Deemed rent u/s. 23(1)(a) not invocable as property leased out for continuous long period

A.S. Raja Sons Enterprises (P.) Ltd Vs ACIT (ITAT Visakhapatnam)

ITAT Vishakhapatnam held that invocation of deemed rent under section 23(1)(a) of the Income Tax Act unjustified since property of the assessee is leased out for a continuous long period for the occupation of tenants.

Facts- The assessee is engaged in the business of letting out buildings both residential and non-residential. The case of the assessee was selected for scrutiny and accordingly statutory notices u/s. 143(2) and 142(1) of the Act. AO observed that assessee has entered into a lease agreement with three parties to rent out different portions.

AO noticed difference in rental income being received from three parties and thereafter issued letter dated 05.04.2021 to the assessee to explain why the deemed rent receivable by the property u/s. 23(1)(a) could not be estimated for the purpose of computation of income from House property of the assessee.

AO not being satisfied with the submissions made by the assessee made an addition of Rs. 6,04,80,000/- being the difference in the rental income u/s. 23(1) of the Act. Further, AO also disallowed a sum of Rs.12,50,000/- u/s. 24(b) of the Act.

CIT(A) dismissed the appeal. Being aggrieved, the present appeal is filed.

Conclusion- Held that the assessee property is leased out for a continuous long period for the occupation of tenants and therefore no deemed rent can be invoked as per section 23(1)(a) of the Act. Further, major portion of the building has been leased out and occupied by the M/s. Visakha Hospitals & Diagnostics Limited for a continuous period of more than ten years.

On similar facts, in assessee’s own case in ITA No. 667/Viz/2019 dated 26.11.2020 for the A.Y. 2015-16 this bench has dismissed the appeal of the revenue by relying on the decision of the Co-ordinate Bench of Kolkata in the case of Oberoi Hotels Pvt., Ltd., v. DCIT. In the result, appeal of the assessee is allowed.

FULL TEXT OF THE ORDER OF ITAT VISAKHAPATNAM

This appeal filed by the assessee against the order of Learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi [hereinafter in short “Ld.CIT(A)”] vide DIN & Order No. ITBA/NFAC/S/250/2024-25/1068294370(1) dated 03.09.2024 for the A.Y.2018-19 arising out of order passed under section 143(3) of the Income Tax Act, 1961 (in short ‘Act’) dated 11.05.2021.

2. Brief facts of the case are that, assessee is engaged in the business of letting out buildings both residential and non-residential which has filed its return of income for the A.Y. 2018-19 admitting total income of Rs. 70,36,870/-on 29.09.2018. Subsequently, the case was selected for scrutiny and accordingly statutory notices under section 143(2) and 142(1) of the Act were issued and served on the assessee through ITBA module. The Assessing Officer observed that assessee has entered into a lease agreement with three parties to rent out portions as follows: –

3. The Assessing Officer noticed difference in rental income being received from three parties and thereafter issued letter dated 05.04.2021 to the assessee to explain why the deemed rent receivable by the property under section 23(1)((a) could not be estimated for the purpose of computation of income from House property of the assessee. In response, assessee submitted reply stating that the lease agreement was entered by the assessee with M/s. Visakha Hospitals & Diagnostics Limited more than ten years back and the department in earlier assessment years have not raised any issues on the differential rental income. Further, it was also submitted during the assessment proceedings that majority of the building approximately 80000 Sq. Feet has been occupied by the hospital and only 2000 Sq. ft each has been occupied by the M/s. IndusInd Bank Ltd., and M/s. A.S. Raja Trust. The Assessing Officer not being satisfied with the submissions made by the assessee made an addition of Rs. 6,04,80,000/- being the difference in the rental income under section 23(1) of the Act. Further, Assessing Officer also disallowed a sum of Rs.12,50,000/- under section 24(b) of the Act.

4. On being aggrieved by the above additions, assessee is in appeal before Ld.CIT(A). Before Ld. CIT(A), assessee made similar submissions and also relied on the decision of the ITAT in assessee’s own case for the earlier assessment year i.e., A.Y. 2015-16. However, Ld. CIT(A) by relying on the decision of the Hon’ble High Court of Kerala in the case of Dr. K.M. Mehaboob [TS-618-HC-2016 (KER)] dismissed the appeal of the assessee.

5. On being aggrieved by the order of the Ld. CIT(A), assessee is in appeal before us by raising following grounds of appeal : –

“1. The order of the learned Commissioner of Income Tax (Appeals) is contrary to the facts and also the law applicable to the facts of the case.

2. The learned Commissioner of Income Tax (Appeals) is not justified in sustaining the addition of Rs.3,49,43,660 made by the assessing officer under the head ‘Income from House Property’ towards:

a. re-computation of annual value us 23(1)(a) at Rs.6,04,80,000 as against Rs.1,23,46,200 computed by the appellant.

b. disallowance of interest of Rs.12,50,000 claimed u/s 24 of the Act.

3. Any other ground that may be urged at the time of appeal hearing.”

6. Ground Nos. 1 & 3 are general in nature and needs no adjudication.

7. Ground No. 2 is with respect to addition of Rs.3,49,43,660/- as income from house property. On this issue, Ld. Authorised Representative [hereinafter “Ld.AR”] submitted that assessee has let out the property to hospital i.e. M/s. Visakha Hospitals & Diagnostics Limited, wherein the major portion of the building aggregating to 80000 Sq. Ft has been let out. Further, he submitted that the nominal portion of 2000 Sq. Ft each has been let out to M/s. IndusInd Bank Ltd., and M/s. A.S. Raja Trust at differential rates. He further argued that M/s. IndusInd Bank Ltd., being a commercial organisation and the property being a prime location the front portion was let out to the bank at a higher rate which cannot be compared to the property let out to M/s. Visakha Hospitals & Diagnostics Limited which has occupied the entire building of five floors. The Ld.AR relied on the order of the Tribunal in assessee’s own case for the A.Y.2015-16. He therefore pleaded that addition made by the Assessing Officer be deleted.

8. Per contra, Ld. Departmental Representative [hereinafter in short “Ld.DR”] submitted that the reliance placed by the Ld.AR in assessee’s own case for the A.Y. 2015-16, it was observed that the revenue has not brought any case contrary to the decision of the ITAT cited by the Ld.AR nor any material submitted by the Ld. DR reversing the decision of the ITAT Kolkata Bench on the same issue. The Ld. DR submitted that subsequently, Hon’ble High Court of Kerala in the case of CIT Dr. K.M. Mehaboob (supra) has held that the provisions of section 23(1) of the Act regarding estimation of rent for the purpose of let-out has been held in favour of the revenue. Ld. DR placed heavy reliance on the above case and pleaded that order of the Assessing Officer be sustained.

9. We have heard both the sides and perused the material available on record and the citations quoted by the rival parties. It is the case of the Assessing Officer that the assessee is receiving lower rent from M/s. Visakha Hospitals & Diagnostics Limited when compared to rental income received from other two parties namely M/s. IndusInd Bank Ltd., and M/s. A.S. Raja Trust. However, assessee contends that it is receiving the rental income as per the terms and conditions as stipulated in the rental agreement with the respective parties. The main contention of the Ld. AR is that the assessee property is leased out for a continuous long period for the occupation of tenants and therefore no deemed rent can be invoked as per section 23(1)(a) of the Act. Further, it was also contended by the Ld.AR that the major portion of the building has been leased out and occupied by the M/s. Visakha Hospitals & Diagnostics Limited for a continuous period of more than ten years. However, Assessing Officer did not agree with the explanation of the assessee and estimated the rental income under section 23(1)(a) of the Act.

10. On similar facts, in assessee’s own case in ITA No. 667/Viz/2019 dated 26.11.2020 for the A.Y. 2015-16 this bench has dismissed the appeal of the revenue by relying on the decision of the Co-ordinate Bench of Kolkata in the case of Oberoi Hotels Pvt., Ltd., v. DCIT in ITA No. 230/Kol/2012 dated 15.10.2015. The case relied on the Ld. DR could not be applied to the instant case as the co-owners themselves are the Directors of the lessee company and hence related. However, in the instant case, the lease has been done to the third non-related parties based on commercial consideration. The portion let out to M/s. A.S. Raja Trust which is a non-profit organisation is meagre and incidental to the hospital activities of M/s. Visakha Hospitals & Diagnostics Limited. It was explained that M/s. A.S. Raja Trust operates a blood bank as a non-profit organisation which is incidental to the hospital run by M/s. Visakha Hospitals & Diagnostics Limited which occupies major portion of the let-out area. Further, as submitted by the Ld.DR the decision of the Tribunal for the earlier assessment year is pending before Hon’ble High Court of Andhra Pradesh for adjudication. The order of the Tribunal, Visakhapatnam is neither stayed nor reversed by the Hon’ble High Court, therefore, we place reliance on the decision of the Tribunal, Visakhapatnam Bench while allowing the ground raised by the assessee in the appeal.

11. In the result, appeal of the assessee is allowed.

Order pronounced in the open court on 24^th October, 2024.