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Facts
The assessee is challenging an order related to the computation of "Income from House Property" for a flat. The Assessing Officer (AO) treated the flat as deemed let out and computed income based on market rent, increasing it by 10%, whereas the assessee had claimed exemption based on municipal valuation.
Held
The Tribunal held that for vacant properties, the tax on rental income should be calculated based on the municipal rateable value, not the market rent estimated by the AO. The addition made by the AO was directed to be restricted to the municipal valuation for 10 months.
Key Issues
Whether the deemed rental income of a vacant property should be calculated based on municipal rateable value or market rent assessed by the AO, especially when the assessee has relied on previous precedents and High Court rulings.
Sections Cited
143(3), 23(1)(a), 23(4), 22, 23
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Income Tax Appellate Tribunal, “D” BENCH MUMBAI
Before: SHRI SANDEEP GOSAIN & SHRI GIRISH AGRAWAL
Present for: assessee : Shri M.M. Golvala, Advocate Revenue : Shri Annavaram Kosuri, Sr. DR Date of Hearing : 15.07.2025 Date of Pronouncement : 16.09.2025 O R D E R
PER GIRISH AGRAWAL, ACCOUNTANT MEMBER:
This appeal filed by assessee is against the order of Ld. CIT(A), National Faceless Appeal Centre (NFAC), Delhi, vide order no. ITBA/NFAC/S/250/2024-25/1072848834(1), dated 03.02.2025 passed against the assessment order by Assessing Officer, Circle- 5(3)(1), Mumbai, u/s. 143(3) of the Income-tax Act, 1961 (hereinafter referred to as the “Act”), dated 16.12.2019 for Assessment Year 2017- 18.
2. Grounds taken by the assessee are reproduced as under:
“1) Both the lower authorities erred in computing "Income from House Property" in respect of Flat No.12B in building called "Manek", at Rs. 19,40,400 as against Rs. 5,026 returned by the assessee. 2) Both the lower authorities erred in ignoring the decisions of the Supreme Court and the jurisdictional High Court which had already interpreted the provisions of section 23(1)(a). 3) Without prejudice to the Ground No.1 above, the income from house property determined by the Assessing Officer is highly excessive and arbitrary and the same requires to be reduced substantially. 4) Both the lower authorities erred in not following the order of the Income tax Appellate Tribunal in the assessee's own case for Assessment Year 2011-12. 5) Both the lower authorities erred in not following the order of the CIT(A) in the assessee's own case for Assessment Years 2012-13, 2014-15 and 2016-17, against which orders no appeal is pending. 6) Without prejudice, both the lower authorities failed to consider that the addition, if any, could only have been made for 10 months.”
Assessee has raised six grounds, out of which ground No.6 is not pressed, accordingly, ground no.6 is dismissed as not pressed. All grounds from 01 to 05 relates to one sole issue of addition of Rs.19,40,400/- as deemed income from house property in respect of Flat No.12B in building called “Manek”, which according to the assessee is excessive and arbitrary and without following the precedents in the earlier years held in his favour.
Brief facts of the case are that assessee owns two flat in Mumbai, i.e., a) Flat No. 12B in building called "Manek"; (deemed let out) b) Flat No. 14B in building called "Manek"
Ravi K Sheth AY 2017-18 Flat no. 12B has been self-occupied by the assessee for more than 20 years. Flat No. 14B was vacant during the year under consideration, and no rent has been received nor has any income accrued to the assessee. In respect of the said flat, exemption was claimed u/s. 23(4). Assessee had gifted Flat No. 12B to his son in January 2017 under a registered Gift Deed dated 30.01.2017. Assessee inadvertently omitted to compute the deemed let out rent in respect of Flat 12B for the period 01.04.2016 to 31.01.2017.
4.1. During the course of the assessment proceedings, Assessing Officer issued a show cause notice dated 15.10.2019 asking the assessee to show cause as to why market rent should not be considered as deemed rent in respect of Flat 12B as has been done in Assessment Years 2013-14, 2014-15 and 2016-17. On receipt of the notice the assessee realised his inadvertent error and requested the Assessing Officer vide letter dated 09.12.2019 to consider the deemed rent of Flat No. 12B on the basis of the Municipal Rateable Value for which he furnished as per the certificate issued by the Co operative Society and the Mumbai Municipal Corporation and to treat the Return of Income as amended to that extent. Copies of these documents are placed in the paper book. Assessee, vide letter dated 09.12.2019, submitted that the flat had not been let out and, therefore, to consider the deemed rent on the basis of the Municipal Rateable Value as per the Certificate issued by the Co-operative society. The Assessing Officer rejected the assessee's submissions and following earlier years' assessment orders, adopted the market rent for 10 months, and also increased the same notionally by 10%, thereby, assessing the income under the head "Income from House Property" at Rs. 25,12,440/- in respect of Flat No. 12B.
Ravi K Sheth AY 2017-18 4.2. According to the assessee, in order to determine the deemed rent in respect of a property, Municipal valuation is one of the tests to be applied in determining the bonafide annual value of a property. Assessee submitted that ld. CIT(A) in the assessee's own case for AY 2012-13, 2014-15 and 2016-17 has vide order dated 31.10.2019 accepted the assessee's contention and deleted the addition made by the Assessing Officer. No further appeal has been filed by the Department. The findings of the Commissioner of Income-tax (Appeals) are reproduced below:
“6.3.1 I have considered the submission of the assessee, carefully gone through the order of the AO, perused the material placed on record, and referred to the case laws relied upon by the assessee and the AO. 6.3.2 After hearing the learned AR and perusing the material on record, I find that this issue was considered by my Id. predecessor in assessee's own case in AY 2011-12 in Appeal No. CIT(A)-10/DCIT-5(3)/623/2013-14 and vide order dated 12/05/2017, he has dismissed, with following observations: "4.2.1 With regard to flat 12B also the action of the AO in estimating the rent @Rs.2,52,000/- per month cannot be found fault with since his estimation is based on reasonable market rates after making clear analysis of such market rates from various sources like the rates of CPWD in the case of Hyderabad Estate located at the same vicinity, rents charged by assessee himself with regard to other flats owned by him in the same building, the rents charged by the other owners of the flat in the same building etc. Therefore, the argument of the Id.AR that the annual rental value of 12B should be taken as per municipal valuation is not acceptable. As emphasized by various courts that the municipal valuation is only a guideline and gains importance only when the relevant comparables with regard to market rent are not available with the AO. In the instant case the AO has gathered the actual market rates from more than one source which speak of the market rates several times more than the rate offered by the assessee at Rs.6,030/- per annum. Interestingly, the rents charged from the same apartment are also more than the rate offered by the assessee. It is also pertinent to note here the provisions of the Act. u/s 23(1)(a) which talk of Annual Value as "the sum which the property might reasonably be expected to let from year to year". It does not emphasise on the actual rent received from such property. When the information with regard to flats in the same building having similar facilities and similar dimensions are available, it is prudent to adopt the same rates in the case of flat 12B also. This is what the lowa has done. Therefore, I am convinced that the estimation made by the AO of annual let out value @ Rs.2,52,000/- is in order and the same is confirmed. Both the grounds raised with regard to estimation of annual market value for flat 12B & 14B are accordingly dismissed"
6.3.3 However, the AR has pointed out that the order of the predecessor was passed in the year 2017 and subsequently the jurisdictional High Court in two cases held that in case of vacant flats, the tax on rental income in terms of section 23 of the Act can be calculated only on the basis of rateable value assessed by the Municipal Corporation. The assessee submitted that the order of the Bombay High Court should be followed as the orders of the Bombay High Court were passed in the years 2018 and 2019 whereas the CIT(A) order for AY 2011-12 was passed in the year 2017. The AR has relied on two decisions of the Bombay High Court in case of Mr. Harsh Jain (ITA No. 1438 of 2016 dated 5th February, 2019) and Laxmi Jain (ITA No. 1285 of 2015 dated 16th April, 2018). 6.3.4 It is seen that under similar circumstances the jurisdictional Tribunal in case of Harsh Jain dated 17.07.2015 has held that in case of vacant property, the tax on rental income in terms of Section 23 of the Act can be calculated only on the basis of rateable value assessed by the Municipal Corporation. The relevant para of the Mumbai Tribunal in case of Harsh Jain dated 17.07.2015 is reproduced as under: "4. At the outset the Ld. AR of the assessee has stated that the. facts of this case on the issue under consideration are identical to the facts of the case of father of the assessee Sh. Anand Jain in ITA No.2709/M/2013 for A.Y. 2009-2010 decided vide common order dated 17.04.2015. We have gone through the order (supra). The issue in the said case was relating to another 20 vacant flats in the same complex namely Central Garden Complex building. The Tribunal while considering the identical issue has made the following observations: 12. The Ld. A.R. of the assessee has contended that it was not a case where the flats were actually let out and therefore there was not any suspicion, doubt or dispute as to the rate of rent which might have been actually received by the assessee. He has contended that in this case, the flats were admittedly vacant and therefore the deemed ALV was rightly offered as per the municipal rateable value. He has relied upon the decision of the co-ordinate bench of the Tribunal in the case of Shri Anil Kashiprasad Murarka vs. ACIT" ITA No.5514/M/2012 decided on 17.12.2014. We have gone through the said decision. The relevant finding of the Tribunal has been given in para 5 of the said order, which for the sake of convenience is reproduced as under: "We have considered rival contentions and found that the issue is covered by the decision of the Hon'ble Bombay High Court in the case of Smt. Smitaben N. Ambani Vs. CWT, reported in (2010) 323 ITR 104 (Born). wherein it was held that the basis on which a self-occupied property is valued under rule 1BB of the Wealth-tax Rules and municipal ratable value is arrived at under the municipal law is the same i.e. "a reasonable amount of rent that can be expected by the owner from a hypothetical tenant". That while arriving at such reasonable amount of rent that can be expected by the owner from a hypothetical tenant, the amount of statutory deduction, if any, permissible under the local municipal law must be added to the ratable value. Thus, the Hon'ble High Court held that while Ravi K Sheth AY 2017-18 applying the provisions of rule IBB for valuing the self-occupied property, municipal rateable value with addition of statutory deductions, if any, may be adopted instead of standard rent, for arriving at the gross maintainable rent. Respectfully following the order of jurisdictional High Court, matter is restored back to the file of AO with a direction to re- compute the ALV in terms of above decision of Hon'ble Bombay High Court."
The case of the assessee is squarely covered by the above decision of the Tribunal and respectfully following the same, it is accordingly directed that the ALV be computed as per the municipal rateable value as deemed income from house property. Ground Nos.2, 3 & 4 are decided accordingly.' 5. The facts of the case in hand are squarely covered by the above decision of the Tribunal. We accordingly direct that the ALV be computed as per the municipal rateable value as deemed income from house property" 6.3.5 The Hon'ble Bombay High Court has upheld the above decision of the Hon'ble Tribunal in of 2016 dated 5th February, 2019 wherein the Hon'ble Bombay High Court has dismissed the appeal of the Department and held as under: 8. Question (b) relates to the additions made by the Assessing Officer by reversing the rateable value of the property owned by the assessee which was vacant. While complying the taxability of deemed rental income in terms of Sections 22 and 23 of the Act, the Assessing Officer discarded the rateable value fixed by the Municipal Corporation for assessing the tax on such properties and substituted the same with market rate as prevalling in the area, as estimated by him after collecting data with respect to the same. The Tribunal, however, deleted addition on the ground that in case of vacant property, the tax on rental income in terms of Section 23 of the Act can be calculated only on the basis of rateable value assessed by the Municipal Corporation.
We find that this view of the Tribunal is supported by decision of this Court by order dated 16th April, 2018 passed in Income Tax Appeal No.1285 of 2015. The Court while dismissing the Revenue's appeal, relied on the decision of this Court in case of Smt. Smitaben N. Ambani v/s. Commissioner of Wealth Tax reported in 323 ITR 104. In such decision, this Court was considering a similar question in context of valuing the self-occupied property, for the purpose of wealth tax of the assessee. The provisions for assessing the value of the property were similar to those applicable in case of assessee's annual rateable value in terms of Section 23 of the Act. This question is, therefore, not entertained. In the result, Appeal dismissed." 6.3.6 On identical issue, the Bombay High Court has also dismissed the appeal of the Department in case of Laxmi Jain in of 2015 dated 16th April, 2018. 6.3.7. Respectfully following the decision of the Hon'ble Bombay High Court in case of Mr. Harsh Jain (ITA No. 1438 of 2016 dated 5th February, 2019) and Ravi K Sheth AY 2017-18 Laxmi Jain (ITA No. 1285 of 2015 dated 16th April, 2018, the AO is directed that the ALV of the Flat No.12-B situated in Building Manek, L.D. Ruparel Marg, Mumbai be computed as per the municipal rateable value as deemed income from house property.”
4.3. Thus, assessee submitted that the addition so made be restricted to Rs.5,026/- being the municipal valuation for 10 months. Assessee has also placed on record, order giving effect to the order of Coordinate Bench for AY 2011-12 whereby relief has been granted to the assessee by taking municipal valuation. The order giving effect is dated 08.07.2024 and is placed on record.
Before us, ld. Counsel for the assessee at the outset pointed out that the present case is squarely covered by assessee’s own case for AY 2011-12. Matter travelled before Coordinate Bench of Mumbai in order dated 07.06.2021. Fact of the case are discussed in para-5 of the said order which is reproduced for the purpose of reference as they are identical with the present case. “5. Coming to the issue of computing the annual value of the house property in respect of Flat No. 12B in building called "Manek", briefly stated facts are, assessee an individual derives income from salary, house property, capital gains and other sources filed his return of income on 30.07.2011 declaring income of ₹.3,91,86,204/- and the return was processed u/s. 143(1) of the Act. Subsequently the assessment was taken up for scrutiny and assessment was completed u/s. 143(3) of the Act on 21.02.2014 computing the annual ratable value for the property at Flat No. 12B in building "Manek" at ₹.30,24,000/- and the property at Flat No. 14B in building "Manek" at ₹.10,50,000/- as against ₹.6,030/- and ₹.7,00,000/- respectively computed by the assessee in his return of income. Assessee considered immovable property at Nagaon as self-occupied property exercising the option u/s. 23(2) r.w.s. 23(4)(a) of the Act. Further, Flat No. 12B in building "Manek" was also considered by the assessee as self- occupied property but treated as deemed let out property as per section 23(4)(b) of the Act. Thus, the house property at Nagaon and the Flat No. 12B in building "Manek" are used by the assessee for his own residence. In case of Flat No. 12B assessee has considered the same as deemed let out and computed income from house property by adopting the annual letting value as fixed by the Mumbai Municipal Corporation. However, the Assessing Officer computed the annual rateable value of the property for Flat No. 128 at ₹.30,24,000/- stating that the fair rent u/s. 23(1)(a) of the Act expected to be fetched per month from letting out the property from year to year is .2,52,000/- when comparing with the rental receipts from similar flats located in the same building. Assessing Officer also relied on the decision of the Mumbai bench of the Tribunal in the 5.1. After considering the factual position and submissions of both the parties, the Coordinate Bench concluded by relying on the decision of Hon’ble Jurisdictional High Court in the case of PCIT vs. Laxmi Jain in order dated 16.04.2018, wherein it was held that as the property in question was never let out by the assessee and was treated as self occupied property, in case of vacant property, tax on rental in terms of section 23 can be calculated only on the basis of rateable value assessed by the Municipal Corporation. Relevant extracts from the said decision are as under: “14. Similarly, the Hon'ble Bombay High Court in the case of Pr.CIT v. Smt Laxmi Jain (supra) held as under: - "This Appeal under Section 260-A of the Income Tax Act, 1961 (the Act), challenges the order dated 26th November, 2014 passed by the Income Tax Appellate Tribunal (the Tribunal). The impugned order dated 26th November, 2014 is in respect of Assessment Year 2009-10.
Revenue urges the following question of law, for our consideration: "Whether on the facts and in the circumstance of the case and in law, the Tribunal was justified in law in holding that rateable value under Section 23(1)(a) of the Act of a property has to be determined as determined by the Municipal Authorities under the Corporation Act"? 3. It is an admitted position that the property has not been let out. The impugned order of the Tribunal dismissed the Revenue's appeal by holding that, the issue raised herein, stands concluded by the decision of the jurisdictional High Court in Smt. Smitaben Ambani v/s. Commissioner of Wealth Tax 323 ITR 104.
4. In view of the above, the question as framed does not give rise to any substantial question of law. Thus, not entertained.
5. Accordingly, Appeal dismissed. No order as to costs."
As could be seen from the above, the ratio of the above decisions squarely applies to the facts of the assessee's case as the property in question was never let out by the assessee and was treated as self-occupied property and it was held that the Tribunal is right in holding that in case of vacant property the tax on rental income in terms of section 23 of the Act can be calculated only on the basis of ratable value assessed by the Municipal Corporation.”
5.2. In the given set of facts as noted above and the judicial precedents in the assessee’s own case, (supra), as well as appellate orders at the first appellate stage for the preceding assessment years against which Revenue did not contest the same at the higher forum and following the decision of Hon'ble High Court of Bombay in Laxmi Jain (supra). we delete the addition made by the ld. AO and direct to restrict the addition to the amount to Rs.5,026/- which represents the municipal valuation for 10 months. Accordingly, appeal of the assessee is partly allowed.
In the result, appeal of the assessee is partly allowed.