2012 (6) TMI 33 - AT - Income Tax

Appeal Success: House Income Computation Adjusted for Fair Rent; Vacancy Allowance Disallowed

The Tribunal partly allowed the appeal regarding the computation of house property income for the assessment year 2006-07. It upheld the Annual Letting ... Annual value of property / annual letting value (ALV) - vacancy allowance under section 23(1)(c) - exclusion of property used for business under section 22 - Municipal Rateable Value (MRV) as guide to ALV but not binding - determination of fair rent by reference to comparable cases and market conditions - return on investment as basis for computing ALVVacancy allowance under section 23(1)(c) - Whether vacancy allowance under section 23(1)(c) is available for portions of the building remaining vacant throughout the previous year - HELD THAT: - The Tribunal accepted that vacancy allowance under section 23(1)(c) is available only where the property has been let and is vacant for part of the year. Relying on the decision of the Hon'ble High Court of Andhra Pradesh in Vivek Jain v. ACIT, the Tribunal held that where the property was not let out at all during the previous year, no vacancy allowance can be given. The undisputed fact that the mezzanine, first and second floors remained vacant throughout the year therefore did not entitle the assessee to vacancy allowance under section 23(1)(c). [Paras 5]Claim for vacancy allowance rejected.Exclusion of property used for business under section 22 - Whether portions occupied by the partnership firm and the company are to be excluded from income under the head 'house property' - HELD THAT: - The Tribunal applied the principle that any portion of property occupied by the assessee for the purpose of business is excluded from income under the head 'house property'. Following precedents of the Hon'ble High Courts of Allahabad and Gujarat, and earlier Bombay decisions, the Tribunal held that where the assessee is a partner in the partnership using the property, such user is treated as the assessee's business and must be excluded. By contrast, occupation by a company in which the assessee is a shareholder and director cannot be treated as the assessee's business because the company has a separate legal identity; such portion must therefore be included in computing house property income. [Paras 5]Portion used by partnership in which assessee is partner excluded; portion used by company in which assessee is shareholder/director not excluded and must be considered for house property income.Annual value of property / annual letting value (ALV) - Municipal Rateable Value (MRV) as guide to ALV but not binding - determination of fair rent by reference to comparable cases and market conditions - return on investment as basis for computing ALV - Method for determination of ALV of the property - HELD THAT: - While the Assessing Officer had adopted a return-on-investment basis (8.5% of cost of construction) to compute ALV, the Tribunal reviewed legal authorities and concluded that MRV, though admissible if correctly determined, is not binding on the assessing authority. The Tribunal reiterated that fair rent (ALV) should be determined with reference to comparative cases in the locality and other relevant market factors; return on investment may not be a reliable indicator in all cases. Given these considerations, the Tribunal found that the question of fair ALV required fresh examination and therefore restored the matter to the Assessing Officer for reassessment after examination of relevant material and after giving the assessee an opportunity of hearing. [Paras 5]Determination of ALV remanded to the Assessing Officer for fresh consideration in light of comparables, market conditions and MRV (not binding); AO to hear the assessee and pass fresh order.Final Conclusion: Appeal partly allowed: vacancy allowance claim rejected; portion occupied by partnership firm excluded from house property income, portion occupied by company included; determination of annual letting value set aside and remanded to the Assessing Officer for fresh determination on the basis of comparative market evidence, with opportunity to the assessee to be heard. Issues:Computation of house property income based on ALV, Allowability of vacancy allowance under section 23(1)(c), Exclusion of area used for business purposes, Method of determination of annual value.Computation of House Property Income:The appeal concerned the computation of house property income for the assessment year 2006-07. The AO observed that the assessee owned a property named 'Varsha' but had not declared any income from it. The AO proposed adopting market rent as the annual value of the property. The assessee argued that certain floors were vacant while others were used for business, and the ALV should be based on Municipal Rateable Value (MRV). The AO estimated the ALV at Rs. 9,97,726 based on a 8.5% return on investment, resulting in an income of Rs. 6,98,409. CIT(A) upheld this approach, leading to the appeal before the Tribunal.Allowability of Vacancy Allowance and Exclusion of Business Area:The dispute centered on whether the vacant portion of the property should be excluded from income computation and if the area used for business purposes should be excluded. The Tribunal noted that no vacancy allowance can be given when the property is not let out at all during the previous year. The property used for business by a partnership firm was to be excluded, following judgments from various High Courts. However, the portion used by a company could not be excluded as the company's business was separate from that of the shareholder or director.Method of Determination of Annual Value:The AO determined the ALV based on a return on investment, while the assessee argued for using MRV. The Tribunal referred to a High Court judgment stating that MRV could be considered as ALV but was not binding on the AO. The Tribunal emphasized that fair rent should be determined based on comparative cases in the locality and other relevant factors, rather than solely relying on the return on investment. Therefore, the issue of determining fair ALV required fresh consideration, and the matter was restored to the AO for reevaluation.In conclusion, the Tribunal partly allowed the appeal, emphasizing the need for a reevaluation of the fair rental value of the property based on local comparative cases and relevant factors rather than a fixed return on investment.