Article On Section 23 In Case The Owner of Property Is Not Able To Find A Tenant And Property Remains Vacant, Can Addition On Account Of Notional Rent Be Made Or Not ?

Here we are discussing Section 23 of Income Tax Act 1961 which provides how to determine annual value of a property for the purpose of calculating income from house property. The Section is reproduced here for ready reference:

 Annual value how determined.

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 receivable 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 :

Provided that the taxes levied by any local authority in respect of the property shall be deducted (irrespective of the previous year in which the liability to pay such taxes was incurred by the owner according to the method of accounting regularly employed by him) in determining the annual value of the property of that previous year in which such taxes are actually paid by him.

Explanation.—For the purposes of clause (b) or clause (c) of this sub-section, the amount of actual rent received or receivable by the owner shall not include, subject to such rules as may be made in this behalf, the amount of rent which the owner cannot realise.

(2) Where the property consists of a house or part of a house which—

(a) is in the occupation of the owner for the purposes of his own residence; or

(b) cannot actually be occupied by the owner by reason of the fact that owing to his employment, business or profession carried on at any other place, he has to reside at that other place in a building not belonging to him, the annual value of such house or part of the house shall be taken to be nil.

(3) The provisions of sub-section (2) shall not apply if—

(a) the house or part of the house is actually let during the whole or any part of the previous year; or

(b) any other benefit there from is derived by the owner.

(4) Where the property referred to in sub-section (2) consists of more than 54[two houses]—

(a) the provisions of that sub-section shall apply only in respect of 55[two] of such houses, which the assessee may, at his option, specify in this behalf;

(b) the annual value of the house or houses, 56[other than the house or houses] in respect of which the assessee has exercised an option under clause (a), shall be determined under sub-section (1) as if such house or houses had been let.

(5) Where the property consisting of any building or land appurtenant thereto is held as stock-in-trade and the property or any part of the property is not let during the whole or any part of the previous year, the annual value of such property or part of the property, for the period up to 57[two years] from the end of the financial year in which the certificate of completion of construction of the property is obtained from the competent authority, shall be taken to be nil.

The language of section is very clear and everything is self explanatory. Now the question is in case a person hold two properties for the purpose of his occupation, then the annual value shall be taken as NIL in case of both the properties. In case he buys third property then annual value of the same has to be determined according to Section 23(1) and if lying vacant then notional rent which has to be calculated as per clause (a) of Section 23(1) which states that the sum for which the property might reasonably be expected to let from year to year shall be taken as annual value of the house property for calculating income from house property. Now the question is in case a person is not able to find a tenant then he will have to pay tax on notional rent ? Section 23(1)(c) provides that where the property or part is let and was vacant during the whole or any part of the year, 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 shall be taken as annual value. Following case laws are important in this matter :

Premsudha Exports (P) Ltd. And … vs Assistant Commissioner Of Income … on 31 May, 2007 Equivalent citations: 2008 110 ITD 158 Mum, (2007) 110 TTJ Mum 89 In this case it was observed that in case no rent is received by assessee then he will fall in clause (c) and determination of annual value shall be actual rent received by assessee. Section 23 deals with computation of ALV in three types of situations. The first situation pertains the determination of ALV on the basis of sum for which the property might reasonably be expected to let from year to year. The second situation deals where the property or any part of property is let and the actual rent received or receivable by the owner in respect thereof is in excess of sum referred to in Clause (a) the amount so received or receivable would be the ALV. The third situation deals 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 rent received or receivable by the owner in respect thereof is less than sum referred to in Clause (a) the amount so received or receivable would be the ALV. In the instant case, since the property remained vacant for the whole year and no rent was received, the ALV should be computed at nil as per Clause (c) of Sub-section 23(1) of the Act. The lower authorities did not examine this aspect and they have confined their deliberation on Clauses (a) and (b). Since all the three clauses are independent clauses and assessee falls within Clause (c), the determination of ALV should be as per Clause (c) of Section 23(1).

In case of Sachin R. Tendulkar, Mumbai vs Dcit 23(3), Mumbai on 10 August, 2018 IN THE INCOME TAX APPELLATE TRIBUNAL “G” BENCH, MUMBAI I.T.A. No. 3755/Mum/2016 (Assessment Year: 2012-13) it was held that in case no rent was  derived from property then no annual value can be taken for the purpose of calculating income from house property.

The case of Empire Capital Pvt. Ltd. Vs ACIT (ITAT Mumbai) Appeal Number : ITA No. 6204/MUM/2018 Date of Judgement/Order : 30/10/2019 Related Assessment Year : 2014-15 The said case is also on the same facts and addition made on account of notional rent was deleted by honorable ITAT.

I hope the article will be useful to everyone interested in this topic.

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