2011 (1) TMI 897 - HC - Income Tax

Vacancy allowance under section 23(1)(c) allowed only for actually let properties, not self-occupied or never-let units

HC held that vacancy allowance under section 23(1)(c) is available only where the property is actually let during the whole or part of the relevant ... Determination of the annual let out value (ALV) of a property - estimation of the actual rental value vacancy allowance - words 'property is let' - Held that:- We find no merit in the submission that the words 'property is let' are used in clause (c) to take out those properties which are held by the owner for self-occupation from the ambit of the said clause. As noted, section 23(2)(a) takes out a self-occupied residential house, or a part thereof, from the ambit of section 23(1) of the Act. Likewise, under section 23(2)(b), where a house cannot actually be occupied by the owner, on account of his carrying on employment, business or profession at any other place requiring him to reside at such other place in a building not belonging to him, the annual value of the property is also required to be treated as nil, thereby taking it out of the ambit of section 23(1) of the Act. Section 23(3)(a) makes it clear that section 23(2) would not apply if the house, or a part thereof, is actually let during the whole or any part of the previous year. Thus, only such of the properties which are occupied by the owner for his residence, or which are kept vacant on account of the circumstances mentioned in clause (b) of section 23(2), fall outside the ambit of section 23(1) provided they are, as stipulated in section 23(3)(a), not actually let during the whole or part of the previous year. Clause (c) was not inserted to take out from its ambit properties held by the owner for self-occupation inasmuch as section 23(2)(a) provides for such an eventuality. It is only to mitigate the hardship faced by an assessee, and as clause (b) does not deal with the contingency where the property is let and, because of vacancy, the actual rent received or receivable by the owner is less than the sum referred to in clause (a), was clause (c) inserted. In cases where the property has not been let out at all, during the previous year under consideration, there is no question of any vacancy allowance being provided thereto u/s 23(1)(c) of the Act. Issues Involved:1. Determination of the annual let out value (ALV) of a property.2. Applicability of section 23(1)(c) of the Income-tax Act, 1961.3. Interpretation of 'property is let' under section 23(1)(c).4. Calculation of income from house property when the property is vacant.Issue-wise Detailed Analysis:1. Determination of the Annual Let Out Value (ALV) of a Property:The appellant, a practicing advocate, declared an annual let out value (ALV) of nil for his property at Flat No. 101, Marigold Apartments, Dwarakapuri Colony, Hyderabad, for the assessment year 2002-03. The assessing authority, however, estimated the ALV at Rs. 1,44,000 based on section 23(1)(a) of the Income-tax Act, 1961. This estimation was upheld by the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal (ITAT), Hyderabad.2. Applicability of Section 23(1)(c) of the Income-tax Act, 1961:The appellant contended that under section 23(1)(c), the ALV should be nil since the property was not let out during the accounting year. The Tribunal clarified that section 23(1)(c) applies only when the property has been let out but remains vacant for a part of the year, resulting in actual rent received being less than the notional value. Since the property was not let out during the year, section 23(1)(c) was not applicable. The Tribunal emphasized that section 23(1)(a) should be used to determine the ALV for properties not let out during the year.3. Interpretation of 'Property is Let' Under Section 23(1)(c):The Tribunal interpreted the phrase 'property is let' to mean that the property must have been actually let out during the previous year to qualify for the benefits under section 23(1)(c). The Tribunal rejected the appellant's interpretation that an intention to let out the property suffices. The Tribunal held that a strict interpretation of the statute is required, and the words 'property is let' cannot be read as 'property is intended to be let.'4. Calculation of Income from House Property When the Property is Vacant:The Tribunal noted that the income from house property is chargeable under section 22 of the Act based on the annual value of the property. Under section 23(1)(a), the ALV is the sum for which the property might reasonably be expected to be let from year to year. If the property is let out and the actual rent received is higher than the notional value, section 23(1)(b) applies. Section 23(1)(c) applies when the property is let out but remains vacant for a part of the year, resulting in actual rent being less than the notional value. The Tribunal concluded that in cases where the property was not let out at all during the year, section 23(1)(a) applies, and the notional value should be taken as the income from the property.Conclusion:The Tribunal upheld the order of the Commissioner of Income-tax (Appeals) and dismissed the appeal, affirming that the ALV of the property should be determined at Rs. 1,44,000 under section 23(1)(a) since the property was not let out during the year. The Tribunal's interpretation of section 23(1)(c) was that it does not apply to properties not actually let out during the previous year.