Whether when NRI's properties remained vacant during the year, it is to be assessed as NIL or ALV is to be worked out as per deeming provisions of Sec 23(1)(a) - ruled in favour of assessee by ITAT

Income tax - BANGALORE, FEB 01, 2012: THE issue before the Bench is - Whether when non-resident Indian assessee’s property had remained vacant during the year, would it be assessed at NIL value under section 23(1)(c) or under the deeming provisions of section 23(1)(a), whereby the annual letting value of the property would be worked out. And the answer goes in favour the assessee.

Facts of the case

The assessee is a non-resident Indian owning eight properties in India. The assessee had shown income from house property and offered annual letting value for taxation from four properties, claimed an exemption on one property for self-occupation and offered three properties in Mumbai for NIL income as these had remained vacant and could not be let out during the year as these were inhabitable. All these three Mumbai properties had yielded income and been taxed in earlier assessment years. The assessee had filed a digital return of income declaring taxable income. The return was processed under section 143(1) and later selected for scrutiny.

According to the assessee, she was unable to let out one of the flats as it was old and not in a habitable condition; another flat had fallen vacant during the year but despite best efforts, a tenant could not be found. Another property, acquired during the previous year, was vacant during the year. Subsequently, it was let out and rental income had been offered for tax, whereby in terms of section 23(1)(c), the annual letting value of the property was adopted as NIL.

The AO however rejected the assessee’s statement being of the view that the income from house property had to be taxed on actual rent received or receivable under sections 22 and 23, whereby notional income of the assets had to be taken for taxing purposes. The AO held that the assessee had not shown any proof regarding efforts made to let out these properties, located in prime localities in Mumbai, which had fetched good rentals in subsequent years. Therefore, the AO adopted the notional value of 70 per cent on the rent received for assessment year 2008-09, for the assessment year under consideration in respect of these properties, which was added to the assessee’s income.

In appeal, the CIT(A) held that the assessee could claim an exemption by taking NIL value only for self-occupied property. Other than this one house, the annual letting value of the other houses had to be determined under section 23(1), as if these houses were let and vacant during some part of the year. Otherwise, section 23(4)(b) would come into the picture and annual letting value had to be determined as per section 23(1)(a). The CIT(A) thus held that the AO’s order determining the ALP was correct and confirmed it.

In appeal before the Tribunal, the assessee submitted that the properties had remained vacant during the whole year, whereby the provisions of section 23(1)(c) were applicable under which the annual letting value was nil and nil value had been adopted. The AO’s assessment of annual letting value from these properties was opposed to law and had to be deleted.

The Revenue side submitted that the deeming provisions contained in section 23(1)(a) were applicable and accordingly annual letting value was required to be worked out.

Having heard the parties, the Tribunal held that,

++ the Lucknow bench of the Tribunal, by following the decision of the Mumbai bench, had deleted the addition made in similar circumstances after considering two interpretations of section 23(1)(c). The Mumbai bench had held that one of the interpretations suggested by the Revenue that the property should be actually let out in the relevant previous year, was not correct because under section 23(1)(c), the property could be vacant during the whole of the relevant previous year. Hence, both these situations could not coexist. The second interpretation suggested by the revenue was that the property should be actually let out during any time prior to the relevant previous year and then only, it could be said that the property was let out and clause (c) would be applicable. Even this interpretation was not acceptable because it meant that the provisions of clause (c) related to the relevant previous year and not to any earlier period. For the correct and workable interpretation of the words 'property is let' in section 23(1)(c), it had to be determined whether actual letting out was a must for a property to fall under the purview of this section. Legislatures in their wisdom had used the words 'house is actually let'. This could not mean actuall letting out of the property because then there would have been no need to use the word 'actually' in section 23(3);

++ the Revenue’s interpretation referring to actual letting out in preceding period, also had no force as the legislature had used present tense. The Revenue’s interpretation could lead to undesirable results because in some cases, if the owner had let out a property for one month or even for one day, that property would acquire the status of 'let out property' for the purpose of section 23(1)(c) for the entire life of the property, even if there was no intention to let it out in the relevant year. Thus, following the order of the Mumbai bench, the Lucknow bench had held that as the rent received or receivable from the property in question during the year was nil, the same was to be taken as the annual value of the property in order to compute the income from house property as provided in section 23(1)(c);

++ facts in the present case were similar. Therefore, following the order of the Lucknow bench, the CIT(A)’s order was set aside and the addition made by the AO and sustained by the CIT(A) was deleted.