2025 (11) TMI 472 - AT - Income Tax

ALV to be computed only for let-out portion; AO's website-derived rate rejected as unrealistic, matter remanded for fresh determination

ITAT held that the assessee's property was partly self-occupied and partly let out, and the AO erred in treating the entire annual letting value (ALV) as ... ALV of property - house property owned by the assessee - assessee partly letting out of the property - HELD THAT:- On question no.7 i.e. nature of property which is taken care of by him, as categorically stated that this is a house property owned by the assessee, currently assessee is occupying first and second floors and the third & fourth floors are rented out to M/s Gyan Enterprises Pvt. Ltd. Further also observed that while answering to question no.8 the caretaker of the property had stated that, since 2011 the third floor of the property has been rented out and from January, 2019 onwards the ground floor of the property has been rented out to Gyan Enterprises Pvt. Ltd. Thus, the statement given by the caretaker of the property clearly establishes the fact of the assessee partly letting out of the property and partly used for self occupation. Thus, assessing the entire ALV of the property as income of the Assessee ignoring the self occupied portion is not correct. Valuation of the property i.e. ALV, we find merit in the submission of the assessee - In the light of the statement of the caretaker of the property, the submissions of the assessee we hold that entire ALV cannot be assessed as income of the assessee. Even the ALV which was determined by the AO was arrived taking artificial rental value of Rs. 1200 per sq.ft. and determined the rental of Rs. 14,88,190/- per month (14,897 sq.ft X 1200) and annual letting value of Rs. 1,78,76,700/- and these rates adopted by the AO appears to be as per information available in the web site magic bricks.com and therefore, these valuations adopted by the AO are also not real and scientific. Thus, we are of the view that the entire issue should go back to the AO for determining the ALV taking into consideration only that part of the building which was let out by the assessee and keeping in view the guidelines set by various decisions including the decisions of the Hon’ble Supreme Court for determining the ALV of the property, after providing adequate opportunity to the assessee. Grounds raised by the assessee are partly allowed for statistical purpose. ISSUES PRESENTED AND CONSIDERED 1. Whether the Assessing Officer (AO) could treat the entire building as let out for computing Annual Letting Value (ALV) where the assessee claimed only a part (third floor) was let out and the balance was self-occupied. 2. Whether an inference that the whole building was let out can be drawn from (a) a lease deed that omits a precise description of the portion let and (b) the existence of a single electricity/water meter without any independent evidence of exclusive occupation. 3. What is the proper legal basis and method for determining ALV for income-tax purposes where local municipal/house-tax records provide a standard/assessed value; and whether the AO's adoption of market/comparable-based notional rent was permissible. 4. Whether the AO was obliged to supply and consider material obtained during physical inspection (including statements recorded under s.131) and whether failure to supply such material or to make findings on physical occupation amounted to violation of principles of natural justice. 5. Whether standard deductions under section 24 (standard deduction and municipal taxes paid) ought to be allowed in computing income from house property once ALV is determined. 6. Whether related consequential assessments and reopenings for other assessment years premised on the AO's ALV determination must be set aside if the ALV determination for the lead year is set aside. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Whether whole building can be treated as let out when only part was actually let Legal framework: Sections 22 and 23 (annual value concept) - annual value is either the expected letting value or actual rent where property/part thereof is let; s.23(2) provides that a house or part of a house in the occupation of the owner for residence has annual value taken to be nil. Precedent treatment: Court authorities (including the Supreme Court decisions relied upon) establish that ALV for house-tax purposes as determined by local authorities/standard rent can be applied for income-tax ALV determination; established principle that suspicion cannot substitute for proof of facts (cited authority on surmise not substituting factual proof). Interpretation and reasoning: The Tribunal found contemporaneous evidence (caretaker's statement recorded by the Revenue) establishing that the assessee occupied the ground and first two floors while third and fourth floors were rented (third from 2011 and ground from 2019). The AO failed to make independent findings rejecting the assessee's claim of self-occupation and instead proceeded on presumption that entire building was let. The Tribunal emphasized that s.23(2) requires exclusion of self-occupied portions from ALV and that AO must ascertain which part is let before aggregating ALV. Ratio vs. Obiter: Ratio - where owner occupies part as residence and leases only a part, AO must restrict ALV to the portion actually let; presumption of whole-building letting cannot replace physical verification and sufficient evidence. Obiter - none beyond treatment of caretaker evidence. Conclusions: The AO's assessment of the entire building's ALV was incorrect; assessment must be reassessed limited to the portion actually let after proper verification and recording of findings. Issue 2 - Legitimacy of drawing inference of whole-building letting from lease deed omission and single meter Legal framework: Fact-finding principles - burden lies on AO to establish facts; no statutory requirement for separate meters to show letting. Precedent treatment: Decisions endorse that inferences must be grounded in evidence and not mere surmise; statutory provisions do not impose obligation of sub-meters as conclusive evidence of letting. Interpretation and reasoning: The Tribunal held that omission in lease deed of description of the part let does not, by itself, prove that whole building was let. Similarly, the presence of a single electric/water meter is not determinative; meter arrangements depend on contractual terms between landlord and tenant and cannot be specie of mandatory proof of full letting. The AO's reliance on such inferences was held to be conjectural and not a substitute for the physical inspection and testimonial evidence ordered by the Tribunal earlier. Ratio vs. Obiter: Ratio - administrative inference (e.g., absence of sub-meters) cannot be used as conclusive proof of whole-building letting where contradictory factual evidence exists; AO must gather and disclose contemporaneous evidence. Conclusions: Inferences drawn solely from lease language omission or single meter were impermissible; AO's reliance on them rendered the ALV finding unsustainable. Issue 3 - Proper method for determining ALV: municipal/standard value v. comparable/market-based notional rent Legal framework: s.23(1)(a) ALV is the sum for which the property might reasonably be expected to let from year to year; established practice is to adopt standard rent/municipal valuation where available and applied analogously from house-tax jurisprudence. Precedent treatment: Supreme Court and High Court decisions (as discussed) hold that where local authority has determined a value for house-tax, that standard can be used for ALV under the Income-tax Act; earlier authorities cited endorse mirroring municipal valuation methodology. Interpretation and reasoning: In this case municipal/house-tax records showed ALV of the whole building at a substantially lower figure than AO's notional market-based computation. The AO's adoption of a per-sq.ft. market rate (sourced from a website) to compute a notional rent led to an inflated ALV; Tribunal found such internet-based comparables and the resulting per-sq.ft. figure to be 'not real and scientific' in the absence of corroborative evidence and without applying municipal valuation guidelines or considering the part-let nature of the property. Ratio vs. Obiter: Ratio - where municipal/house-tax valuation exists and is relevant, AO should take into account such valuation and the principles adopted in municipal valuation jurisprudence; market comparables may not be reliable absent proper material and adherence to accepted valuation principles. Conclusions: AO's ALV based on market/comparable notional rent was unsustainable; ALV determination must follow municipal/standard valuation principles and be confined to the portion actually let. Issue 4 - Duty to disclose and consider material from physical inspection and compliance with natural justice Legal framework: Principles of fair procedure and natural justice require that materials relied upon in assessment, including statements recorded under statutory notice, be placed on record and that assessee be given opportunity to meet those materials; AO must make and record independent findings when directed to verify physical facts. Precedent treatment: Authorities require that assessments not be made on undisclosed material or ex parte factual conclusions; Tribunal's earlier directions to verify were binding and required considered findings. Interpretation and reasoning: The AO conducted a physical visit and recorded the caretaker's statement but did not supply copy to the assessee nor make explicit findings on the occupation status of specific floors. Tribunal held that non-supply and failure to adjudicate as per earlier remand amounted to procedural infirmity and a breach of the earlier directions and natural justice. The caretaker's statement when produced by Revenue to the Tribunal supported the assessee's claim of part-occupation; had it been supplied earlier it would have been material to the assessee's case. Ratio vs. Obiter: Ratio - AO must disclose and consider statements/evidence gathered on inspection and must make explicit findings on disputed factual issues; failure to do so is a procedural defect affecting the validity of ALV determination. Conclusions: AO's assessment suffered from non-disclosure and inadequate findings; reassessment is required after supplying material and affording opportunity to the assessee. Issue 5 - Allowance of standard deduction under section 24 and municipal taxes Legal framework: Section 24 prescribes deductions (including standard deduction @30% of annual value and municipal taxes paid) in computing income from house property. Precedent treatment: Routine application that once ALV or actual rent is determined, prescribed deductions under s.24 are to be allowed. Interpretation and reasoning: Tribunal noted that AO assessed gross ALV without allowing statutorily mandated deductions; directed that standard deduction and house-tax paid be allowed against whatever ALV is finally assessed for the tenanted portion. Ratio vs. Obiter: Ratio - where ALV (or actual rent) is assessed, s.24 deductions must be allowed; omission to do so is incorrect. Conclusions: On fresh assessment the AO must allow standard deduction @30% and deduction for house-tax paid in computing net income from the tenanted portion. Issue 6 - Consequential effect on other assessment years and s.147 reopenings Legal framework: Assessments and reopenings premised on a flawed factual/legal determination for the lead year should be reconsidered; tribunals may set aside related assessments and restore issues to AO for fresh adjudication consistent with lead-year directions. Precedent treatment: Consistent with appellate practice that related years be reconsidered where the lead-year factual foundation is disturbed. Interpretation and reasoning: The Tribunal held that assessments for other years that were reopened on the basis of the ALV determination for the lead year must be set aside and restored for fresh adjudication in light of the Tribunal's findings that the AO's ALV determination was unsustainable. Ratio vs. Obiter: Ratio - setting aside and restoration of connected assessment years is appropriate where the principal factual/legal finding underpinning them is vitiated. Conclusions: Assessments for the related assessment years are set aside and issues restored to AO for fresh adjudication along with the lead year.