Brief- ITAT Mumbai held in case of ACIT vs. Suryashankar Properties Limited that Intention of letting out the property is to be seen for invoking clause (c) of section 23(1) for computing the annual letting value of the property and it is irrelevant whether the property is/was let out.
Brief Facts of the Assessee:
The Assessee Company is formed with the object of acquiring immovable property (“the property”) to be let out but the property was not let out during the financial year under consideration. The Assessee Company had claimed certain expenditure including interest which was laid out for the purpose of assessee’s business. The Assessee computed the income under the head “Income from House property” by considering the annual value from the property as Nil and also carried forward the loss as provided for in Section 71B of the Income Tax Act, 1961 (“The Act”).
The Assessing officer however rejected the assessee’s claim of ascertaining annual value of the property as Nil as per section 23(1)(c)and consequently disallowed interest paid by treating the same as pre-operative expenditure and by contending that the pre-operative expenses can be claimed under section 35D of the Act and thereby also disallowed the claim of the assessee for carry forward of loss under the head Income from House Property” as provided for in Section 71B of the Act.
Held by CIT (A):
The CIT (A) upheld the Assessee’s contention to compute the income under the head “Income from House property” and also allowed the Assessee to carry forward the loss as provided for in Section 71B of the Act.
Question of Law:
Whether clause (c) of section 23(1) can only be invoked where the property was let out/not let out in earlier years and property is not let out in the present year?
Contention of the Revenue:
The Revenue contended that since the assessee company was formed with the object of acquiring the property to be let out, and the said property had not been let out, the assessee had not commenced “business” and consequently all the expenditure, including the interest, is to be treated as “pre-operative expenditure” and could be claimed under section 35D of the Act.
Even if the income is computed under the head “Income from house property”, the annual value of the property cannot be computed by invoking clause (c) of section 23(1) as the said clause can be invoked only if the property was let out in the previous year.
Contention of the Assessee:
The Assessee relied on the judgement in the case of M/s Aryabhata Properties Limited, ITA No.6928/Mum/2011, order dated 31-7-2013 in which similar issue was raised. The annual value of the property computed as per section 23(1)(c) of the Act was Nil as the property was vacant in the whole year and loss by way of interest was claimed.
It was the contention that provisions of section 23(1)(c) will apply as the property is held with an intention to let out and efforts are made to let out during the year.
Held by the Income Tax Appellate Tribunal (“ITAT”):
The ITAT held that facts of the Assessee are pari materia with the case law relied on by the Assessee in case of Aryabhata Properties Limited (supra) in which the conditions to be satisfied for invoking section 23(1)(c) was explained.
The words of Section 23(1)(c) do not talk of actual let out also, but talk about the intention to let out. 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 (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.
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).
Hence the order of CIT(A) was upheld for computing losses under the head income from house property and allowing the said loss to be carried forward u/s. 71B of the Act, so far as it pertained to the interest expenditure. .
Section 23 –
23. (1) For the purposes of section 22, the annual value of any property shall be deemed to be—
(a) the sum for which the property might reasonably be expected to let from year to year; or
(b) where the property or any part of the property is let and the actual rent received or receivable20 by the owner in respect thereof is in excess of the sum referred to in clause (a), the amount so received or receivable; or
(c) where the property or any part of the property is let and was vacant during the whole or any part of the previous year and owing to such vacancy the actual rent received or receivable by the owner in respect thereof is less than the sum referred to in clause (a), the amount so received or receivable.