Actual rent, house property interest deduction, and no-exempt-income rule under section 14A shaped the assessee's relief.

Actual rent under registered and genuine commercial lease arrangements could not be substituted by notional market rent under section 23(1)(a) in the absence of evidence of suppression, sham, or colourable bifurcation of receipts, so the enhancement of annual letting value was unsustainable. Interest on borrowings used to acquire commercial property was allowable under section 24(b) where the borrowings were linked to the acquisition and no diversion was shown, so the disallowance failed. Section 14A read with Rule 8D could not be applied where no exempt income accrued during the relevant years, and the Finance Act, 2022 Explanation was treated as prospective, so the disallowance was deleted.

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Issues: (i) Whether the Annual Letting Value could be enhanced under section 23(1)(a) on a notional market-rent basis by disregarding the actual rent and separate amenities receipts under genuine commercial agreements; (ii) Whether interest on borrowings used for acquisition of commercial properties was deductible; (iii) Whether disallowance under section 14A read with Rule 8D could be made when no exempt income was earned during the relevant years.

Issue (i): Whether the Annual Letting Value could be enhanced under section 23(1)(a) on a notional market-rent basis by disregarding the actual rent and separate amenities receipts under genuine commercial agreements.

Analysis: The assessment proceeded on suspicion, without material showing suppression of rent, receipt of unaccounted consideration, or any sham arrangement. The leave and license agreements and separate amenities agreements were registered and executed with independent tenants, and the Revenue failed to establish that the bifurcation of receipts was a colourable device. In such genuine arrangements, actual rent cannot be displaced by hypothetical fair-rent estimates merely on generalized market perceptions.

Conclusion: The enhancement of Annual Letting Value was not sustainable and the deletion by the CIT(A) was upheld in favour of the assessee.

Issue (ii): Whether interest on borrowings used for acquisition of commercial properties was deductible.

Analysis: Once the income from the properties was assessed under the head income from house property, the statutory deduction for interest on borrowed capital utilized for acquisition of such property followed under section 24(b). The record showed nexus between the borrowings and acquisition of the properties, and there was no finding of diversion of funds for non-business or personal use. The Revenue's contrary approach was internally inconsistent.

Conclusion: The disallowance of interest expenditure was rightly deleted and the issue was decided in favour of the assessee.

Issue (iii): Whether disallowance under section 14A read with Rule 8D could be made when no exempt income was earned during the relevant years.

Analysis: The factual position was undisputed that no exempt income accrued or arose during the years under consideration. In the absence of exempt income, the foundational requirement for section 14A did not exist. The Explanation inserted by the Finance Act, 2022 was treated as prospective and could not govern the earlier assessment years involved in the appeals.

Conclusion: The section 14A read with Rule 8D disallowance was unsustainable and its deletion was upheld in favour of the assessee.

Final Conclusion: The Revenue's appeals were rejected after affirming the deletion of all three categories of additions for each year under consideration.

Ratio Decidendi: Actual rent under genuine arm's length commercial agreements cannot be substituted by notional annual value in the absence of evidence of suppression or sham, interest on borrowed capital used to acquire house property is allowable under the house-property provisions, and section 14A cannot be invoked where no exempt income is earned during the relevant year.

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