Vacancy allowance u/s 23(1)(c) allowable for property not let out due to reasonable cause or despite effort. Municipal rate substituted for comparable market rent
ABCAUS Case Law Citation:
ABCAUS 2795 (2019) (02) ITAT
Important Case Laws Cited/relied upon by the parties
CIT vs. Tip Top Typography [2014] 368 ITR 330 (Bom)
Saif Ali Khan Pataudi vs. ACIT
In the instant case, the assessee had challenged the order of the learned Commissioner of Income Tax (Appeals) in confirming addition of Net Annual letting value of the property vacant throughout the year based on comparable rent as fair rent.
The assessee owned six floors in a building. Three floors were actually let out and remaining three floors were vacant due to a notice by the Municipal Corporation.
The AO however applied the average rate of rental for rented three floors for the vacant area, and assessed taxable deemed rent.
Before the CIT(A), the assessee’s plea was that the value should be taken as nil in accordance with the provisions of section 23(1)(c) of the Income Tax Act, 1961 (the Act). In the alternative, it was argued that the ALV should be the municipal rateable value.
It was also contended that the vacant flats were being in dispute with Municipal Corporation and, hence, the calculation of the notional rent was not correct.
However, the CIT(A) did not accept the same. He proceeded to reject the submissions of the application of municipal rateable value. He further did not accept the ratio as emanating from the Hon’ble High Court decision.
Accordingly, he upheld the AO’s action.
Against the above order, the assessee was in appeal before us.
Before the Tribunal, the assessee contended that it was undisputed that the said vacant floors were not let out during the concerned Assessment Year. He also submitted that it was also undisputed that there was notice from Municipal Corporation directing to regularize the structure and order issued for demolishing of partitions and cabins for said three floors.
The Tribunal agreed with the assessee in that there was reasonable cause due to which the said premises could not be let out during the concerned Assessment Year.
The Tribunal placed reliance upon the provision of section 23(1)(c) and the decision of the ITAT wherein the vacancy allowance was allowed and it was held that letting out a house which is defective/not constructed as per an approved plan cannot be forced upon the assessee.
In the said case, the Tribunal examined the provisions of sub-section (3) of section 23 and opined that the Legislatures in their wisdom have used the words ‘house is actually let’ which shows that the words ‘property is let’ cannot mean actual letting out of the property because had it been so, there was be no need to use the word ‘actually’ in sub-section (3) of section 23.
The Tribunal had opined that if the property is held by the owner for letting out and efforts are made to let it out, that property is covered by clause 23(1)(c) and this requirement has to be satisfied in each year that the property was being held to let out but remained vacant for whole or part of the year.
The Tribunal had clarified that the meaning and interpretation of the words ‘property is let’ cannot be ‘property actually let out’. Thus, if a property is held with an intention to let out in the relevant year coupled with efforts made for letting it out, it could be said that such a property is a let out property and the same would fall within the purview of clause (c) of section 23(1).
In the present case, the Tribunal, while examining it on the provisions of section 23(1)(c) and above precedent, found that the assessee’s submissions that the property could not be let out due to reasonable cause, was cogent.
Further, the Tribunal also noted that the assessee had accepted that the municipal rateable value may be applied to compute the fair rental value to be brought to tax in light of the Hon’ble Jurisdictional High Court decision in which it was duly expounded that the municipal rateable value though not binding on the AO, is approved method for determining the fair rental value and it is only when the AO is convinced that case before him is suspicious and the determination by the parties is doubtful, that he can resort to enquire about the prevailing rate in the locality, the AO can reject the municipal rateable value.
The Tribunal observed that it was not the case of the AO that the assessee had actually let out of the property or he had received some undisclosed money in lieu, and he was not disclosing the income.
Accordingly, the Tribunal directed the AO to apply the municipal rateable value in determining the fair rental value to be brought to tax.
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