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Income Tax Appellate Tribunal, AHMEDABAD “D” BENCH
Before: Shri P.M. Jagtap & Shri Siddhartha Nautiyal
आदेश/ORDER PER : SIDDHARTHA NAUTIYAL, JUDICIAL MEMBER:-
These two appeals filed by the Revenue are against the order of the ld. Commissioner of Income Tax (Appeals)-12, Ahmedabad in Appeal no. CIT(A)-12/27 to 33/CC-1/2016-17 vide order dated 27/03/2018 passed for the assessment year 2013-14 & 2014-15.
Since common issues are involved for both the assessment years under consideration i.e. assessment years 2013-14 and 2014-15, both appeals are being taken up together.
The Department has raised the following grounds of appeal:- IT(SS)A No. 207/Ahd/2018 A.Y. 2013-14
“1. On the facts and in the circumstances of the case, the Ld.CIT(A) has erred in deleting the addition made on account of Annual Lettable Value (ALV) as income from House Property of Rs. 63,37,765/-. 2. On the facts and in the circumstances of the case, the Ld.CIT(A) has erred in deleting the addition made on account of disallowance of interest expenditure of Rs.99,21,084/-. 3. It is, therefore, prayed that the order of the Ld.CIT(A) may be set-aside and that of Assessing Officer may be restored to the above extent. 4. The appellant craves leave to add, alter, amend and/or withdraw any ground(s) of appeal either before or during the course of hearing of the appeal.”
ITA No. 1461/Ahd/2018 A.Y. 2014-15 “1. On the facts and in the circumstances of the case, the Ld.CIT(A) has erred in deleting the addition made on account of Annual Lettable Value (ALV) as income from House Property of Rs.69,52,499/-.
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On the facts and in the circumstances of the case, the Ld.CIT(A) has erred in deleting the addition made on account of disallowance of interest expenditure of Rs.86,78,028/-. 3. It is, therefore, prayed that the order of the Ld.CIT(A) may be set-aside and that of Assessing Officer may be restored to the above extent. 4. The appellant craves leave to add, alter, amend and/or withdraw any ground(s) of appeal either before or during the course of hearing of the appeal.”
We shall first take up assessment year 2013-14.
Ground 1: Addition on account of annual lettable value (ALV) as income from house property of � 63,37,765/-
The brief facts in relation to this ground of appeal are that during the course of assessment, the AO observed that the assessee had shown “income from house property” from various properties in different years, however, in some of the years, income from some of the properties were not shown/ shown at “Nil”. For the impugned assessment year 2013-14, the AO held that for the properties which remained vacant for throughout the year under consideration, the provisions of section 23(1)(a) of the Act were attracted and notional annual lettable value (ALV) was required to be added to the total income of the assessee. The notional ALV for assessment year 2013-14 was computed by the AO at � 90,53,950/- and after deduction under section 24, the net income from house property of � 63,37,765/-was added to the total income of the assessee.
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In appeal, the assessee submitted that the AO could should not have worked out notional ALV of various vacant properties since the properties were not capable for being let out during the impugned assessment year for various reasons like lack of parking space, global recession and non- availability of tenant despite the best efforts put by the assessee. The assessee placed reliance on several case laws in support of the contention that if for reasons beyond the control of the assessee, the property could not be let out, then the provisions of section 23(1)(a) of the Act are not attracted so as to attribute the notional value to the rent which the assessee would have received. The Ld. CIT(Appeals) accepted the assessee’s arguments and deleted the additions with the following observations:
“8.2 In view of the aforesaid decisions of Hon'ble ITAT and the A.O. having not mentioned any contrary decision, I am inclined to agree that if property has remained without being occupied and let out then owing to such vacancy the actual rent received or receivable by the owner in respect thereof is less than a sum for which property might reasonably be expected to let from year to year is to be considered. As the actual rent received is NIL, the ALV of the same has to be taken as NIL as envisaged u/s 23(l)(c) of the Act. Therefore the A.O. is direct to consider the A.L.V at NIL in respect of each such property which has remained vacant and to delete addition of Rs.63,37,765/-. The appeal succeeds on this ground.”
The Department is in appeal before us against the aforesaid order passed by Ld. CIT(Appeals) deleting the ALV computed by the Ld. Assessing Officer. The Ld. DR submitted that Ld. CIT(Appeals) has not gone into the facts of the case while allowing assessee’s appeal. The Ld. CIT(Appeals) simply accepted the assessee’s contention and the judicial precedents placed before him and has not gone into the details of each of the individual properties and has not ascertained separately as to the reasons
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why the same were lying vacant. The Ld. DR placed reliance on decisions of Vivek Jain 14 taxmann.com 146 (Andhra Pradesh), wherein the High Court held that where property has not been let out at all during the previous year under consideration, there is no question of any vacancy allowance being provided under section 23(1)(c) of the Act. Further, the High Court held that the words in section 23(1)(c) of the Act is “let” and the same cannot be read as “where the property is intended to be let”. Further, the Ld. DR placed reliance on the case of Susham Singla 76 taxmann.com 349 (Punjab and Haryana), in which the High Court held that section 23(1)(c) of the Act would not apply to properties which remained vacant throughout the previous year.
In response, the counsel for the assessee submitted that the assessee had retained certain unsold properties, which could not be rented out for reasons beyond the control of the assessee. In some case, the property were not being capable of let out on account of lack of certain infrastructure facilities, and in other cases, though the assessee had made best efforts to let out the property, however due to recession and the reasons beyond the control of the assessee, the same could not be let out. The counsel for the assessee submitted that a total of 12 properties remained vacant throughout the year under consideration. The counsel for the assessee drew our attention to pages 1-255 of the paper book (copies of advertisements given by the assessee etc.) and submitted that though the assessee had put its best efforts to lease out the property, the same could not be done during the impugned year under consideration. The assessee placed reliance on several case laws in support of his contention that if the assessee “intended” to let out the
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property and despite the best efforts put in by the assessee, the properties could not be let out, then the assessee was entitled to the benefits of section 23(1)(c) of the Act.
We have heard the rival contentions and perused the material on record. In this respect, it would be useful to reproduce the relevant part of section 23 of the Act, for ready reference:
Annual value how determined.
(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 :
8.1 In the case of Asfa Technologies & BPO (P.) Ltd.[2022] 143 taxmann.com 170 (Chennai - Trib.), the ITAT has held that if property is let out for two or more years and was vacant for whole or any part of
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previous year, then said property would come within ambit of provisions of section 23(1)(c).The ITAT further held that where property owned by assessee was let right from assessment years 2008-09 to 2011-12, however, same was vacant due to non-availability of tenants for impugned assessment year alone, Assessing Officer had erred in computing annual value of property in terms of section 23(1)(a) and, thus, he was to be directed to delete addition made towards income from house property. While passing the order, the ITAT held as below:
■ As per provisions of section 23(1), for the purpose of section 22, annual value of any property shall be deemed to be sum for which property might reasonably be expected to let from year-to-year and where property or any part of property is let and was vacant during whole or any part of previous year and owing to such vacancy, actual rent received or receivable by the owner in respect thereof is less than sum referred to in clause (a) amount so received or receivable will be annual value of the property. As per plain reading of section 23(1)(c), if any property was let and was vacant during whole or any part of previous year, then annual value of said property should be computed in terms of provisions of section 23(1)(c). In the instant case, there is no dispute with regard to fact that property owned by the assessee was let right from assessment years 2008-09 to 2011-12, however, same was vacant due to non-availability of tenants for the assessment year 2012-13 to assessment year 2013-14. But, same property was again let out from the assessment year 2015-16 onwards. The assessee has computed nil annual letting value of the
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property in terms of provisions of section 23(1)(c), whereas the Assessing Officer has determined annual value in terms of provisions of section 23(1)(a). According to the Assessing Officer, in order to apply provisions of section 23(1)(c), property must be let out during the previous year and it should be vacant for any part of the previous year. ■ There is no merit in the reasons given by the Assessing Officer for simple reason that in order to attract section 23(1)(c), following requirements must be fulfilled: (i) the property or any part thereof must be let out; (ii) It should have been vacant during the whole or part of the previous year; and (iii) Owing to such vacancy actual rent received or receivable by the owner in respect thereof should be less than the sum referred to in clause (a). From the above, it is very clear that provisions of section 23(1)(c) does not apply, in case where property is not let out at all. However, if the property is let out for two or more years and was vacant for whole or any part of the previous year, then said property would come within ambit of provisions of section 23(1)(c). In the instant case, property was let out earlier; however, it was vacant during the impugned assessment year owing to non-availability of tenants. It is not the case of the Assessing Officer that property was not at all let out. In fact, the Assessing Officer has admitted the fact that property was let out, but was vacant for the impugned assessment year alone. Further, the assessee has made his best efforts to let out the property which is evident from e-mail correspondence between the assessee and agents however, could not get tenants for relevant period. Therefore, the
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assessee has rightly computed annual letting value of the property as per provisions of section 23(1)(c). The term 'property is let' used in section 23(1)(c) is solely used with intent to avoid misuse of determination of annual value of self-occupied property by taking recourse to section 23(1)(c), however, same cannot be stretched beyond that and thus, annual value of property which was let, but thereafter remains vacant for whole year under consideration, subject to condition that same is not put under self-occupation of the assessee and is held for the purpose of letting out of the same would continue to be determined under section 23(1)(c).
8.2 In the case of Metaoxide (P.) Ltd.[2018] 92 taxmann.com 302 (Mumbai - Trib.), the ITAT held that in order to avail benefit of clause (c) of section 23(1), it is not necessary that property should have been actually let out in relevant previous year or during any time prior to relevant previous year.
8.3 In the case of Vikas Keshav Garud[2016] 71 taxmann.com 214 (Pune - Trib.), the ITAT held that where assessee intended to let property and took appropriate efforts in letting property but ultimately failed to let same, in terms of section 23(1)(c) its ALV had to be treated as nil being less than sum referred to in section 23(1)(a) of the Act. The ITAT made the following observations while passing the order:
Section 23(1)(c) by its literal wording include a situation where a property which was vacant during the whole year by saying that
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'when a property is let and was vacant during the whole or part of the previous year actual rent received or receivable by the owner is less than sum referred to in clause (a), the amount so received or receivable'. It goes without saying that a situation cannot co-exist wherein the property is let during the previous year and is also simultaneously vacant for the whole year. The word 'let' and 'vacant' are mutually exclusive. To appreciate it further, the underlying principle of this provision has to be viewed with regard to the intention together with efforts put by assessee in letting out the property, etc. and then gross annual value is required to be determined.
8.4 In the case of Ms. Priyananki Singh Sood [2019] 101 taxmann.com 45 (Delhi - Trib.), the ITAT held that where assessee intended to let out property and took appropriate efforts in letting property, however, due to fall in property prices failed to let out same year after year because of which property remained vacant, assessee was entitled to claim benefit under section 23(1)(c) of the Act.
8.5 In the case of Sachin R. Tendulkar [2018] 96 taxmann.com 253 (Mumbai - Trib.), the ITAT held that where assessee owned a house property which remained vacant throughout relevant year as he could not find a suitable tenant despite writing various letters to concerned builder, he was eligible to claim vacancy allowance under section 23(1)(c) and, thus, rental income from said property was rightly declared at nil.
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8.6 In the case of Sonu Realtors (P.) Ltd.[2018] 97 taxmann.com 534 (Mumbai), the ITAT held that though term 'property is let' used in section 23(1)(c) is solely with intent to avoid misuse of determination of 'annual value' of self-occupied properties by assessee by taking recourse to section 23(1)(c), however, same cannot be stretched beyond that and, thus, 'annual value' of a property which is let, but thereafter remains vacant for whole year under consideration, subject to condition that same is not put under self- occupation of assessee and is held for purpose of letting out of same, would continue to be determined under section 23(1)(c).
8.7 In the case of Kamal Kumar[2022] 140 taxmann.com 106 (Delhi - Trib.), the ITAT held that where commercial property of assessee remained vacant during whole of previous year due to facts that property was unauthorized property and Government was having a sealing drive on unauthorized property, provisions of section 23(1)(c) would not be applicable and tax authorities below had thus fallen in error in taxing assessee on basis of notional rent.
8.8 Now coming to the instant facts, we observe that the counsel for the assessee has submitted that the properties under question were let out in earlier years, but due to reasons beyond the control of the assessee, the same could not be let out during the year under consideration. The counsel for the assessee placed on record various documents in support of the contention that the assessee had made substantial efforts by way of newspaper advertisements etc. to lease out the properties, however, despite best efforts, the properties could not be let out during the year under consideration. We
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are of the considered view that in light of the judicial precedents highlighted above, the provisions of section 23(1)(a) of the Act cannot be invoked in case the properties have been let out in some earlier year, however, the same were lying vacant for the entire year under consideration, despite efforts being made by the assessee. The provisions of section 23(1)(a) of the Act can be invoked in the event the properties are lying vacant all throughout and have not been let out either in the prior or succeeding assessment years and also the assessee has made no effort to let out the same. Further, notably the words used in section 23(1)(c) of the Act are “the property is let and was vacant during the whole…of the year”, which necessarily implies that the same property cannot be “let out” and yet remain “vacant” during the same assessment year. Therefore, as noted above, the reasonable construction/interpretation of section 23(1)(c) of the Act would be that if the property has been let out in any of the previous years, but the same could not be let out despite the best efforts by the assessee, the assessee would be entitled to avail the benefits of section 23(1)(c) of the Act. Accordingly, in our considered view, the Ld. CIT(Appeals) has not erred in facts and in law in allowing the assessee’s appeal on this issue.
In the result, Grounds No.1 of Department’s appeal for assessment year 2013-14, is dismissed.
Ground No. 2: Disallowance of Interest Expenditure of Rs. 99,21,084/- 10. The brief facts in relation to this ground of appeal are that the assessee had claimed total interest expenditure of � 1,42,98,568/-. During the course of assessment, the AO observed that in respect of amounts taken from
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individuals/HUF/companies, the assessee has not furnished any documentary evidence to show that the same interest bearing borrowed amount had been given as loan to third party to earn interest. The AO observed that the assessee has failed to establish direct nexus between the interest expenses of � 71,86, 866/- towards the loan taken during assessment year 2012-13. Further, the AO observed that the assessee, without taking any loan, has given interest payment of � 26,14,218/- towards M/s Klasse consultants and � 120,000/- paid to Vinubhai Shah (HUF). Accordingly, the AO held that since the assessee has failed to establish clear nexus between the interest expenditure of � 99,21,084/- (comprising of � 71,86, 866/- + � 26,14,218/- + � 120,000/-), the same is being disallowed and added back to the total income of the assessee.
In appeal, Ld. CIT(Appeals) allowed the assessee’s appeal with the following observations:
“8.4 The Ld. AR has relied upon his submission of A.Y. 2010-11 against the assessment u/s 153C r.w.s. 143(3), wherein the Ld: AR has submitted that the appellant had incurred interest expense towards loans taken and same were extended to other parties on which interest income has been earned that interest income earned during the year and offered to tax u/s 56 of the Act is Rs.1,06,06,189/- as against interest expense of Rs.93,97,212/- that interest expense that is claimed as expenditure u/s 57 of the Act while computing income from other sources. It is also submitted that CIT(A)-5 Baroda vide order dated 05/10/2016 in the appellant's own case for A.Y. 2012-13 [against earlier assessment order u/s 143(3)] held on the identical issue, in the appellant's favor and that on absolute identical facts the principle applied to A.Y. 2010-11 also. 8.5 I find that there is income u/s 56 which is more than the expenses claimed u/s 57. Following the decision of CIT(A)-5 Baroda, the AO is directed to delete the addition of Rs.99,21,084/-. The appeal on the ground succeeds.”
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The Department is in appeal before us against the aforesaid additions deleted by the Ld. CIT(Appeals). The Ld. DR argued that the Ld. CIT(Appeals) has passed a cryptic order and has not discussed as to how the assessee has established correlation/nexus between the interest-bearing loans taken and the interest income earned on the same. The Ld. DR drew our attention to 8.4 of page 21 of Ld. CIT(Appeals) and submitted that the Ld. CIT(Appeals) has simply passed a cryptic order, without independently verifying the facts of the case or establish how the interest bearing those were utilised for earning interest income.
In response, the counsel for the assessee submitted that Ld. CIT(Appeals) has placed reliance on the order for assessment year 2010-11, in which all the facts have been discussed in detail. He drew our attention to pages 1 and 4 of the paper book, and submitted that all details regarding interest received and paid have been filed. Accordingly, Ld. CIT(Appeals) has not erred in facts and in law in deleting addition in the instant facts.
We have heard the rival contentions and perused the material on record. In our considered view, the Ld. CIT(Appeals) has not clearly brought out the facts on record and has not discussed how interest-bearing funds have been utilised for earning interest income, which is a pre-requisite for claiming expenditure under section 57 of the Act. The Ld. CIT(Appeals) has granted relief to the assessee on the basis firstly that income under section 56 of the Act is more than the expenses claimed under section 57 of the Act and secondly, on identical facts Ld. CIT(Appeals) has granted relief to the
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previous assessment years AY 2010-11 and AY 2012-13. However, there is no discussion in the order regarding the interest expenditure claimed by the assessee and how and where such interest-bearing funds were utilised for earning interest income. The Ld. CIT(Appeals) has not discussed how the facts in earlier years were identical/applicable to the facts of the present year i.e. no enquiry/ discussion is done with respect to parties from whom the interest bearing loan was taken and to which parties, the loan was given on interest to earn interest income. Further, Ld. CIT(Appeals) has not controverted the specific findings made by the Ld. Assessing Officer in the assessment order under consideration. In view of the above facts, in the interest of justice, we are restoring the file to Ld. CIT(Appeals) so as to conduct an acceptable enquiry into the nexus between the interest-bearing loans and how the same were utilised to earn interest income, so as to examine the eligibility of claim made by the assessee. In the result, the file is being restored to the Ld. CIT(Appeals) with the above directions.
In the result, Ground No.2 of the Department’s appeal is allowed for statistical purposes.
Grounds numbers 3 and 4 of Department’s appeal for assessment year 2013-14 are general in nature and do not require any specific adjudication.
In the result, the appeal of the Department for A.Y. 2013-14 is partly allowed for statistical purposes.
Assessment year 2014-15:
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Since the facts and issues for consideration for both the years are common, our findings for assessment year 2013-14 would apply to assessment year 2014-15 as well.
In the result, Grounds No.1 of Department’s appeal for assessment year 2014-15, is dismissed.
Ground No. 2 of Department’s appeal for assessment year 2014-15 is allowed for statistical purposes.
Grounds numbers 3 and 4 of Department’s appeal are general in nature and do not require any specific adjudication.
In the result, the appeal of the Department for A.Y. 2014-15 is partly allowed for statistical purposes.
In the combined result, both the appeals filed by the Revenue are partly allowed for statistical purposes.
. Order pronounced in the open court on 10-11-2022
Sd/- Sd/- (P.M. JAGTAP) (SIDDHARTHA NAUTIYAL) VICE PRESIDENT JUDICIAL MEMBER Ahmedabad : Dated 10/11/2022 आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:-
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Assessee 2. Revenue 3. Concerned CIT 4. CIT (A) 5. DR, ITAT, Ahmedabad 6. Guard file. By order/आदेश से,
उप/सहायक पंजीकार आयकर अपील�य अ�धकरण, अहमदाबाद