2022 (6) TMI 574 - AT - Income Tax

Income from house property - Deemed rental income - vacant property - Addition on account of rent which was never earned and realized by the assessee - Addition on the basis of assumption that the property in question was rented out whereas the same property was self occupied during the year under appeal therefore the action of the authorities below is wrong illegal misconceived unjustified and bad at law therefore it should be quashed - HELD THAT - The Bench is of considered opinion that an affidavit along with verification appended when stands corroborated with any piece of evidence like in the present case the copies of minutes of meeting then the same cannot be said to be a self-serving affidavit of a fact. As these facts are verifiable facts and not merely facts stated on belief. The Tax Authorities had their means to have gone further into the inquiry with regard to facts stated in the affidavit. Rather and strangely the Tax authorities observed that this on oath statement is not substantiated by evidence so disbelieved the affidavit. At the same time once the affidavit was admitted by way of additional evidence and the remand report on its factual aspects was called it cannot be brushed aside by calling it a self-serving document unless the same was factually controverted by evidence or on oath statement on the part of revenue. Thus the bench is of the considered opinion that there was sufficient material before the ld. Tax Authorities which established that there was a genuine dispute in the locality where the commercial building of assessee was situated and that dispute was of such nature that no prudent person could be expected to have taken the disputed building on rent. The fact that this meeting was called on 28.11.2011 where a consensus was reached between the authorities and owners of building indicate that during the relevant financial year the property was actually not available in the hands of assessee to be let out. Admittedly it was let out in next FY. Reliance on judgment of Vivek Jain 2011 (1) TMI 897 - ANDHRA PRADESH HIGH COURT is not justified as that was a case where residential flat free of any sort of dispute was available in the hands of assessee to be let out. However in the case in hand the property of the assessee cannot be said to be one actually available with him to be let out. The claim of assessee is not merely that in spite of his efforts he could not let out a property which was otherwise rentable. His claim rests on the fact that the property was actually not rentable for the reasons of issues with regard to demolition drive and sealing in the area making it not worthy of being taken on rent for any commercial purpose. This Bench is of considered opinion that the legal disability created by the action of municipal authorities or under course of law restricting the rights of the property holder to let out the property is a case where provision of Section 23(1)(c) would not be applicable. The word receivable refers to the payment not being realised. The use of word receivable in Section 23(1)(c) of the Act indicates that there should be not mere possibility of receiving the rent but rent can become payable in all the probability as the property is available for being given on rent. Then it can be considered to be receivable . Therefore the correct interpretation is that in case the property is vacant then the notional rent can be taxed if it can be considered as receivable as mentioned in Section 23(1)(a) of the Act. When there is some legal disability or physical impossibility in creating a tenancy and due to which the property is left vacant in any part or whole of the year then there is no possibility of rent being realized and so the rent cannot be said to be receivable and accordingly on basis of notional rent no tax liability can be created. The tax authorities below have thus fallen in error in taxing the assessee on basis of notional rent. Thus the bench is inclined to decide the grounds raised in favour of the assessee.

Summary

Issues Involved:
1. Addition of Rs. 1,26,00,000/- to the income of the assessee on account of notional rent.
2. Applicability of Section 23(1)(c) of the Income Tax Act, 1961.
3. Charging of interest under Sections 234A, 234B, and 234C of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Addition of Rs. 1,26,00,000/- on Account of Notional Rent:
The core issue revolves around the addition of Rs. 1,26,00,000/- to the income of the assessee based on notional rent for a vacant commercial property. The Assessing Officer (AO) added this amount by interpreting section 23(1)(c) of the Income Tax Act, which suggests that tax is imposable on vacant property even if no rent is realized. The property in question was vacant due to a demolition drive by the Government of Delhi, making it difficult to find tenants. Despite repeated efforts, the property could not be rented out during the financial year 2012-13 but was rented out in the next financial year. The Tribunal acknowledged that the property was commercial and remained vacant during the relevant financial year. The Tribunal found that the affidavit submitted by the assessee, corroborated by the minutes of a meeting with the Lieutenant Governor of Delhi, indicated a genuine dispute in the locality due to the demolition drive, which made the property unrentable. The Tribunal concluded that the tax authorities erred in adding the notional rent to the assessee's income.

2. Applicability of Section 23(1)(c) of the Income Tax Act, 1961:
The Tribunal examined the applicability of Section 23(1)(c) of the Act, which deals with the annual letting value of the property. The assessee argued that the property was not rentable due to external factors beyond their control, such as the demolition drive and sealing of properties in the area. The Tribunal agreed, stating that the legal disability created by the municipal authorities restricted the rights of the property holder to let out the property. Therefore, the provision of Section 23(1)(c) would not be applicable in this case. The Tribunal emphasized that the term "receivable" in Section 23(1)(c) implies that rent should be payable in all probability, which was not the case here due to the legal and physical impossibility of creating a tenancy.

3. Charging of Interest under Sections 234A, 234B, and 234C:
The assessee contested the charging of interest under Sections 234A, 234B, and 234C, amounting to Rs. 3,34,647/-, Rs. 13,38,588/-, and Rs. 1,37,576/-, respectively. The Tribunal's decision to set aside the addition of notional rent inherently impacted the computation of interest under these sections. Since the primary addition was quashed, the consequential interest charges also stood nullified.

Conclusion:
The Tribunal allowed the appeal, setting aside the impugned orders. It concluded that the tax authorities erred in adding notional rent to the assessee's income, given the genuine dispute and legal disability affecting the property's rentability. The Tribunal emphasized that Section 23(1)(c) does not apply when the property cannot be rented out due to external legal or physical constraints. Consequently, the interest charges under Sections 234A, 234B, and 234C were also quashed. The order was pronounced in open court on April 28, 2022.