Appeal allows no deemed rent for five vacant flats under section 23(1)(c); office not exempt under section 22

ITAT (Ahmedabad) allowed the assessee's appeal against addition of deemed rent for five vacant Mumbai flats, finding bona fide efforts to let and intention to let sufficient under section 23(1)(c), so the addition is unsustainable. The Tribunal upheld the addition of notional rent for the office premises at Hariom Chambers, rejecting exemption under section 22 for lack of business/professional activity. Alternatively, the Tribunal allowed the assessee to treat the office as self-occupied and deem Ruby Villa, Indore, as let out, directing recomputation of income from house property.

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ISSUES PRESENTED AND CONSIDERED

1. Whether deemed rental income under section 23(1)(c) is exigible where residential properties, held with intention to let out, remained vacant throughout the year despite bona fide efforts to let them and were sold during the same year.

2. Whether an office premises used for managing personal investments in shares and securities qualifies for exemption from notional rent under section 22 as property "used for the purposes of business or profession" where no business or profession income is assessed under the head "Profits and Gains of Business or Profession".

3. Whether an assessee may, during assessment proceedings, change the designation of which properties are to be treated as self-occupied under section 23(4), and, if permitted, the consequent recalculation of deemed rent on the substituted property.

ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Deemed rent on vacant residential flats under section 23(1)(c)

Legal framework: Section 23(1)(c) treats annual value as nil where a property, though held with an intention to let out, remains vacant for the whole or part of the year despite efforts to let it out; annual value otherwise is actual rent received or receivable.

Precedent treatment: Coordinate bench decisions have held that the expression "property is let" includes cases where the property is held with intention to let out and bona fide efforts are made though letting does not materialize; authorities have cautioned against requiring infallible documentary proof of efforts.

Interpretation and reasoning: The Court accepted that intention to let out together with bona fide, reasonable efforts is the operative test under section 23(1)(c), and that commercial realities (such as loss/absence of documentary confirmations due to subsequent sale and the impact of COVID-19) may render contemporaneous broker confirmations unavailable. The onus to establish intention and efforts rests on the assessee but does not rigidly demand documentary proof where credible explanation and surrounding facts (prior offer of deemed rent in earlier years; sale during the year; engagement of brokers) corroborate the claim.

Ratio vs. Obiter: Ratio - Benefit under section 23(1)(c) cannot be denied solely on absence of formal acknowledgments from brokers where the assessee furnishes plausible explanation and surrounding circumstances corroborate bona fide efforts; precedent supporting this proposition was followed. Obiter - Observations on commercial unreality of expecting infallible records and on pandemic-specific hardships are ancillary but consistent with reasoning.

Conclusions: Addition of deemed rent on five residential flats was unsustainable; section 23(1)(c) applies where bona fide efforts to let out are shown by credible explanation and corroborative circumstances, and the addition is to be deleted.

Issue 2 - Exemption under section 22 for office used to manage investments

Legal framework: Section 22 excludes from the charge of income from house property annual value of property "occupied by the owner for the purposes of his business or profession" where profits of that business or profession are chargeable to tax.

Precedent treatment: The authorities below interpreted section 22 to require that the property be used for a business or profession the profits of which are chargeable under "Profits and Gains of Business or Profession"; absence of such assessment has been held to negate entitlement to the exclusion.

Interpretation and reasoning: The Court applied the statutory language literally: exemption under section 22 contemplates use of the property for business/profession whose profits are chargeable to tax under the corresponding head. Here there was no material to establish organized business or profession in respect of investment management, and the assessee's income was not assessed under the business/profession head. The mere use of premises for personal investment monitoring, without identifiable chargeable business/profession profits, does not satisfy the statutory condition.

Ratio vs. Obiter: Ratio - Exemption under section 22 requires that the property be used for a business/profession the profits of which are chargeable under the business/profession head; absence of such chargeability precludes the exclusion. Obiter - Remarks distinguishing active, organized investment business from passive personal investment management are explanatory.

Conclusions: Addition of deemed rent on the office premises at Hariom Chambers was properly sustained; exemption under section 22 was not available on the facts.

Issue 3 - Alteration of election as to self-occupied properties under section 23(4) during assessment proceedings

Legal framework: Section 23(4) permits two properties to be treated as self-occupied for the purpose of computing income from house property; the selection of such properties affects computation of deemed rent on others.

Precedent treatment: Coordinate bench authorities have held that an assessee may modify or elect which property is self-occupied during assessment proceedings, particularly where the earlier option results in a non-beneficial outcome and a substitution is sought in good faith; such relief aligns with principles of taxpayer-friendly interpretation and avoiding taking advantage of an assessee's ignorance of law.

Interpretation and reasoning: The Court followed the coordinate bench's reasoning that the option as to which properties are self-occupied is not an absolute, irrevocable choice fixed only at return-filing; where alternative designation is advanced during assessment and is more beneficial and factually justified, the assessee may be permitted to substitute. The Court applied that principle to permit treating the office premises as self-occupied and designating the Ruby Villa property as deemed let out, directing recomputation accordingly.

Ratio vs. Obiter: Ratio - An assessee can modify the choice of self-occupied properties under section 23(4) during assessment proceedings and the Assessing Officer must allow a beneficial substitution where justified. Obiter - Policy considerations favoring remedial relief and non-technical penalization of bona fide taxpayers underpin the holding.

Conclusions: The assessee is entitled to elect during assessment proceedings to treat the office premises as self-occupied and to have the other property treated as deemed let out; the AO is directed to recompute income from house property accordingly.

Cross-reference

The allowance of relief under Issue 3 is contingent upon Issue 2 being dismissed; the Court permitted substitution only as an alternative to the primary contention that the office premises be exempt under section 22. The deletion under Issue 1 is independent and directed notwithstanding the outcomes on Issues 2 and 3.

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