Case Law Details
Pavel Garg Vs ACIT (ITAT Delhi)
Annual value of house property cannot be determined on ad-hoc basis when rent realized by assessee in subsequent years is on record
ITAT finds that the AO has computed 10% of the value of investments in house property whereas the ld. CIT(A) reduced the amount to 5% of the value of investments. Both decisions are on ad-hoc basis. The rent realized by the assessee in the subsequent years is on record with all the evidences. Hence, we deem it proper to refer the matter back to the file of the AO to compute the income from house property as per the municipal value in accordance with the provisions of Section 23(1) of the Income Tax Act, 1961.
FULL TEXT OF THE ORDER OF ITAT DELHI
The present appeal has been filed by the assessee against the order of the ld. CIT(A)-20, New Delhi dated 27.03.2018.
2. Following grounds have been raised by the assessee:
“1. That the addition of Rs. 10,46,249 on account of Deemed Rent of house properties lying vacant for whole of the year is illegal and unjustified and, therefore, ought to be deleted.
2. Without prejudice to the above, the computation of deemed rent of Rs. 10,46,249 calculated @ 5% of investment in house property is not in conformity with the annual value of house determined as per municipal valuation and therefore, the excess of Rs. 10,46,249 over such annual value as per municipal valuation is illegal and unjustified and ought to be deleted.
3. That the Commissioner (Appeal) erred in not deciding the issue raised by the assessee that deemed annual value of house property cannot exceed the annual value of house determined as per municipal valuation and therefore, the order passed by the Commissioner (Appeal) is illegal and unjustified.
4. Without prejudice to the above, deemed annual value calculated @ 5% of value of investment in house property on ad hoc basis without bringing on record any reason or justification to substantiate the rate of 5%, ignoring the rent fetched by adjoining house property, is based upon the whims, fancies and caprices of the Commissioner (Appeal) and, therefore, the addition of Rs. 10,46,249 on account of deemed rent is illegal, unjustified and ought to be deleted.”
3. The assessee is an individual earning income from salary, house property and interest. The assessee filed his return of income on 30.09.2013 declaring income of Rs. 1,09,45,520/-. The case was selected for scrutiny assessment.
4. The immovable properties of the assessee consisting of (i) house situated at 32, Sector-15, Sonepat, Haryana-132302, and (ii) office situated at DTJ-120, 1st Floor, Jasola Tower-B, Jasola, New Delhi- 110025 had remained vacant during the whole of the previous year relevant to the assessment year 2013-14.
5. During the course of assessment proceedings, the assessee submitted that their annual value was “Nil” by virtue of the provisions of section 23(1)(c) of the Income Tax Act, 1961. The Assessing Officer did not agree with the assessee’s contention and added notional annual value calculated @10% of cost of the abovementioned properties to the returned income of the assessee.
6. Aggrieved, the assessee filed appeal before the ld. CIT(A).
7. Before ld. CIT(A), the assessee submitted that he intended to let out the property during the year under consideration. However, he could not find any suitable tenant and, therefore, both properties remained vacant during the year under consideration. As soon as he found tenant, he let out both properties in succeeding year 2016-17. As evidence of properties actually let out in FY 2016-17, assessee submitted Rent Agreement, Monthly Rent Bills raised by assessee upon tenants with service tax charged thereon and Bank Statement highlighting the receipt of rent cheques from tenants. The assessee contended that courts have held that the phrase “is let” used in section 23(1)(c) means “is intended to be let”. The assessee further submitted that it is not the case of AO that the impugned properties were in self-occupation of assessee. Therefore, the annual value of the said two vacant, intended to be let out, actually let out in succeeding year and never in self-occupation of assessee, was “Nil” by virtue of section 23(1)(c).
8. The ld. CIT(A) rejected the assessee’s contention on the ground that the properties were not let in past years and letting in future years does not entitle the assessee to relief granted in section 23(1)(c).
9. Aggrieved the assessee filed appeal before us.
10. The assessee submitted that section 23 wherever uses the phrase “is let” includes “deemed to be let” (term used in section 23(4)(b))” and “actually let” [term used in section 23(3)(a)]. The legislature in its wisdom has used these two phrases – “is let”, and “actually let” – in different context and meaning. Had the Parliament intended to mean “is let” as “is actually let”, there would have arisen no occasion to use the phrase “actually let” in section 23(3)(a) instead of “is let” used in section 23(1)(b) and 23(1)(c). Moreover, use of phrase “actual rent received” after “is let” in the section 23(1)(b) and 23(1)(c) points out that the legislature well considered a situation where the property is let without actual rent received or receivable. It thus means that “is let” is certainly wider than “actually let” and includes both “deemed let” and “actually let”. The distinction between the terms “is let” and “actually let” becomes further apparent from a bare perusal of sub-section (4) of section 23 which provides that where an assessee owns more than one house property in occupation used for the purpose of own residence, the annual value of any one of such house property, at his option, shall be taken to be “Nil” and the annual value of the remaining house or houses shall be determined under sub-section (1) as if such house or houses had been let. Here the words “sub-section (1)” and “as if had been let” cannot be ignored and have to be given due meaning. It is by now a settled law that deeming fictions have to be strictly construed in such a manner as to give logical meaning to the fiction. Once section 23 deems properties, not being any one of the self-occupied residential house and actually let properties, as let property for the purpose of section 23(1), there is no justification to state that the term “is let” wherever used in section 23(1) including section 23(1)(c) does not include such deemed let property. It is further to be noted that there has never been any dispute to the proposition that subsection (1) of section 23 deems ALV as income from house property and covers all house properties – whether actually let or deemed to be let. It thus means that besides actually let properties, section 23 prescribes computation machinery for deemed let properties also. Moreover, if the meaning of the phrase “is let” is restricted to “actually let”, the two phrases “is let” and “was vacant during the whole of the previous year” seem to contradict each other, for a property cannot be vacant during the whole of the financial year if it is actually let or vice versa. However, once it is understood that section 23 covers deemed let as let properties and thus the phrase “is let” includes both “actually let” and “deemed let” properties, the use of phrase “was vacant during the whole of the previous year” in the company of “is let” begins to covey its due meaning. The meaning becomes that in the case of actually let property, such property may remain vacant for part of the year, and in the case of deemed let property, such property may remain vacant for the whole or part of the relevant financial year.
11. It was argued that section 24(1)(ix), which provided for vacancy allowance upto AY 2001-02 against computation of annual value of a house property remaining vacant. Section 24(1)(ix) was deleted from statute vide Finance Act, 2001 and simultaneously section 23(1)(c) was inserted. Prior to deletion, section 24(1)(ix) read as – “where the property is let and was vacant during a part of the year, that part of the annual value which is proportionate to the period during which the property is wholly unoccupied or, where the property is let out in parts, that portion of the annual value appropriate to any vacant part, which is proportionate to the period during which such part is wholly unoccupied.” A perusal of section 24(1)(ix) shows that the legislature considered the words “vacant” and “unoccupied” as synonymous. The sub-section provided that where a property was let out for a part of the year and remained vacant or unoccupied for the remaining part of the year, the annual value of such property was to be reduced proportionate to the period for which it remained vacant. This allowance was termed as vacancy allowance. A bare perusal of section 24(1)(ix) clearly shows that it did not contain the phrase “during the whole of the previous year”, as appearing in the present section 23(1)(c). It was argued that, at that time, the intention of Legislature was that the assessee could avail vacancy allowance only for the part of the period and if the property remained vacant throughout the whole of the year, no vacancy allowance was allowable. And obviously, the annual value of such property was to be computed by taking recourse to section 23(1)(a), i.e. ALV. However, the substitution of section 23 by virtue of Finance Act, 2001 made the following two major departures inasmuch as the admissibility and calculation of vacancy allowance is concerned. Firstly, for the first time, by virtue of insertion of sub-clause (c) to section 23(1), the vacancy allowance was provided for in the computation section itself, i.e. section 23, instead of section 24 which laid down admissible deductions against the annual value computed u/s 23. Secondly, the vacancy allowance was also allowed where the property remained vacant during the whole of the relevant financial year, which was not there in the erstwhile section 24(1) (ix).
12. It was argued that section 23(1)(c) covers the following three situations:
1. Where the property or any part of the property is deemed to be let and was vacant during the whole of the relevant financial year – In such case, the annual value shall be nil because actual rent received or receivable is nil provided such property is not in self-occupation of the assessee, for in that case, it shall not be vacant property.
2. Where the property or any part of the property is deemed to be let and was vacant during the part of the financial year – In such case, owing to vacancy, the annual value for the vacant period shall be nil. However, for the part period during which the property was in occupation of the assessee for his own residence or for deriving any other benefit therefrom and thus not vacant although deemed as let property, the ALV for that period shall be deemed to be its annual value.
3. Where the property or any part of the property is actually let and was vacant during part of the relevant financial year – In such case, the actual rent received or receivable shall be the annual value.
13. In the instant matter, the properties deemed to be let were vacant during the whole of the relevant financial year and were not in self-occupation of the assessee. Hence, the properties fall in aforesaid Situation l and, therefore, the annual value shall be “Nil”.
14. It was argued that even if the annual value is to be computed u/s 23(1)(a), i.e., ALV or fair value, based upon various High Court orders, the assessee submitted that the annual value can never exceed the municipal value and/or standard rent determinable under the provisions of the relevant statute.
15. It was argued that to prove the municipal value, assessee submitted copy of property tax challans and property tax returns of the said two immovable properties. As per said evidences, the annual value of the properties situated at (i) 32, Sector-15, Sonepat, Haryana-132302 and (ii) DTJ-120, 1st Floor, Jasola Tower-B, Jasola, New Delhi-110025 came to Rs.16,000/- and Rs.52,698/- respectively, totaling to Rs.68,698/-.
16. The assessee further submitted that actual rent realized by the assessee in FY 2016-17 of the said two properties situated at (i) 32, Sector-15, Sonepat, Haryana-132302 and (ii) DTJ-120, 1st Floor, Jasola Tower-B, Jasola, New Delhi-110025 was Rs. 110,400/- (Rs. 9200 per month) and Rs.1,44,000/- (Rs. 12000 per month) respectively, totaling to Rs. 2,54,400. As evidence, assessee submitted Rent Agreement, Monthly Rent Bills raised by assessee upon tenants with service tax charged on rent and Bank Statement highlighting the receipt of rent cheques from tenants in FY 2016-17. The assessee thus contended that annual value of the said two properties in terms of section 23(1)(a) came to Rs. 2,54,400/-.
17. The assessee further submitted along letter dated 09.03.2016 the property-wise chart of rental income (copy enclosed herewith at As Page no. ) earned on different immovable properties owned by the assessee with no adverse inference drawn by the AO in respect of annual income of those properties. The chart revealed that the assessee earned rent of Rs.48,000/- during the impugned AY 2013-14 from each of house properties situated at (i) 30, Sector-15, Sonepat, Haryana-132302, (ii) 114-L, Model Town, Sonepat, Haryana-132302, the and (iii) 115-R, Model Town, Sonepat, Haryana-132302. Undoubtedly, the house property situated at 30, Sector-15, Sonepat, Haryana-132302 was adjoining with the house property situated at 32, Sector-15, Sonepat, Haryana-132302 in respect of which the Commissioner (Appeal) has determined annual value at Rs. 3,15,750/- against the annual value of Rs. 48,000/- accepted by the AO for the said adjoining house property and other house properties in close vicinity.
18. Thus, it was argued that the deemed annual value @ 5% of value of investment in house property was calculated by ld. CIT(A) on ad-hoc basis without bringing on record any reason or justification to substantiate the rate of 5%, ignoring the actual rent fetched by adjoining house properties and admitted by the AO during the course of assessment proceedings without drawing any adverse inference in respect thereof.
19. Heard the arguments of both the parties and perused the material available on record.
20. We find that the AO has computed 10% of the value of investments in house property whereas the ld. CIT(A) reduced the amount to 5% of the value of investments. Both decisions are on ad-hoc basis. The rent realized by the assessee in the subsequent years is on record with all the evidences. Hence, we deem it proper to refer the matter back to the file of the AO to compute the income from house property as per the municipal value in accordance with the provisions of Section 23(1) of the Income Tax Act, 1961.
21. In the result, the appeal of the assessee is allowed for statistical purpose.
Order Pronounced in the Open Court on 15/02/2022.
