2025 (2) TMI 1386 - AT - Income Tax

Notional rent for vacant commercial premises must be computed using municipal ratable value; tax officer to reassess accordingly.

For computation of notional rent under income from house property for vacant commercial premises, the municipal ratable value must be ascertained and ... Addition of notional Rent Income u/s 23(1)(a) - Income from House Property - deemed rent for the commercial premises - Mesne Profit application - computation of the notional rent by ascertaining the municipal ratable value - as argued said commercial premises was actually let out till A.Y.2010-11 but remained vacant since then and also throughout the year and therefore the ALV of the said property was to be taken at 'Rs. Nil' as provided U/sec 23(1)(c) Whether notional rent can be computed in respect of a vacant premise based on the proportionate to the property taxes paid by the assessee? - HELD THAT:- Admittedly, there is no evidence please don’t record by the assessee that the premises and Anupam society was sub judice and therefore it could not have been let out. The documents filed by the assessee in respect of the suit filed with honourable small causes court attained its finality based on which the assessee withdrew its suit. Except for Mesne Profit application, nothing was pending which could lead to the conclusion that the premises at Anupam society could not have been left out to due to impossibility. We therefore find the decisions relied by the AR in respect of the proposition that no ALP could be computed in respect of premises at Anupam society will be of any support. Manner in which the Notional rent has been computed, it is noted that the notional rent in respect of both the properties are computed u/s 23(1)(a) of the is noted that based on the property taxes paid by the assessee the rental income was re worked on percentage basis. Such kind of computation in our view is unsustainable in the eyes of law. As in the case CIT Vs. Tip top Typography [2014 (8) TMI 356 - BOMBAY HIGH COURT] held that, rent should be computed at Municipal ratable value. AO is directed to ascertain the municipal valuation for computing notional rent. We accordingly direct the AO to ascertain the Municipal ratable value for computing the notional rent. Needless to say that proper opportunity of being heard must be granted to assessee in accordance with law. Issues: (i) Whether notional rent (annual value) can be computed for a vacant commercial premises by proportionately applying property tax percentages (as done by the authorities) or whether municipal ratable value must be ascertained; (ii) Whether a premises vacant for the whole year must have annual letable value taken as Nil under section 23(1)(c) of the Income-tax Act, 1961.Issue (i): Whether notional rent may be computed by proportionately applying property taxes paid by the assessee across properties or whether municipal ratable value is the correct basis for computing notional rent under section 23(1)(a).Analysis: The Tribunal examined the method used by the authorities below, which reworked rental income on a percentage basis derived from property taxes paid and found such computation legally unsustainable. The Tribunal referred to binding principle that municipal ratable value is the appropriate basis for computing notional rent and directed the Assessing Officer to ascertain municipal ratable value for computing annual value, ensuring the assessee is given proper opportunity of hearing.Conclusion: The Tribunal held that notional rent cannot be sustained if computed merely by proportionate application of property taxes; the Assessing Officer is directed to compute notional rent by ascertaining the municipal ratable value. This conclusion is partly in favour of the assessee.Issue (ii): Whether the annual letable value of a premises vacant for the whole year must be taken as nil under section 23(1)(c) of the Income-tax Act, 1961.Analysis: The Tribunal reviewed the factual record and concluded that the assessee did not establish that the premises were incapable of being let out for the whole year (no sufficient evidence of impossibility or continuing restraint on letting). The Tribunal found prior case authorities cited by the assessee inapplicable on the facts and therefore declined to treat the annual value as nil under section 23(1)(c).Conclusion: The Tribunal rejected the contention that annual letable value should be nil under section 23(1)(c) on the facts of the case; this conclusion is against the assessee.Final Conclusion: The appeals are partly allowed the Tribunal upheld that annual value cannot be declared nil on the available facts but restricted the method of computing notional rent and remitted the matter to the Assessing Officer to ascertain municipal ratable value and recompute notional rent with opportunity to the assessee.Ratio Decidendi: For computation of notional rent under section 23(1)(a) the municipal ratable value is the proper basis; a mere proportionate reworking based on property taxes paid is not sustainable in law, and vacancy will lead to nil annual value under section 23(1)(c) only where incapacity to let out for the whole year is satisfactorily established.