ALV Must Be Limited to Actually Let-Out Portion ITAT Delhi

ITAT Delhi order in Asha Burman Vs ACIT on whether assessment should be limited only to the part of the property actually let out, excluding self-occupied portions

Summary: The ITAT Delhi addressed whether the Assessing Officer was justified in taxing the entire residential property’s Annual Letting Value (ALV) or only the portion actually let out. The assessee owned a multi-storey building in New Delhi, leasing only the third floor while occupying the remaining floors. Despite physical verification confirming partial letting, the AO assessed the entire property’s ALV on a notional basis, citing shared utilities. The Tribunal found this approach arbitrary and unsupported by evidence, holding that only the rented portion could be assessed under Section 23(1), while self-occupied portions must be excluded under Section 23(2). The ITAT also directed the AO to recompute ALV based on municipal valuations, permit statutory deductions under Section 24, and reassess related issues like deemed dividend under Section 2(22)(e). Consequently, assessments for AYs 2012–13 to 2017–18 were set aside and remanded for fresh determination consistent with factual letting and legal principles.

Key Issue:-

Whether the AO was justified in treating the entire building as let out and assessing the corresponding notional ALV, or whether assessment should be limited only to the part of the property actually let out, excluding self-occupied portions?

Brief Facts:-

The assessee, an individual, owns a residential property at 23, Kautilya Marg, Chanakyapuri, New Delhi.

• The building comprises four floors: ground plus three floors.
• Since acquisition, the assessee has self-occupied the ground floor and first two floors.
• Only the third floor (approx. 2,758 sq. ft.), including a terrace, was leased to M/s Gyan Enterprises Pvt. Ltd. from 1 April 2011 for Rs. 30,000 per month, with a large refundable security deposit of Rs. 10 crore.
• The Assessing Officer (AO) initially assessed the entire property as let out and determined the Annual Letting Value (ALV) at Rs. 1.78 crore based on a comparable property’s rent.
• On appeal, CIT(A) upheld the AO’s view, but the Tribunal remitted the matter to the AO for physical verification of the letting status.
• Physical visit and caretaker’s statement confirmed that only part of the building was let out, and the balance was self-occupied.
• Despite this, the AO maintained the whole property’s ALV as taxable on the basis of having a single water and electricity meter.
• The assessee argued that the ALV assessed should be limited to the portion actually let out, allowing deduction under section 24 and excluding self-occupied areas.

Relevant Statutory Provisions

Section 22, Income Tax Act, 1961: Income chargeable under the head “Income from house property” includes the Annual Letting Value of property.

Section 23(1) and 23(2), Income Tax Act, 1961:

1) Annual value is deemed to be:

(a) sum for which property might be reasonably expected to let (ALV), or

(b) actual rent received if higher, or

(c) actual rent received if less due to vacancy.

2) Where property or part thereof is occupied by the owner for his residence, the annual value of such portion shall be taken as zero.

Tribunal’s Observations

• The caretaker’s statement (under section 131) confirmed partial letting of third and fourth floors and self-occupation of upper floors by the assessee.
• AO’s method of determining ALV on comparables without physical verification or considering caretaker statement was arbitrary.
• Reliance on a single meter to prove whole building letting was speculative and not supported by law.
• Notional ALV of Rs. 1.78 crore was unscientific and contradicted local house tax records showing ALV around Rs. 27.58 lakh.
• The entire property’s ALV cannot be taxed where only a part is let out; ALV must be proportionate to the let-out portions.
• Deduction under section 24 and house tax payments must be allowed while computing income from house property.

Decision: 

The ITAT set aside all assessments from AY 2012-13 to 2017-18 insofar as ALV and income from house property portions are concerned.

Since we have set aside the assessment for the AY 2015-16 for making assessment afresh the decision taken there in applies to all these appeals. Thus, all these assessments for the assessment years 2012-13, 2013-14, 2014-15 & 2016-17 passed u/s 143(3) r.w.s. 147 are set aside and the issues in appeals are restored to the file of the AO for making fresh assessment along with the assessment for the AY 2015- 16. For the AY 2012-13 the assessee also challenged the addition made u/s 2(22)(e) of the Act in respect of rental deposit received by the assessee from the tenant which was treated as deemed dividend. This ground also is restored to the AO to decide afresh in the light of the above observation that the property was in fact let out by the assessee and the deposit was received by the assessee is only a rental deposit. Therefore, since this ground is consequential the same is restored to the file of the Assessing Officer.

11. Coming to the appeal for the AY 2017-18 we observe that the same is completed u/s 143(3) of the Act and the issue remains the same to that of the appeals for the assessment years 2012-13, 2013-14, 2014-15 & 2016-17. Thus, the assessment made u/s 143(3) for the Ay 2017-18 is set aside and the issue in appeal is restored to the file of the AO to decide afresh in the light of the observations made by us for the AY 2015-16.

The matter was remitted to the AO to redo the assessments consistently:

• Taking into account the portion actually let out.
• Determining ALV based on local house tax valuations and factual evidence.
• Allowing statutory deductions under section 24.

References 

The Supreme Court in Diwan Daulat Rai Kapoor vs. NDMC & Others (122 ITR 700) held standard rent (assessed by local authorities for house tax) is the appropriate ALV for Income Tax purposes.

• Sheela Kaushish vs. CIT (131 ITR 435) held standardized procedure for house tax valuation applies for IT ALV assessment.
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• CIT vs. Shoorji Vallabhdas & Co. (46 ITR 144) established that real income must be assessed, not notional. Suspicion or assumption cannot override factual evidence.