2020 (11) TMI 1124 - AT - Income Tax

Income from house property - Determination of Annual Lettable Value - Determination of deemed rental income for property let out to multiple tenants - AO has noted that assessee letting out different sections of the same complex to three different parties and he has received rental income from these parties, therefore the AO has asked the assessee to explain why the deemed rent receivable by the property u/sec. 23(1)(a) should not be estimated - CIT(A) deleted addition - HELD THAT - The assessee is having a commercial complex and same is let out to 03 different parties and receiving rental income as per the agreement entered with the tenants. The case of the AO is that the rent received by the assessee is very low and he should have been received more than what is received. The case of the assessee is that he is receiving the rental income as per the terms and conditions stipulated in the agreement. It is not the case of the AO that the amount received is more than what is stated in the agreement. It is also the case of the assessee that the property is old property and leased out for a long period and continuous occupation of the tenants, therefore no deemed rent can be invoked as per section 23(1)(a) - AO not agreed with the explanation of the assessee and invoked section 23(1)(a) and estimated the deemed rental income. Deeming provision of Section 23(1)(a), in the case of let out property, only the actual rent received was required to be considered as annual value of properly. AO failed to appreciate such estimation of annual letable value as per provision of Section 23(1)(a) was, called for only in case of vacant property and not where the properly was actually let out since in the case of let out property, the assessee was not entitled to anything over and above the agreed rent. The said action of the AO has resulted in taxing notional income in the hands of the assessee, which never accrued and hence cannot be brought to tax. Thus respectfully following the decision of Oberoi Hotels Pvt. Ltd 2016 (1) TMI 169 - ITAT KOLKATA we find no infirmity in the order passed by the ld. CIT(A). Thus, this appeal filed by the Revenue is dismissed

Summary

Issues:
1. Interpretation of section 23(1)(a) of the Income Tax Act.
2. Determination of deemed rental income for property let out to multiple tenants.
3. Application of deemed rent provisions when property is leased out for a long period.
4. Consideration of actual rental income versus expected rental income for tax purposes.
5. Admissibility of rental income based on lease agreements.

Analysis:

Issue 1: Interpretation of section 23(1)(a) of the Income Tax Act
The Revenue contended that the order of the CIT(A) was erroneous on facts and in law, specifically citing section 23(1)(a) which deems the Annual Lettable Value to be the higher of the Municipal Value and the Fair Rent value. The AR failed to produce Standard Rent fixed by a Rent Control Act, leading to a dispute over the application of this provision.

Issue 2: Determination of deemed rental income for property let out to multiple tenants
The AO invoked section 23(1)(a) to estimate deemed rent receivable by the property due to the perceived discrepancy between the lease rent offered by the assessee and the expected rent based on prevailing rates. The AO argued that the rent received was lower than expected, leading to the calculation of deemed rental income for assessment purposes.

Issue 3: Application of deemed rent provisions when property is leased out for a long period
The assessee justified the lease rates based on long-standing agreements and the specific nature of the property, emphasizing that the property was leased out for a long period due to limited prospective tenants for the specialized building. The contention was that no deemed rent should be invoked under section 23(1)(a) due to the extended lease agreements and continuous occupation by tenants.

Issue 4: Consideration of actual rental income versus expected rental income for tax purposes
The CIT(A) relied on a decision from the ITAT, Kolkata Bench in a similar case to support the deletion of the addition made by the AO. The decision emphasized that the actual rental income admitted by the assessee based on lease agreements should be considered for taxation purposes, rather than estimating expected rental income when the property is already leased out.

Issue 5: Admissibility of rental income based on lease agreements
The CIT(A) concluded that the AO's determination of deemed rental income was unwarranted as there was no evidence of additional income beyond what was admitted by the assessee based on lease agreements. The decision highlighted that the actual rental income received and declared should be the basis for taxation, especially when the property is already let out.

In summary, the ITAT upheld the CIT(A)'s decision to delete the addition made by the AO, citing the precedent set by the ITAT, Kolkata Bench in a similar case. The appeal filed by the Revenue was dismissed, and the cross objection by the assessee was also dismissed due to an unexplained delay.