2024 (1) TMI 840 - AT - Income Tax

Income from House property - Allowance of interest u/s. 24(1)(b) in computing the income from house property, being rent on a multi-storied building - assessee s claim stands denied by the assessing authority, admitting the interest on capital borrowed to be for constructing a house property, income from which is assessable u/s. 22 rws. 23, for want of evidence - HELD THAT - The first appellate authority allowed relief for the said years on the basis that the claim could not be denied on that basis where a claim had been in fact preferred; the footnote in the returns being explained to an inadvertent carry-over of the said remark in the returns for the earlier years where no such claim was, for that reason, i.e., non-payment, made. The non-claim and, consequently, non-allowance for the earlier years, would therefore be of no consequence; the disallowance by AO under such circumstances being in fact perverse inasmuch as he disallows interest which he claims has not been paid in the face of accounts reflecting the payment. There has accordingly been no adjudication on the merits of the claim for any of the preceding years; the disallowance of interest since reversed in first appeal, for the two preceding years being on account of a misconception as to non-payment of interest by the assessee, which fact did not obtain. The assessee has before us relied on the relevant parts of the balance-sheet for the earlier years, i.e., the schedule of fixed assets, as well as it s face, reflecting the source and application of funds, to substantiate that the building was financed primarily from secured (from bank) and unsecured (from directors) borrowings. On the basis of the Grounds of Appeal before the first appellate authority, also filed physically (copy on record), it is also shown that the same were also adduced before the AO - we only consider it fit and proper that the matter is restored back, which we do at the request of Ms. Ammal, to the file of the AO, for determination afresh, setting aside the impugned order. Annual value how determined - Computation of annual value (AV) u/s. 23 whether with or without reckoning the non-receipt of any rent for the seventh (top) floor of the building inasmuch as no rent was received for the same, either during the current year or even the preceding years - HELD THAT - A property, whether let or not, is liable to be assessed at it s annual value, defined as the rent reasonably expected on being let from year to year (s. 23(1)(a)). Sections 23(1)(b) and (c) provide for adjustment to the said value on account of actual rent, received or receivable, being either higher or lower, the latter being on account of vacancy. And which would, where so, obtain instead of a notional rent expected on a year-to-year letting contemplated u/s. 23(1)(a) as the annual value , at which income from a house property is to be otherwise assessed. That is, in case of actual letting, precedence is to be given to the real state of affairs. Vacancy can only follow a state of actual letting, envisaged u/ss. 23(1)(b)/(c). Reduction due to vacancy u/s. 23(1)(c) would accordingly follow a condition of actual letting, absent in the instant case for the top floor of the building. A part of the property referred to therein is one which admits of an actual and separate letting. The AV of the 7 th floor would therefore be computed u/s. 23(1)(a), while that for other floors, being let, u/s. 23(1)(a) r/w ss. 23(1)(b)/(c). We decide accordingly, remitting the matter back to the file of the AO to do the needful after hearing the assessee. Assessee s appeal is partly allowed.

Summary

Issues involved:
The judgment deals with two main issues - (1) allowance of interest u/s. 24(1)(b) in computing income from house property, and (2) computation of annual value (AV) u/s. 23 regarding non-receipt of rent for a specific floor of a building.

Issue 1 - Allowance of Interest u/s. 24(1)(b):
The appeal concerns the denial of the assessee's claim for interest on capital borrowed for constructing a house property, Mithun Towers, by the assessing authority. The first appellate authority allowed relief for the preceding years, emphasizing that the disallowance by the Assessing Officer was based on a misconception regarding non-payment of interest. The Tribunal found sufficient reason to condone the delay in filing the appeal and decided to restore the matter for a fresh determination by the AO after considering the evidence presented by the assessee.

Issue 2 - Computation of Annual Value u/s. 23:
The second issue revolves around the computation of annual value (AV) u/s. 23 concerning the non-receipt of rent for the top floor of Mithun Towers. The Tribunal analyzed the interpretation of sec. 23(1)(c) and compared conflicting decisions to determine whether the property being vacant affects the AV. The Tribunal concluded that the benefit of vacancy in computing AV does not apply when the property is not actually let, emphasizing that actual letting is a prerequisite for adjusting the annual value based on rent received or receivable. The Tribunal remitted the matter back to the AO for further action after hearing the assessee.

Separate Judgment:
The judgment was delivered by Shri Sanjay Arora, AM. The Tribunal partially allowed the assessee's appeal, addressing both issues of interest allowance and annual value computation under sections 24(1)(b) and 23, respectively. The Tribunal emphasized the importance of actual letting in determining the annual value of a property and clarified the conditions under which adjustments can be made based on rent received or vacancy. The matter was remitted back to the AO for appropriate action following the Tribunal's decision.