1989 (4) TMI 108 - AT - Income Tax

Residential property tax deduction upheld for 26 units despite shared facilities

The Tribunal upheld the AAC's order, allowing a deduction of Rs. 36,200 under Section 23(1)(b) for the 26 residential units. It concluded that each room ... Annual Value, Assessment Year, House Property Issues Involved:1. Deduction under Section 23(1)(b) for multiple residential units.2. Classification of the property as residential or commercial for tax purposes.3. Interpretation of 'residential unit' under the Income Tax Act.Issue-wise Detailed Analysis:1. Deduction under Section 23(1)(b) for Multiple Residential Units:The primary issue in this case was whether the building, which contained 26 separate rooms rented to different tenants, could be considered as comprising multiple residential units for the purpose of claiming a deduction under Section 23(1)(b) of the Income Tax Act, 1961. The Income Tax Officer (ITO) treated the entire building as one residential unit and allowed a deduction of Rs. 2,400 only, rejecting the assessee's claim for a higher deduction based on the number of rooms. The ITO's reasoning was based on the fact that the building had a single Census Number, a common passage, and shared water facilities, indicating it as a single unit.2. Classification of the Property as Residential or Commercial for Tax Purposes:The ITO argued that the property was used for commercial purposes by tenants engaged in diamond cutting and polishing, thus not qualifying for the residential deduction under Section 23(1)(b). The assessee countered that the property was residential when let out, and the tenants' use for commercial activities did not change its classification. The Appellate Assistant Commissioner (AAC) upheld the assessee's claim, noting that each unit had a separate electric meter and entrance, distinguishing it from the case cited by the ITO (CIT v. Mrs. Elizabeth Varghese).3. Interpretation of 'Residential Unit' under the Income Tax Act:The Tribunal examined the definition and interpretation of 'residential unit' under the proviso to Section 23(1). It noted that the terms 'building' and 'residential unit' are distinct and must be treated separately. The Tribunal highlighted several features of the property, such as separate entrances, electric meters, and bathrooms for each room, which supported the classification of each room as an independent residential unit. The Tribunal also distinguished the present case from the Kerala High Court decision (CIT v. Mrs. Elizabeth Varghese) by highlighting differences such as the provision of separate electric meters and the method of property tax assessment based on capital value rather than annual letting value (A.L.V.).Conclusion:The Tribunal upheld the AAC's order, allowing the deduction of Rs. 36,200 under Section 23(1)(b) for the 26 residential units. It emphasized that each room constituted a separate residential unit despite common facilities like staircases and water supply. The Tribunal also dismissed the argument that the property was commercial, citing the Andhra Pradesh High Court decision (Dr. J.V. Desai v. CIT) that the tenant's use of the property does not alter its residential classification if it was residential when let out. The appeal was dismissed, affirming the AAC's decision in favor of the assessee.