Revenue cannot tax deemed rental income under Section 23(1)(a) for actually let-out commercial properties

ITAT Visakhapatnam dismissed Revenue's appeal regarding deemed rental income under Section 23(1)(a). AO attempted to estimate higher rental income for assessee's commercial complex let to three parties, arguing actual rent received was below market rate. CIT(A) deleted the addition. ITAT held that Section 23(1)(a) deeming provisions apply only to vacant properties, not actually let-out properties where only agreed rent is taxable. Following Oberoi Hotels precedent, ITAT ruled that taxing notional income that never accrued is impermissible, upholding CIT(A)'s decision.

---

---

Issues:
1. Interpretation of section 23(1)(a) of the Income Tax Act.
2. Determination of deemed rental income for property let out to multiple tenants.
3. Application of deemed rent provisions when property is leased out for a long period.
4. Consideration of actual rental income versus expected rental income for tax purposes.
5. Admissibility of rental income based on lease agreements.

Analysis:

Issue 1: Interpretation of section 23(1)(a) of the Income Tax Act
The Revenue contended that the order of the CIT(A) was erroneous on facts and in law, specifically citing section 23(1)(a) which deems the Annual Lettable Value to be the higher of the Municipal Value and the Fair Rent value. The AR failed to produce Standard Rent fixed by a Rent Control Act, leading to a dispute over the application of this provision.

Issue 2: Determination of deemed rental income for property let out to multiple tenants
The AO invoked section 23(1)(a) to estimate deemed rent receivable by the property due to the perceived discrepancy between the lease rent offered by the assessee and the expected rent based on prevailing rates. The AO argued that the rent received was lower than expected, leading to the calculation of deemed rental income for assessment purposes.

Issue 3: Application of deemed rent provisions when property is leased out for a long period
The assessee justified the lease rates based on long-standing agreements and the specific nature of the property, emphasizing that the property was leased out for a long period due to limited prospective tenants for the specialized building. The contention was that no deemed rent should be invoked under section 23(1)(a) due to the extended lease agreements and continuous occupation by tenants.

Issue 4: Consideration of actual rental income versus expected rental income for tax purposes
The CIT(A) relied on a decision from the ITAT, Kolkata Bench in a similar case to support the deletion of the addition made by the AO. The decision emphasized that the actual rental income admitted by the assessee based on lease agreements should be considered for taxation purposes, rather than estimating expected rental income when the property is already leased out.

Issue 5: Admissibility of rental income based on lease agreements
The CIT(A) concluded that the AO's determination of deemed rental income was unwarranted as there was no evidence of additional income beyond what was admitted by the assessee based on lease agreements. The decision highlighted that the actual rental income received and declared should be the basis for taxation, especially when the property is already let out.

In summary, the ITAT upheld the CIT(A)'s decision to delete the addition made by the AO, citing the precedent set by the ITAT, Kolkata Bench in a similar case. The appeal filed by the Revenue was dismissed, and the cross objection by the assessee was also dismissed due to an unexplained delay.

---