2022 (7) TMI 74 - AT - Income Tax

Income from house property - notional rental income assessed in the hands of Appellant by the Assessing Officer in respect of area leased out by the Appellant to the Lessee - for Leased Property CIT(A) did not grant benefit of vacancy allowance for the period commencing from 19.10.2012 to 31.12.2012 - case of the Appellant that during the aforesaid period, despite making best efforts, the Leased Property could not be rented - HELD THAT - In the case of Premsudha Exports (P) Ltd. 2007 (5) TMI 348 - ITAT MUMBAI it has been held by the Tribunal that even the intention to let out the property would be sufficient to invoke provisions of Section 23(1)(c). The fact that Appellant intended to rent the Leased Property and made efforts for the same has not been doubted by the Assessing Officer or by the CIT(A). Accordingly we hold that the Appellant is entitled to benefit of vacancy allowance in terms of Section 23(1)(c) of the Act for the period commencing from 19.10.2012 to 31.12.2012 during which the Leased Property was actually vacant. Notional interest charged for the period commencing from 01.01.2013 to 31.03.2013 forming part of the rent free period of five months - Appellant documentary evidence in the forms of approvals obtained by the Lessee from the Electrical Department, Bangalore, Govt. of Karnataka and the civil interior works contract entered by the Lessee for making the Leased Property fit for occupation. However, the same were simply brushed aside by the CIT(A) - it is admitted facts that no rent has actually been received by the Appellant for the period of three months commencing from 01.01.2013 to 31.03.2013. In absence of any allegations by the Revenue regarding the bonafides of the transactions, the agreement between the parties is to be accepted. In our view, the Assessing Officer erred in attributing a notional rent for a period of three months without appreciating the nature of transactions - no efforts were made by the Assessing Officer to determine the monthly rental/rate at which the Leased Property might have been reasonably expected to be let out in terms of Section 23(1)(a) - actual annual rent received by the Appellant cannot be substituted by a notional rent without the Assessing Officer arriving at a finding that the Leased Property is can be reasonably expected to be let out for a higher sum. In view of the aforesaid, we delete the addition of notional rent made by the Assessing Officer for the period of three months commencing from 01.01.2013 to 31.03.2013.

Summary

Issues Involved:
1. Application of Section 23(1)(c) of the Income Tax Act to the property let out as a bare shell structure.
2. Assessment of notional rental income for the period when the property was rent-free for renovation.

Issue-wise Detailed Analysis:

1. Application of Section 23(1)(c) of the Income Tax Act:
The appellant was engaged in real estate investment and acquired a bare shell structure property on 19.10.2012, intending to lease it out. Despite efforts, the property remained vacant until 31.12.2012. The appellant leased the property to Schneider Electric Pvt. Ltd. from 01.01.2013 with a rent-free period of five months for renovations. The Assessing Officer (AO) assessed notional rental income for the period from 19.10.2012 to 31.03.2013. The appellant argued that the property was unfit for occupation and cited judicial precedents to support the application of Section 23(1)(c) for vacancy allowance. The Tribunal noted that the appellant's intention to let out the property and efforts made were sufficient to invoke Section 23(1)(c), granting the appellant the benefit of vacancy allowance for the period 19.10.2012 to 31.12.2012, as the property was indeed vacant during this time.

2. Assessment of Notional Rental Income for Rent-Free Period:
For the period from 01.01.2013 to 31.03.2013, the AO attributed notional rent despite the property being in a rent-free period for renovations. The Tribunal observed that the agreement between the appellant and the lessee was genuine, and the property was a bare shell structure requiring significant modifications. The Tribunal emphasized that no rent was received during this period, and the AO did not establish that the property could reasonably be expected to be let out for a higher sum. Consequently, the Tribunal deleted the addition of notional rent for the period 01.01.2013 to 31.03.2013, recognizing the legitimacy of the rent-free period for making the property fit for occupation.

Conclusion:
The Tribunal ruled in favor of the appellant for both assessment years, allowing the appeals and deleting the notional rental income additions made by the AO. The judgment highlighted the importance of considering the actual condition of the property and the genuine efforts made to lease it out when applying the provisions of Section 23(1)(c) and assessing notional rental income.