MOHIT VIJAYKUMAR GUPTA,MUMBAI vs. THE DCIT, CIRCLE-2(1)(1), AHMEDABAD

Accordingly, CIT(Appeals) sustained the additions made on account of deemed rental income of ₹7,43,199/– and ₹13,86,000/– against which the assessee is in appeal before us.

The assessee is in appeal before us against the order passed by CIT(Appeals) dismissing the appeal of the assessee. Before us, the Counsel for the assessee submitted that the authorities below had erred both in law and on facts in sustaining the additions made towards deemed rent on the five flats situated at Mumbai and on the office premises at Hariom Chambers, Andheri (West), Mumbai. In respect of Ground No. 1 relating to deemed rent on the five vacant flats, the Counsel submitted that the assessee was the owner of five residential flats at Mumbai. These flats were initially contemplated for personal use or business purposes and had not been let out. However, in the earlier assessment years 2019–20 and 2020–21, the assessee had voluntarily offered deemed rental income of ₹19,70,935/- from these very flats under the head “Income from House Property”. During the relevant previous year, i.e., F.Y. 2020–21, the assessee decided to let out the said flats and accordingly engaged real estate brokers to identify suitable tenants. However, due to the COVID-19 pandemic and its economic aftermath, the flats remained vacant throughout the year despite bona fide efforts made to rent them out, and were ultimately sold during the same financial year. Therefore, in accordance with the provisions of section 23(1)(c) of the Act, Mohit Vijaykumar Gupta vs. DCIT Asst. Year : 2021-22 which provides that where property remains vacant despite efforts to let out, the annual value shall be taken as nil, the assessee rightly considered nil deemed rent for the year under appeal. The Counsel further submitted that both the Assessing Officer and the CIT(A) erred in rejecting the assessee’s claim on the sole ground that no documentary evidence of efforts to let out the properties was produced. The ld. counsel for the assessee submitted that the assessee had indeed given a mandate to brokers for renting out the flats but was unable to furnish confirmations as the same were not preserved or traceable after the eventual sale of the flats. It was pointed out that the flats were ultimately sold through brokers, which itself corroborates that the assessee was in contact with property dealers during the relevant period and had taken genuine steps towards renting the properties before their sale. The Counsel placed reliance on the decision of the Hon’ble ITAT, Mumbai Bench in the case of Shri Sachin R. Tendulkar v. DCIT-23(3), wherein it was held that the expectation of the revenue authorities that an assessee should maintain an infallible record or obtain documentary evidence such as acknowledgments from brokers to substantiate efforts for letting out is unrealistic and beyond normal human conduct. The Tribunal observed that where the property is held with an intention to let out and efforts are made, though unsuccessfully, the assessee is entitled to the benefit of section 23(1)(c). The Counsel also relied upon the judgment of the Hon’ble ITAT, Mumbai Bench in Premsudha Exports (P.) Ltd. v. ACIT [(2008) 110 ITD 158 / 17 SOT 293], wherein it was held that the expression “property is let” in section 23(1)(c) does not require actual letting out but covers cases where the property is held with an intention to let out and bona fide efforts are made for the same. On these legal propositions and factual circumstances, it was contended that the assessee’s case falls squarely Mohit Vijaykumar Gupta vs. DCIT Asst. Year : 2021-22 within the purview of section 23(1)(c) and the authorities below have erred in taxing deemed rental income of ₹7,43,199/-. It was therefore prayed that the addition sustained by the CIT(A) be deleted in full. As regards Ground No. 2 relating to deemed rent on the office premises at Hariom Chambers, the Counsel submitted that the said premises is a commercial property used by the assessee for managing his substantial investment portfolio in shares and securities. The assessee had deployed large sums of money in the capital market, and it was imperative to maintain an office infrastructure for monitoring and administering such investments. The Counsel submitted that section 22 of the Act specifically excludes from charge any property which is used for the purpose of the assessee’s business or profession, and the presence or absence of taxable business income in a particular year does not alter the applicability of this provision. The test of exemption under section 22 is the “use” of the property for business or professional purposes and not the quantum of profit earned therefrom. Therefore, once it is accepted that the office was used for managing investment operations, the same cannot be subjected to deemed rent taxation under section 22 of the Act. Without prejudice to this primary contention, the Counsel submitted that the assessee had alternatively requested the Assessing Officer to consider the office premises at Hariom Chambers as one of the two self-occupied properties permitted under the Act, and consequently, to treat the property at 2, Ruby Villa, Indore, as deemed let out. The Assessing Officer, however, ignored this first alternative and instead adopted the second alternative furnished by the assessee, computing deemed rent at ₹13,86,000/- based on rent received in subsequent years. The CIT(A) mechanically confirmed the addition, merely observing that the assessee did not have income taxable under the head “Profits and Gains of Business or Profession.” The Counsel Mohit Vijaykumar Gupta vs. DCIT Asst. Year : 2021-22 contended that this finding is legally unsustainable and contrary to the language of section 22, which does not restrict exemption only to cases where profits are assessable under that head. It was therefore urged that the addition on account of deemed rent of ₹13,86,000/- be deleted. In respect of Ground No. 3 concerning change of self-occupied property during assessment proceedings, the Counsel submitted that this ground was raised in the alternative, without prejudice to Ground No.

In response, Ld. DR placed reliance on the observations made by CIT(Appeals) in the appellate order.

We have carefully considered the rival submissions, perused the assessment order, the order of the learned Commissioner of Income Tax (Appeals), and the material placed on record including the judicial precedents relied upon by the learned counsel for the assessee. Insofar as Ground No. 1 relating to deemed rent on the five vacant flats at Mumbai is concerned, it is an admitted fact that the assessee was the owner of five flats which were intended to be let out but remained vacant during the year due to the unprecedented situation created by the COVID-19 pandemic and were subsequently sold during the year itself. The assessee had duly offered deemed rental income on the said flats in earlier years, but for the year under appeal, determined the annual value as Nil under section 23(1)(c) of the Act on the ground that the properties, though intended to be let out, remained vacant despite bona fide efforts made to rent them. The authorities below have rejected the assessee’s claim merely on the basis that no formal evidence or confirmation from brokers was produced. In our considered opinion, the denial of benefit under section 23(1)(c) of the Act to the assessee is not justified. The said provision provides that where the property remains vacant for the whole or part of the year despite efforts to let it out, the annual value shall be the actual rent received or receivable, which in this case is Nil. The coordinate bench of this Tribunal in Shri Sachin R. Tendulkar v. DCIT-23(3), (order dated 09.02.2018), has held that the expression “property is let” in section 23(1)(c) includes cases where the property is held with an intention to let out and efforts are made, though unsuccessfully. The Tribunal further observed that the expectation that an assessee should maintain infallible records of efforts made to let out the Mohit Vijaykumar Gupta vs. DCIT Asst. Year : 2021-22 property is unrealistic and contrary to normal human conduct. Similar view has been taken in Premsudha Exports (P.) Ltd. v. ACIT [(2008) 110 ITD 158 (Mum.) / 17 SOT 293], wherein it was held that if a property is held with an intention to let out and remains vacant despite efforts, the benefit of section 23(1)(c) cannot be denied merely because the letting out did not materialize. In the present case, the assessee has explained that mandates were indeed given to brokers for renting out the flats, but due to the pandemic and the subsequent sale of the properties, confirmations could not be preserved or traced. The explanation is plausible and in line with the commercial reality of the situation and also in light of the fact that the properties in question were sold during the impugned year under consideration, which supports the fact that the assessee was in touch with the brokers. We find merit in the submissions of the assessee that the intention to let out and the bona fide efforts made are sufficient to attract the provisions of section 23(1)(c). Accordingly, we hold that the addition made by the Assessing Officer and confirmed by the learned CIT(A) towards deemed rent of ₹7,43,199/- in respect of five flats at Mumbai is unsustainable in law. The same is hereby directed to be deleted. Hence, Ground No. 1 of the assessee’s appeal stands allowed.

With regard to Ground No. 2, relating to deemed rent on the office premises at Hariom Chambers, Andheri (West), we find that the assessee had claimed exemption from notional rent under section 22 of the Act on the ground that the premises were used as an office to manage his investments in shares and securities. However, as noted by the learned CIT(A), the assessee was not carrying on any business or profession with income chargeable under that head, and his income was assessable under other heads. Section 22 of the Act exempts from tax the annual value of property Mohit Vijaykumar Gupta vs. DCIT Asst. Year : 2021-22 used for the purposes of business or profession, the profits of which are chargeable to income tax. In the instant case, there is no material on record to establish that the assessee was carrying on any organized business or professional activity in relation to his investment operations. Hence, we find no infirmity in the conclusion drawn by the learned CIT(A) in upholding the addition on this count. Accordingly, Ground No. 2 of the assessee’s appeal is dismissed.

In the result, the appeal of the assessee is partly allowed, Ground No. 1 and Ground No. 3 being allowed, and Ground No. 2 being dismissed.