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Income Tax Appellate Tribunal, Mumbai “E” Bench, Mumbai.
Before: Shri B.R. Baskaran (AM) & Shri Aby T. Varkey (JM)
The assessee has filed this appeal challenging the order dated 20.7.2023 passed by the learned CIT(A), National Faceless Appeal Centre, Delhi and it relates to A.Y. 2014-15. The assessee is aggrieved by the decision of the learned CIT(A) rendered on following issues: - (a) Assessment of annual rental value of the property which remained vacant during the year.
(b) Disallowance of expenses claimed by the assessee.
The assessee was engaged in the business of manufacture of thermo equipments. Since the assessee had stopped business in the past, it had let out its properties and earned rental income from them. During the year under consideration, the AO noticed that the assessee did not declare rental income from one of the office premises titled as “Marathon Innova A-902”. The assessee submitted that the above said property has remained vacant during whole of the year and hence rent was not received. The Assessing
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Officer, however, did not accept the above said explanations given by the assessee and took the view that the annual letting value (ALV) of the property should be assessed as “deemed rental income”. He also took the view that the ALV of the property should be computed @ 8.5% of the value of the property. Accordingly, he determined the ALV of the property at Rs.20,60,713/-, which was computed at 8.5% of the value of property. After allowing deduction of Rs. 30% of the annual letting value towards repairs u/s 24 of the Act, the Assessing Officer determined the rental income assessable under the head Income from house property in respect of the above said property at Rs. 14,42,499/- and assessed the same.
The Assessing Officer also noticed that the assessee has claimed the expenses to the tune of Rs. 7,72,901/- while computing total income. From the income generated by the assessee, the Assessing Officer noticed that the assessee has declared interest income of Rs.19.69 lakhs received from M/s. Alf Engineering Pvt. Limited. He noticed that the provisions of sec.57 permit deduction of expenses, which have been incurred to earn the interest income. Since the assessee did not prove that the above said general expenses have been incurred to earn the interest income, the Assessing Officer held that the above said claim of expenses is not allowable as deduction. He noticed that the above said expenses included statutory expenditure of Rs.16,636/- incurred by the assessee to maintain the status of the assessee as ‘company’. The AO took the view that the above said amount of Rs.16,636/- is allowable as deduction and accordingly disallowed balance amount of Rs. 7,56,265/-.
The assessee challenged both the additions by filing appeal before the Ld CIT(A), but could not succeed. Hence the assessee has filed this appeal before the Tribunal.
We heard the parties and perused the record. With regard to the first issue of assessing the deemed rental income, uncontroverted fact is that the 3 Kanti Thermo Equip Pvt. Ltd.
assessee had let out the said property in the earlier years and has also declared rental income in those years. It is the submission of the assessee that during the year under consideration the property remained vacant during the whole of the year. This submission has not been proved to be wrong. In the instant year the AO has taken the view that the ALV of the impugned property, which remained vacant during whole of the year, is assessable as “Deemed rental income”. The concept of deemed rental income is applicable to self occupied properties as stated in sec. 23(4) of the Act. The Income tax Act did not make is applicable to let out properties.
The Annual rental value (ALV) of property is determined in terms of provisions of section 23 of the Act. The provisions of sec. 23(1)(c) are relevant to the cases of let out properties and the same read as under:- (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 The question is how to determine the ALV of let out property, which remained vacant during whole of the year. The above said question vis-à-vis sec. sec.23(1)(c) of the Act was examined and interpreted by the Pune Bench of the Tribunal in the case of Shri Vikas Keshav Garud (ITA No. 747/PN/2014) and the relevant discussion made in this regard are extracted below :- “8. The ALV of property remaining vacant for the whole year has to be computed with reference to section 23(l)(c) of the Act. This sub-section deals with a situation where the property remains vacant for the whole year. Section 23(l)(c) of the Act as relevant in the context is set out for ready reference as under :- "[Annual value how determined. 23. (1) For the purposes of section 22, the annual value of any property shall be deemed to be— (a) xxxxx (b) xxxxx (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
4 Kanti Thermo Equip Pvt. Ltd. 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. "[underline is ours]
9. Section 23(l)(c) by its literal wording include a situation where a property which was vacant during the whole year by saying that "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. If the assessee intended to let the property and took appropriate efforts in letting the property but ultimately failed to let the same, the actual rent received from it will have to be considered as "Zero" being less than the sum referred in section 23(l)(a) of the Act. The revenue has not brought anything on record in rebuttal to say that the property has not remained vacant for the whole year or was self occupied in some manner. As noted above, the fact that the assessee had on the previous occasion in the preceding year rented the property remains un-traversed. We are not inclined to agree with the interpretation suggested by the Revenue that property should be actually let out in relevant to previous year. This interpretation does not appear consistent with the phraseology mandated in S. 23(l)(c) which includes a situation where the property can remain vacant during the whole of the relevant previous year. Hence, both situations namely 'property is let' and remained vacant for the whole year cannot co-exist during the financial year. We also note from a reading of another provision i.e. subsection (3) of section 23 of the Act, where the legislatures in their wisdom have used the word 'house is actually let'. This also shows that the expression 'property is let' cannot mean actual letting out of the property because had it been so, there was be no need to use the word 'actually' in sub-section (3) of section 23 of the Act. Applying the purposive interpretation, the expression 'property is let' has to be read in contrast tc 'property is self occupied' to arrive at its true purport. We simultaneously note on facts that the property has been actually let out in the financial year 2006-07 as noted above. It cannot be reckoned to be in the control of the assessee to let out the property throughout necessarily. The decision of Hon'ble Andhra Pradesh High Court in the case of Vivek Jain (supra) relied upon by the revenue cannot be read in a manner that if the property remains vacant throughout the year, section 23(l)(c) do not apply at all more so when the property was let out in proceeding or 5 Kanti Thermo Equip Pvt. Ltd.
subsequent year. Therefore, in the totality of the circumstances and having regard to the provisions of the Act, we are of the view that the ALV of the property at Dande Towers which remained vacant for the whole year has to be assigned Nil value in terms of section 23(l)(c) of the Act.”
It has been held by the Pune bench of ITAT that if the let out property remained vacant during whole of the year, then the ALV of the same should be taken as NIL. In the instant case also, the impugned property is a let out property and it remained vacant during whole of the year. Following the above said decision of Pune bench of Tribunal, we hold that the annual letting value of the impugned property, which remained vacant during the whole of the year, should be taken as NIL. Accordingly, we set aside the order passed by the learned CIT(A) on this issue and direct the Assessing Officer to delete the addition relating to deemed rental income.
Next issue relates to the disallowance of expenses. We noticed that, during the year under consideration the assessee did not carry on any business. From the Profit and Loss account furnished by the assessee, we notice that the assessee has generated three types of income, viz., (a) rental income, (b) interest income earned from M/s. Alf Engineering Pvt. Ltd. and (c) share of profit received from a partnership firm.
The expenditure of Rs. Rs. 7,56,265/- has been incurred in respect of above said three types of income.
We shall examine as to whether the above said expenditure is deductible against any of the above said income.
(i) We notice that the rental income has been declared by the assessee under the head ‘income from house property’. For computing income under this head, only those expenses mentioned in sec.24 of the Act could be claimed as deduction against rental income. It is not shown
6 Kanti Thermo Equip Pvt. Ltd. that any part of expenses of Rs.7,56,265/- is allowable as deduction u/s 24 of the Act. Hence the above said general expenses cannot be deducted against rental income. Even if it includes any type of expenditure of the nature not mentioned in sec.24 of the Act, the same is not allowable as deduction.
(ii) The share of profit received from a partnership firm is exempt under section 10(2A) of the Act and hence, even if any part of the above said expenditure is related to the share of profit received from a partnership firm, the same is liable to be disallowed, since the expenditure incurred in earning exempt income is not allowable as deduction.
(iii) Hence, in the facts of the present case, the entire expenses claimed by the assessee should be related to the interest income earned by the assessee from M/s. Alf Engineering Pvt. Limited. We noticed that the Assessing Officer has assessed interest income under the head ‘Income from other sources’. As per the provisions of section 57 of the Act, only those expenses which have been incurred to earn the interest income are allowable as deduction. We notice that the general expenses claimed by the assessee consisted of electricity charges, miscellaneous expenses, audit fees etc. It was not shown by the assessee that these expenses have been incurred to earn interest income.
In view of the above, we are of the opinion that the tax authorities are justified in disallowing the expenses of Rs. 7,56,265/- claimed by the assessee. Accordingly we uphold the order passed by the learned CIT(A) on this issue.
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In the result, appeal filed by the assessee is partly allowed.
Order pronounced on 31.1.2024.