AO to determine annual letting value based on material evidences, if not satisfied with workings or municipal value – ITAT
In a recent judgment, ITAT has held that if property is vacant for the year under consideration, the duty is cast upon the AO to determine the annual letting value u/s 23(1)(a) of the Income Tax Act, 1961 (the Act). Further, AO has to determine annual letting value of house property based on material evidences, if he is not satisfied with workings or municipal value.
ABCAUS Case Law Citation:
ABCAUS 3929 (2024) (04) ITAT
Important Case Laws relied upon:
Shri Rajkumar P. Shevani
Sachin R. Tendulkar
Arihant Patni
Vivek Jain reported in 337 ITR 74
Pankaj Wadhwa 101 taxmann.com 161
Sushma Singla 76 taxmann.com 349 (P. & H.)
Tip Top Typography reported in 368 ITR 330 (Bom)
In the instant case, the assessee had challenged the order passed by the CIT(A) National Faceless Appeal Centre (NFAC) in in confirming the addition made by the Assessing Officer (AO) on account of deemed rent under the head income from house property.
The assessee was an individual, filed return of income declaring income by way of salary, house property, business/profession, capital gains and income from other sources.
Under scrutiny, notices u/s 143(2) and 142(1) of the Act were issued. In response to the said notices, the assessee filed details before the AO.
According to the AO, the assessee had shown gross annual value regarding an office which was low as compared to value of similar properties in the same premises. Further, fair rent of the office was also very low.
In response to the show cause, the assessee contended that the property was vacant during the year and municipal value was considered as deemed to be let out for computing income by taking support of the orders of the Co-ordinate Bench benches of ITATs
The AO held the municipal value would become the comparable only when no other comparable instances are available and proceeded to determine the gross annual value for property in accordance with the conditions laid down in clause (a) of Section 23(1) of the Act. Accordingly, he determined the net income for property by giving deductions on account of taxes to local authority, standard deduction u/s. 24(a) of the Act and interest paid on forward
capital. Regarding two other properties the AO in the absence of any working or supporting rental value, determined the income from property on estimate basis and passed order u/s 143(3) of the Act.
before the NFAC, it was specifically argued that the expression “the sum for which the property might be expected to be let out from year to year” as provided in Section 23(1)(a) of the Act does not mean the rent received in preceding years or the rent received for similar premises, but the rent receivable in the perfect market conditions which is best indicated by the municipal valuation.
Further, it was contended as the property could remain vacant throughout the year the annual value of the same is Nil by placing reliance in the case judgment of the Co-ordinate Bench Bench.
The NFAC observed that the assessee could not establish the municipal valuation is the reasonable value expected to let for the year in consideration and the annual value based on the municipal valuation adopted by the assessee cannot be considered as the “reasonable value expected to let” as for similar property of the assessee in the same year in the same location. By holding so, the NFAC, confirmed the order of Assessing Officer (AO).
The Tribunal observed that the assessee placed reliance on the order of the Tribunal wherein, it was held that a property could remain vacant throughout the year leading to a nil annual value. The CIT(A) had considered the same and observed that, subsequently, the Tribunal following the decision of Hon’ble High Courts held that rent for the assessee’s property shall be calculated as per the provisions of section 23(1)(a) of the Act, even if the claim of nil ALV u/s. 23(1)(c) of the Act is made on the ground that the said building was vacant for the year under consideration. The Tribunal opined that the judgment relied upon by the CIT(A) was fully applicable for the facts and circumstances in the present case.
The Tribunal observed that Hon’ble Bombay High Court had held that section 23(1)(a) of the Act is relevant for determining the income from house property and concerns determination of the annual letting value of such property. That provision talks of “the sum for which the property might reasonably be expected to let from year to year.” Further, the words “the sum for which the property might reasonably be expected to let from year to year” provide a specific direction to the Revenue for determining the “fair rent”. The Assessing Officer, having regard to the aforesaid provision is expected to make an inquiry as to what would be the possible rent that the property might fetch.
The Hon’ble High Court further observed that if the rateable value, if correctly determined, under the municipal laws can be taken as annual letting value u/s. 23(1)(a) of the Act. However, it was made it clear that rateable value is not binding on the AO, if the AO can show that rateable value under municipal laws does not represent the correct fair rent, then he may determine the same on the basis of material/ evidence placed on record.
Further Hon’ble Punjab and Haryana High Court had held that if the property is vacant for the year under consideration, the duty is cast upon the AO to determine the annual letting value u/s 23(1)(a) of the Act.
The Tribunal opined that the AO rightly disregarded the municipal valuation as shown by the assessee and determined the net income taking into account the average value of other similar properties belonging to assessee in the same building by giving deductions i.e. taxes paid to local authority, u/s. 24(a) of the Act and interest paid on borrowed capital.
The Tribunal rejected the submissions that no ALV could be determined on the property which was vacant under the year under consideration.
For the remaining two properties, according to the AO, the said fair rent was very low and no working or supporting evidences furnished by the assessee for showing rental value. In such circumstances, the AO estimated rent per month as fair market value.
The Tribunal opined that the order of CIT(A) was not justified in confirming the order of AO in determining annual letting value on estimation basis.
Therefore, the Tribunal held that order of CIT(A) in confirming the view of AO, which is on estimation, was not justified. Therefore, the ITAT remanded the matter to the file of AO to determine correct annual value for two properties.
Download Full Judgment ABCAUS 3929 (2024) (04) ITAT Click Here >>
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