2025 (4) TMI 1025 - AT - Income Tax

ITAT upholds municipal rateable value over actual rent for let out property income calculation

Deputy Commissioner of Income Tax-23 (1) Versus M/s. Laxmi Finance And Leasing Company Co-op Society Ltd. Laxmi Towres, Maharashtra And (Vice-Versa)

The ITAT Mumbai held that for let out property, when actual rent received is less than municipal rateable value, the higher of municipal value and actual ... Addition in respect of let out property - whether in the case of let out property if the actual rent received is less than municipal rateable value then the rental value should be adopted as ALV? - CIT(A) directing to adopt the Municipal rateable value for computation of ALV - HELD THAT:- Issue is squarely covered by the order of the Co-ordinate Bench for A.Y.2011-12 [2021 (9) TMI 597 - ITAT MUMBAI] as held that the actual rent received by the assessee in respect of let out property to some other tenant in subsequent assessment year cannot be used as a fair rental value for an earlier assessment year in respect of property that is let out to different tenant. While that has been held for a let out property, the same principle would indeed be applicable for vacant property also. We have also held in ground No.2 of the Revenue hereinabove that in such a scenario, municipal value should be adopted with the actual rent and higher of those two should be considered as the annual value. We find that the ld. CIT(A) has also directed the ld. AO to consider only the municipal value as the annual value in respect of vacant properties, on which finding, we do not find any infirmity. Taxability of transfer fee - As in view of the fact that as on date, the issue in dispute before us is already decided in the case of ITO vs. Venkatesh Premises Co-operative Society Ltd [2018 (3) TMI 675 - SUPREME COURT] to hold that the receipt on account of transfer fee / amenities fee cannot be brought to tax as income of the assessee. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Tribunal are:(i) Whether the learned CIT(A) erred in deleting the addition made by the Assessing Officer (AO) regarding the annual let out value (ALV) of let out properties, specifically in holding that if actual rent received is less than municipal rateable value, the municipal rental value should be adopted as ALV.(ii) Whether the CIT(A) erred in directing adoption of municipal rateable value for computation of ALV without appreciating that the AO determined ALV under Section 23(1)(a) of the Income Tax Act, 1961 (the Act), which defines annual value as the sum for which the property might reasonably be expected to let from year to year.(iii) Whether the CIT(A) erred in principle by not appreciating the AO's contentions in determining the annual value of the property.(iv) Whether the CIT(A) erred in not applying the provisions of Sections 23(1)(a), 23(1)(b), and 23(1)(c) of the Act appropriately.(v) Whether the CIT(A) erred in deleting the addition of Rs. 36,56,800 received as transfer fees under the head 'income from other sources', ignoring precedents which held that transfer fees received from non-members are taxable as profit and not exempt under the principle of mutuality.(vi) Whether the CIT(A) erred in deleting the addition on account of transfer fees without appreciating that the amount was received from non-members, thereby rupturing the basic concept of mutuality.2. ISSUE-WISE DETAILED ANALYSISIssue 1 to 4: Determination of Annual Let Out Value (ALV) of Let Out and Vacant PropertiesRelevant Legal Framework and Precedents: The determination of annual value is governed by Section 23 of the Income Tax Act, 1961. Section 23(1)(a) provides that annual value shall be the sum for which the property might reasonably be expected to let from year to year. Section 23(1)(c) was inserted to protect the assessee in cases where the property is let but remains vacant for part or whole of the year, and the actual rent received is less than the sum referred to in clause (a). The Explanation to Section 23(1) clarifies that the amount actually received does not include unrealized rent.Precedents considered include decisions of this Tribunal in Sachin R Tendulkar vs. DCIT and Somu Realtors Pvt. Ltd. vs. DCIT, which held that for vacant properties, annual value should be determined under Section 23(1)(c) if the property remains vacant for the whole year. The Hon'ble Andhra Pradesh High Court in Vivek Jain vs. ACIT was also relied upon, which provided a detailed interpretation of Section 23(1)(c).Court's Interpretation and Reasoning: The Tribunal noted that the AO determined ALV of vacant properties by reference to rent received by the assessee from a different tenant in a subsequent year, applying a discount to reflect the earlier year's value. The CIT(A) held that municipal value should be adopted as ALV for vacant properties under Section 23(1)(a), rejecting the assessee's argument that intention to let out the property suffices to apply Section 23(1)(c). The Tribunal agreed with the CIT(A), relying on the Andhra Pradesh High Court decision, which emphasized that the term 'let' in Section 23(1)(c) means actual letting and cannot be equated with 'intention to let.'The Tribunal further held that:Section 23(1)(c) applies only where the property is actually let but remains vacant for part or whole of the year.Where property is not let at all during the year, Section 23(1)(c) does not apply and annual value must be determined under Section 23(1)(a).The actual rent received in a subsequent year for a different tenant cannot be used as a benchmark for ALV in an earlier year for vacant properties.Municipal rateable value is an appropriate basis for ALV of vacant properties when actual rent is not available.Key Evidence and Findings: The properties in question were vacant during the relevant assessment year, with only one property let out. The assessee's claim of intention to let out the vacant properties was not accepted as sufficient to apply Section 23(1)(c). The AO's use of rent from a different year and tenant was disapproved.Application of Law to Facts: The Tribunal applied the strict grammatical interpretation of Section 23(1)(c) as mandated by the Andhra Pradesh High Court, rejecting the assessee's broader interpretation based on intention. The municipal value was upheld as the correct basis for ALV of vacant properties.Treatment of Competing Arguments: The assessee argued for no annual value on vacant properties under Section 23(1)(c) citing intention to let. The Revenue urged for adoption of fair rental value based on rent received in a later year. The Tribunal rejected both, favoring municipal value as the appropriate standard.Conclusions: The Tribunal upheld the CIT(A)'s order deleting additions on rented properties and directing ALV of vacant properties to be computed on municipal rateable value. The Revenue's grounds challenging this were dismissed.Issue 5 and 6: Taxability of Transfer Fees under Principle of MutualityRelevant Legal Framework and Precedents: The principle of mutuality exempts contributions from members for common benefits from taxation. However, transfer fees received from non-members or amounts exceeding by-laws or government directions are taxable as income. Precedents include the Special Bench decision in Walkeshwar Triveni Co-Op Hsg. Society and the Bombay High Court decision in Presidency CHS Ltd., which held that transfer fees from non-members are taxable.The Tribunal also considered the Hon'ble Supreme Court decision in ITO vs. Venkatesh Premises Co-operative Society Ltd., which clarified the tax treatment of transfer fees.Court's Interpretation and Reasoning: The AO added transfer fees received from non-members to income under 'other sources', rejecting the assessee's claim of exemption under mutuality. The CIT(A) deleted this addition relying on a coordinate bench order for a subsequent assessment year and held the transfer fee was covered by mutuality.The Tribunal noted that the notification relied upon by the AO exempting transfer fees applied only to cooperative housing societies, not to a premises society like the assessee. The Tribunal also observed that the Supreme Court decision in Venkatesh Premises Co-operative Society Ltd. held that transfer fees/amenities fees are not taxable.Key Evidence and Findings: The transfer fees were received from non-members, which typically ruptures mutuality. However, the Tribunal found that the Supreme Court ruling in the relevant case supported exemption in such circumstances for premises societies.Application of Law to Facts: The Tribunal applied the Supreme Court precedent to hold that the transfer fees received by the assessee were not taxable income.Treatment of Competing Arguments: The Revenue relied on earlier High Court decisions and the concept that transfer fees from non-members break mutuality. The Tribunal declined to follow these, instead following the binding Supreme Court ruling favoring exemption.Conclusions: The Tribunal dismissed the Revenue's appeal on this issue, holding the transfer fee was exempt under mutuality as per the Supreme Court decision.3. SIGNIFICANT HOLDINGSThe Tribunal made the following crucial legal determinations:On the issue of annual value of vacant properties, the Tribunal stated verbatim from the Andhra Pradesh High Court decision:'Section 23(1)(c) does not apply to situations where the property has either not been let out at all during the previous year or, even if let out, was not vacant during the whole or any part of the previous year... The words 'where the property is let' cannot be read as 'where the property is intended to be let'. The provisions of a tax statute must be strictly construed... The Legislature may be safely presumed to have intended what the words plainly say.'This established the principle that mere intention to let is insufficient; actual letting is required to invoke Section 23(1)(c).On the taxability of transfer fees, the Tribunal held:'Respectfully following the aforesaid decision of Hon'ble Supreme Court, we hold that the receipt of Rs.5 lakhs on account of transfer fee / amenities fee cannot be brought to tax as income of the assessee.'This confirms that transfer fees received by premises societies are exempt under the principle of mutuality as per Supreme Court authority.Final determinations on each issue are:The deletion of additions on account of enhanced ALV on let out properties was upheld.The municipal rateable value is the appropriate basis for determining ALV of vacant properties under Section 23(1)(a), rejecting the assessee's contention based on intention to let.The transfer fees received by the assessee are exempt from tax under the principle of mutuality, following Supreme Court precedent.The Revenue's appeals and the assessee's cross objections were dismissed.