.r.t. fair rent) is on account of vacancy or unrealizability. This is the effect of a combined/conjoint reading of section 23(1), i.e., of all its limbs together, even as the entire section stands read, as is to be, as a whole. Both ss. 23(1)(b) and 23(1)(c) only represent different scenarios qua a property which is let. That the letting is for rent is both plain and manifest, so that it contemplates actual letting only. How else could, one may ask, the reduction in rent received/receivable and, thus, in AV, be possible? The actual letting is thus the sine qua non where a reduction or remission in rent on account of vacancy occurs, and is thus to be taken in to account. The words where the property is let in sections 23(1)(b) and 23(1)(c), thus, represents a state of actual letting and cannot be extended to a state of intended letting . Letting , it may be appreciated, is a culmination of intended letting , so that the Act stipulates a maturity/completion of the intention to let. The words actually let in section 23(3) have no bearing at all in the matter. The same have perhaps been used to emphasize the deemed letting where some benefit is derived by the owner in respect of his house property, whether self-occupied or not, and also of such deeming in respect of all such residential houses, save one (sections 23(2), 23(3) and 23(4)). There is also no anomaly in the provision, which is sought to be pleaded with reference to the word whole occurring in s. 23(1)(c). Before parting, we may also advert to the argument advanced during hearing of the occupation certificate being issued by Brihan Mumbai Mahanagar Palika only on May 21, 2009 and the final payment of ₹ 875 lacs to the seller being, as provided in the conveyance deed, made only there-upon, seeking its admission as additional evidence on that ground. The same is without merit, even as noted by the Bench during hearing itself. The possession of the property has been admittedly taken on 18/12/2008, and the property is fully constructed, having all amenities (refer Clause (xv) of the Conveyance Deed). The property is lettable and, in fact, actually let 1/4/2009 onwards. The conveyance of the property is complete, and the Deed only recognizes a lien thereon in favour of the Vendor to the extent of the amount unpaid, i.e., ₹ 875 lacs, about 10% of the property value.

Summary

Issues Involved:
1. Correct amount at which the annual value of the assessee's Swami Vivekanand (S.V.) Road, Mumbai property is liable to be assessed under section 22 read with section 23 of the Income Tax Act, 1961.

Detailed Analysis:

Facts of the Case:
The assessee acquired two properties during the previous year, one at S.V. Road, Mumbai, and another at Vile Parle, Mumbai. The S.V. Road property was purchased on December 18, 2008, with the intent of letting it out for rental income. The property was let to M/s. Super Religare Laboratories Ltd. (SRL) from April 1, 2009, at a monthly rent of ?38.95 lakhs. The Assessing Officer (AO) computed the annual value (AV) of the property for the relevant year at ?116.85 lakhs, based on the proposed annual rent for three months (January to March 2009).

Assessee's Argument:
The assessee contended that since the property was vacant for the entire period of the year since its acquisition in December 2008, its AV should be restricted to the actual rent received or receivable, which is Nil. The assessee argued that the intent to let out the property should be considered sufficient to meet the condition of the property being let. They relied on several tribunal decisions to support their claim.

Revenue's Argument:
The Revenue argued that the notion of ‘proposed to be let’ or ‘held for letting’ cannot be imported into the provision. The AV is determined based on the fair rental value, which is the rent at which the property may reasonably be expected to be let from year to year, irrespective of actual letting or rent receipt. They relied on several judicial precedents, including decisions by the Supreme Court, to support their stance.

Discussion:
The Tribunal discussed the legislative history and judicial interpretations of sections 22 and 23 of the Act. It noted that prior to its substitution by the Finance Act, 2001, section 23(1) did not reference ‘vacancy’ in determining AV. The Tribunal referred to several judicial decisions that clarified the scope of the words “where the property is let” and emphasized that vacancy allowance can only be claimed if the property was let for at least part of the relevant previous year.

Key Judicial Precedents:
- Vivek Jain vs. Asst. CIT [2011] 337 ITR 74 (AP): The court clarified that section 23(1)(c) applies only to properties that are actually let and become vacant during the year. The provision does not extend to properties intended to be let but not actually let.
- CIT vs. Dalhousie Properties Ltd. [1984] 149 ITR 708 (SC): The Supreme Court held that AV is to be determined based on the fair rental value, irrespective of actual letting.
- Liquidator of Mahamudabad Properties (P.) Ltd. v. CIT [1980] 124 ITR 31 (SC): The court held that even properties in disrepair have some AV, rejecting the notion that uninhabitable properties carry no AV.

Tribunal's Conclusion:
The Tribunal concluded that the words “where the property is let” in sections 23(1)(b) and 23(1)(c) refer to actual letting and cannot be extended to intended letting. The AV should be based on the fair rental value, and vacancy remission is only applicable if the property was actually let for part of the year and remained vacant for the other part. The Tribunal upheld the impugned order and dismissed the assessee’s appeal.

Order:
The assessee’s appeal is dismissed.

Conclusion:
The Tribunal upheld the assessment of the annual value based on the fair rental value, rejecting the assessee’s claim for vacancy remission on the ground of intended letting. The decision is consistent with judicial precedents that emphasize actual letting as a prerequisite for claiming vacancy remission under section 23(1)(c) of the Income Tax Act, 1961.