2022 (5) TMI 932 - AT - Income Tax

Income from house property u/s 23 - deemed rental income - estimating the fair market rent in respect of two properties owned by the assessee - Municipal Ratable Value of the impugned property or the actual rent offered by the assessee in the return of income - whether said properties were held by the assessee for its business purposes and hence, the deemed rental income thereon was no assessable as income from house property u/s 23 - HELD THAT - AO has merely relied on the report submitted by the Assessing Officer, which is based on hearsay opinions. AO was duty bound to conduct proper investigation before rejecting the assessee s claim of deciding Annual value based on the Annual rateable value decided by Municipal Authorities. AO has also not given any specific reasons for rejecting the Rent claimed to be earned by the assessee from the impugned flat in Siddhivinayak Park. Thus, it is a settled proposition that , the places where Rent Control Act is not applicable, the Annual Value decided by Municipal Authorities can be a rational yardstick . In the case under consideration the DR has not brought to our notice any reason for which Municipal Value cannot be considered as Fair Rent u/s 23(1). Neither the AO nor the CIT(A) has discussed why Annual value decided by Municipal Corporation shall not be adopted as Fair Rent for the purpose of section 23(1) in this case. As already discussed why the report submitted by the Inspector cannot be considered. Therefore, we are of the opinion that , in this case the Municipal Ratable Value of the impugned property or the actual rent offered by the assessee in the return of income , whichever is higher, shall be adopted as fair rent u/s 23(1)(a) of the Act. Assessee appeal allowed.

Summary

Issues Involved:

1. Determination of fair market rent under Section 23(1)(a) of the Income Tax Act.
2. Validity of the Inspector's report used for estimating fair market rent.
3. Consideration of Municipal rateable value versus market enquiry for determining fair rent.

Issue-wise Detailed Analysis:

1. Determination of Fair Market Rent under Section 23(1)(a) of the Income Tax Act:

The primary issue was whether the fair market rent of two properties owned by the assessee was correctly estimated by the Assessing Officer (AO) under Section 23(1)(a) of the Income Tax Act. The properties in question were a showroom at Rushiraj Regency, Nashik, and a flat at Siddhivinayak Park, Nashik. The AO estimated the fair market rent based on an Inspector's report, which suggested higher rental values than what the assessee had declared. The AO made additions to the total income of the assessee based on these estimated rents, which were upheld by the Commissioner of Income Tax (Appeals) [CIT(A)].

2. Validity of the Inspector's Report Used for Estimating Fair Market Rent:

The AO relied on a report from the Inspector, who conducted a local enquiry to determine the market rent of the properties. The Inspector's report was based on informal conversations with local individuals and did not include any formal evidence such as rental agreements or statements recorded under Section 131 or information collected under Section 133(6) of the Act. The Tribunal found that the Inspector's report was not fully reliable as it was based on hearsay and lacked concrete evidence.

3. Consideration of Municipal Rateable Value versus Market Enquiry for Determining Fair Rent:

The assessee argued that the AO should have adopted the Municipal rateable value instead of relying on the Inspector's report. The Tribunal referred to several case laws, including the decisions of the Hon'ble ITAT Pune Benches and the Hon'ble Delhi High Court, which support the view that the Municipal rateable value can be a rational yardstick for determining fair rent, especially when the Rent Control Act is not applicable. The Tribunal noted that the AO did not conduct a proper investigation or provide specific reasons for rejecting the Municipal rateable value or the actual rent declared by the assessee.

Conclusion:

The Tribunal concluded that in the absence of a proper investigation and concrete evidence, the Municipal rateable value or the actual rent declared by the assessee, whichever is higher, should be adopted as the fair rent under Section 23(1)(a) of the Act. The appeal of the assessee was allowed, and the additions made by the AO were set aside.

Order Pronounced:

The order was pronounced on 8th April 2022, allowing the appeal of the assessee.