Issue for Consideration
The annual value of any building or land
appurtenant thereto is chargeable to income tax in the hands of the owner,
under the head ‘Income from House Property’, as per section 22 of the
Income-tax Act. The amount received or receivable is deemed to be the annual
value, as per section 23(1)(c), in a case where the property is let and was
vacant during the whole or any part of the previous year and as a result
thereof, the amount received or receivable is less than the sum for which the
property is reasonably expected to be let from year to year.
The relevant part of section 23(1),
substituted with effect from 1.4.2002, reads as under:
23.
(1) For the purposes of section 22, the annual value of any property shall be
deemed to be—
(a) the sum for which the
property might reasonably be expected to let from year to year; or
(b) where the property or any
part of the property is let and the actual rent received or receivable by the
owner in respect thereof is in excess of the sum referred to in clause (a), the
amount so received or receivable; or
(c) where the property or any
part of the property is let and was vacant during the whole or any part of the
previous year and owing to such vacancy the actual rent received or receivable
by the owner in respect thereof is less than the sum referred to in clause (a),
the amount so received or receivable :
Issues arise in interpretation and application
of clause (c) of section 23(1), particularly about the possibility of claiming
the benefit of section 23(1)(c) by limiting the deemed annual value determined
under clause (a), in cases where the property was not let out during the year
and had remained vacant throughout the year. An additional dimension is
provided to the issue in a case where attempts are made to let out the property
without success, or where the property was let out during the preceding
previous year, but had remained vacant during the previous year.
A controversy has arisen around the true
import of clause (c) on account of certain decisions, whereunder the Pune and
other benches of the Income Tax Appellate Tribunal have taken a view that the
benefit of clause (c) shall be available even in cases where a property had
remained vacant throughout the year. Against that the Mumbai bench had recently
held that the property should have been let, at least for some part of the
year, for availing the benefit under the said clause.
Vikas Keshav Garud’s Case
The issue in
the recent past had arisen in the case of Vikas Keshav Garud vs. ITO, 71
taxmann.com 214,
before the Pune Bench of the Tribunal for assessment year 2009-10.
In that case, the commercial premises
situated at Dande Towers, Pune, owned by the assessee, had remained vacant
throughout the financial year 2008-09. The assessee had not offered any deemed
income for the purposes of taxation for assessment year 2009-10. The A.O.
however assessed the notional income of the premises at Rs. 1,51,200 under the
head ‘Income From House Property’ by adopting annual letting value of Rs.
12,600 p.m., which was the monthly rent received by the assessee during the
financial year 2006-07 from a tenant.
The assessee challenged the assessment under
the head ‘Income from House Property’ before the CIT(A) in appeal, which was
dismissed by the CIT(A), by confirming the action of the A.O., relying on the
decision of the Andhra Pradesh High Court in the case of Vivek Jain vs.
ACIT, 337 ITR 74 (AP).
The Tribunal, in a further appeal by the
assessee, noticed that the A.O. had denied the benefit of clause (c) on the
ground that the property was not let at all during the year under consideration
and had also held that the intention to let out the property had no bearing on
application of the provisions of clause (c) of section 23(1); that the assessee
had ardently contested the action of the A.O. by relying on the decisions,
before the CIT(A) in the cases of Premsudha Exports (P.) Ltd. vs. ACIT, 110
ITD 158 (Mum) and Shakuntala Devi vs. DDIT, ITA No. 1520/Ban/2010 dt.
20.12.2011; that both the authorities had relied upon the decision in the
case of Vivek Jain (supra) for denying the benefit of clause (c) and
rejecting the claim of the assessee.
The Tribunal noted that the property was let
out in financial year 2006-07 to IDBI Home Finance Ltd. at a monthly rent of
Rs. 12,600 and that the assessee could not let out the property during the
year, which led to the property remaining vacant throughout the year, though it
was available for being let and the intention to let, though clear, could not
fructify into actual letting. The Tribunal, in allowing the claim of the
assessee, held that the underlying principle of the provision was to be viewed
with regard to the intention of the assessee in letting out of the property,
together with the efforts put in by assessee for such letting out; that the
actual rent received from the property would have to be considered as ‘zero’ in
case of an assessee who made appropriate efforts for letting the property, but
failed to let.
Importantly, the Tribunal held that the
language of section 23(1)(c) clearly included a situation, where a property was
vacant for the whole year; that a situation could not co-exist wherein the
property was let during the year, with it being simultaneously vacant for the ‘whole’
year; that the words ‘let’ and ‘vacant’ were mutually exclusive;
that the interpretation placed by the authorities was inconsistent with the
phraseology of the provision.
The Tribunal gathered the legislative intent
of allowing the benefit of clause (c) in the given situation, by contrasting
the provisions of sub-section (3) of section 23 of the Act, whereunder the
legislature in its wisdom used the phraseology ‘house is actually let’.
The Tribunal observed that the legislature, wherever required, had insisted on
actual letting of the property in express terms. Applying the purposive
interpretation, the Tribunal held that the expression “property is let”
had to be read in contrast to “property is self-occupied” to arrive at
the true import of clause (c).
Importantly, the Tribunal observed that the
decision of the high court in Vivek Jain’s case (supra) could not
be read by the revenue in a manner that if the property remained vacant
throughout the year, section 23(1)(c) did not apply at all. The Tribunal also
relied on the fact that the property was actually let out during the financial
year 2006-07. In the totality of the circumstances and having regard to the
provisions of the Act, the Tribunal held that the annual value for the property
had to be assessed at Nil. The appeal of the assessee on this ground was
accordingly allowed by the tribunal.
A similar view was taken by the Mumbai bench
of the Tribunal in the case of Informed Technologies India Ltd. vs. Dy CIT
162 ITD 153.
Sharan Hospitality (P.) Ltd.’s case
The issue again arose before the Mumbai
bench of the ITAT in the case of Sharan Hospitality (P.) Ltd. vs. DCIT in
ITA No. 6717/Mum/2012 dt. 12.09.2016 for assessment year 2009-10.
The assessee company, in the facts of the
case during the previous year under consideration, had acquired two properties.
One of the properties was acquired on December 18, 2008 and possession was
received on the same date. The property was acquired with the intent of
letting, so as to earn rental income. The assessee had entered into
negotiations with a company, which was in the process of setting up a state of
the art laboratory, at the relevant time. The basic terms and conditions agreed
upon between the parties for taking the property on rent, w.e.f 1.4.2009
onwards, were recorded in a letter of Intent dated February 9, 2009. The
property was accordingly let with effect from 1.4.2009 at the agreed rent of
Rs.38.95 lakh per month vide Leave and License Agreement dated 06.08.2009. The
Assessing Officer computed the annual value of the said property for assessment
year 2009-10 at Rs.116.85 lakh, i.e., taking notional rent for three months,
being January to March, 2009, ignoring the fact that the property was vacant
during that period. The action of the AO was confirmed by the CIT(A).
In appeal to the Tribunal, the assessee,
while not disputing the quantum of the gross annual rental value, claimed that,
inasmuch as the property, though lettable, was ‘vacant’ during the entire
period of the year since its acquisition in December, 2008; that its annual
value ought to be restricted to the actual rent received or receivable, i.e.,
Nil; that the condition of the property being let was met by the intent to let
out the same; that when the legislature had required the house property to be
actually let, it had stated so, as in section 23(1)(a); that not accepting the
claim of assessee would lead to absurd results, as in a case where the property
was not let for a single day of the year, and was vacant for the whole year,
its AV would stand to be computed taking the lettable value for the entire
year, while if it was let even for a single day during the year, the same would
stand restricted to the actual rent received/receivable, i.e., for one day.
It was further argued that the property
could not be ‘let’ and be ‘vacant‘ for the whole year at the same
time in-as-much as the two conditions could not co-exist, as was pointed out by
the Tribunal in Premsudha Exports (P.) Ltd. vs. ACIT, 295 ITR (AT) 341
(Mum). The words “where the property was let” were to be
construed to include property held with the intent of letting it. Reliance was
also placed on decisions in cases of, Kamal Mishra vs. ITO 19 SOT 251 (Del);
Smt. Poonam Sawhney vs. AO, 20 SOT 69 (Del.); ACIT vs. Dr. Prabha Sanghi, 139
ITD 504 (Del); DLF Office Developers vs. ACIT, 23 SOT 19 (Del); Indu Chandra
vs. DCIT in ITA No. 96/2011 (Luck.); Shakuntala Devi vs. Dy. DIT (in ITA No.
1524/Bang/2010 dated 20.12.2011); Aryabhata Properties Ltd. vs. ACIT (in ITA
No. 6928/Mum/2011 dated 31.7.2013); and ACIT vs. Suryashankar Properties
Ltd. in ITA No. 5258/Mum/2013 dated 10.6.2015).
The Revenue, in reply, contended that the
notion of ‘proposed to be let’ or ‘held for letting‘, etc.,
could not be imported into the provision, which sought to bring to tax a
notional sum, being the income potential – termed annual value, of a house
property, subject of course to the provisions of the Act, the measure of which
was the fair rental value, defined as the rent at which the house property
might reasonably be let from year to year; that it had nothing to do with the
actual letting of the house property, or the actual receipt of rent, and was in
the nature of an artificial or statutory income; the law in the matter was
well-settled, by the decision in case of CIT vs. Dalhousie Properties Ltd.,
149 ITR 708 (SC); New Piece Goods Bazar Co. Ltd. vs. CIT, 18 ITR 516 (SC); CIT
vs. H. G. Gupta & Sons, 149 ITR 253 (Del); and Sakarlal Balabhai vs.
ITO, 100 ITR 97 (Guj). It was further contended that the annual value,
irrespective of whether the property was actually let or not, was thus to be
subjected to tax, unless covered u/s. 23(1)(b), as was reiterated in Sultan
Brothers (P.) Ltd. vs. CIT, 51 ITR 353 (SC) and In Liquidator of
Mahamudabad Properties (P.) Ltd. vs. CIT, 124 ITR 31 (SC), wherein it was
held that even where the property was found to be in a state of utter
disrepair, it would yet have some annual value. The decisions relied upon by
the assessee, viz. Premsudha Exports (P.) Ltd. (supra); Shankuntala
Devi (supra); and Indu Chandra (supra) were claimed to be
distinguishable on facts. Reliance was placed on the case of Vivek Jain vs.
ACIT 337 ITR 74 (AP), wherein the Andhra Pradesh high court, had rejected
similar contentions as were made in the instant case.
The Tribunal noted that a deduction for
vacancy allowance up to assessment year 2001-02, was allowable under clause
(ix) of section 24(1) which clause was omitted w.e.f. assessment year 2002-03.
Instead, section 23(1), substituted w.e.f. A.Y. 2002-03, contained clause (c)
that provided for appropriate reduction of annual value in cases where a let
property was vacant. The Tribunal simultaneously took note of various decisions
of the courts, wherein it was held that the vacancy allowance of the kind
provided u/s. 24(1)(ix) could not be claimed if the property was not let out at
all during the previous year concerned, and that a proportionate amount out of
the annual value was permissible to be deducted, only where the property was
let out for a part of the year.
The Tribunal further noted that the issue,
u/s. 24(1)(ix), was well settled in favour of the view that a vacancy allowance
was possible only where the property was let out for a part of the year and not
where the property remained vacant throughout the year. Importantly, the
Tribunal in paragraph 5.3 of its order observed, that the position of the law qua
vacancy remission, post amendment, remained the same. The law laid down by
the courts in interpreting section 24(1)(ix) materially remained the same u/s.
23(1)(c), and therefore, no adjustment was possible under clause (c) of section
23(1) for a property which was vacant throughout the year. It also referred to
Circular no. 14 of 2001 issued by the CBDT for explaining the provisions of the
Finance Act, 2001 and to the Notes to clauses and the Explanatory Memorandum
accompanying the said Finance Act.
The Tribunal, in paragraph 5.2, took a
detailed note of the decision of the Andhra Pradesh high court in the case of Vivek
Jain (supra) and the reasons supplied by the court in arriving at the
conclusion that no adjustment was possible u/s. 23(1)(c) on account of vacancy
in a case where the property was not let out at all during the year of
assessment.
The Tribunal also took note of the decisions
in cases of Ramesh Chand vs. ITO 29 SOT 570 (Agra) and Indra S. Jain
vs. ITO, 52 SOT 270 (Mum.), wherein a view similar to the one being
advocated by the revenue was taken. The plethora of cases cited by the assessee
in favour of its claim including the case of Premsudha Exports (P.) Ltd. vs.
ACIT, 295 ITR (AT) 341 (Mum.), could not persuade the Tribunal to allow a
relief under clause (c) of section 23(1). On the contrary, the Tribunal
expressed its anguish that the different benches in the past failed to take
notice of the decision in the case of Vivek Jain (supra) and also did
not notice the developed law on the subject while deciding the issue u/s.
24(1)(ix), now omitted. It also observed that the Tribunal, in any case, was
not competent to read down the provision of law in a manner desired by the
assessee.
The Tribunal further observed that vacancy
as a concept had a symbiotic relationship with the notion of letting out and both
of them were intrinsically linked. There could not be a vacancy without actual
letting and there was no scope for the application of the ‘principle of causus
omissus’, inasmuch as the law on the subject was abundantly plain and
clear. A vacancy could not exist or be considered independent of and de hors
the letting. The assessee’s appeal was accordingly dismissed.
Observations
The issue under consideration has become
extremely contentious in as much as some of the decisions, delivered by
different benches of the Tribunal, uphold the claim for relief u/s. 23(1)(c) on
account of vacancy, even after the sole decision of the high court on the
subject in the case of Vivek Jain (supra), a decision which was cited
specifically in Vikas Keshav Garud’s case (supra).
In Vivek Jain’s case (supra), the
assessee, a practicing advocate, had adopted an annual value of Rs. Nil in
respect of a property that was vacant during the year as the same was not let
out. The benefit of section 23(1)(c) claimed by him was rejected by the AO, the
CIT(A) and the ITAT. In the further appeal u/s. 260A, the Andhra Pradesh High
Court upheld the action of the assessing officer with the following findings
and observations;
– the
contention that, as clause (c) provided for an eventuality where a property
could be vacant during the whole of the relevant previous year, both
situations, i.e., “property is let” and “property is vacant for
the whole of the relevant previous year”, could not co-exist, did not
merit acceptance.
– a
property let out for two or more years could also be vacant for the whole of a
previous year bringing it within the ambit of clause (c) of section 23(1) of
the Act.
– clause
(c) encompassed only such cases where a property was let out for more than a
year in which event alone would the question of it being vacant during the
whole of the previous year arose.
– the
contention that, if the owner had let out the property even for a day, it would
acquire the status of “let out property” for the purpose of clause
(c) for the entire life of the property even without any intention to let it
out in the relevant year was also not tenable.
– the circumstances in which the annual let out value of a house
property should be taken as nil was as specified in section 23(2) of the
Act.
– u/s.
23(l)(c), the period for which a let out property might remain vacant could not
exceed the period for which the property had been let out.
– if
the property had been let out for a part of the previous year, it can be vacant
only for the part of the previous year for which the property was let out and
not beyond.
– for that part of the previous year during which the property was not
let out, but was vacant, clause (c) would not apply and it was only clause (a)
which would be applicable, subject of course to sub-sections (2) and (3) of
section 23 of the Act.
– such
a construction did not lead to any hardship, inconvenience, injustice,
absurdity or anomaly and, therefore, the rule of ordinary and natural meaning
being followed could be departed from.
– the
benefit u/s. 23(1)(c) could not be extended to a case where the property was
not let out at all.
– there
was no merit in the submission that the words “property is let” were
used in clause (c) to take out those properties which were held by the
owner for self-occupation from the ambit of the said clause.
– section
23(2)(a) took out a self-occupied residential house, or a part thereof,
from the ambit of section 23(1) of the Act. Likewise, u/s. 23(2)(b),
where a house could actually not be occupied by the owner, on account of his
carrying on employment, business or profession at any other place requiring him
to reside at such other place in a building not belonging to him, the annual
value of the property was also required to be treated as nil, thereby taking it
out of the ambit of section 23(1) of the Act. Section 23(3)(a) makes it
clear that section 23(2) would not apply if the house, or a part thereof, was
actually let during the whole or any part of the previous year. Thus, only such
of the properties which were occupied by the owner for his residence, or which
were kept vacant on account of the circumstances mentioned in clause (b)
of section 23(2), fell outside the ambit of section 23(1) provided they were,
as stipulated in section 23(3)(a), not actually let during the whole or part of
the previous year.
– clause
(c) was not inserted to take out from its ambit properties held by the
owner for self-occupation inasmuch as section 23(2)(a) provided for such
an eventuality.
– it
was only to mitigate the hardship faced by an assessee, and as clause (b)
did not deal with the contingency where the property was let and, because of
vacancy, the actual rent received or receivable by the owner was less than the
sum referred to in clause (a), that clause (c) was inserted.
– in
cases where the property had not been let out at all, during the previous year
under consideration, there was no question of any vacancy allowance being
provided thereto u/s. 23(l)(c) of the Act.
– the
order of the Tribunal, denying the benefit of vacancy u/s. 23(1)(c), was
upheld.
The unfairness of the law is manifest in
cases where the property is ready for being let out and cannot be let out in
spite of the best of the efforts of the owner. This unfairness is further
aggravated in a case where the property was let out in the past but could not
be let out during the year. It is in such circumstances that the decision of the
Andhra Pradesh high court hits hard and perhaps requires reconsideration. It is
true that the court had comprehensively examined the provisions, on hand, of
section 23(1)(c). There, however, is an urgent need to appreciate the
following:
– the
provisions of section 23(1)(c) are materially different than the erstwhile
provisions of section 24(1)(ix), and therefore the case law developed on the
subject of a provision, now omitted, i.e. based on past law, should not color
the outcome on a new provision of law. An independent appraisal of section
23(1)(c) on the basis of the language of the law is required.
– the
express words of the phraseology ‘was vacant during the whole or any part of
the previous year’ in section 23(1)(c) requires to be given due weightage.
While the Andhra Pradesh High Court has sought to give meaning to the term ‘whole’
in the provision by explaining that it dealt with a situation involving letting
out of the premises for longer period, it remains to be interpreted in the
context of real life situations involving shorter periods of letting out. There
is no reason to not apply the provision in cases of letting out for shorter
periods and, if done so, there is a good possibility of a relief in such cases.
– again,
the use of the phraseology ‘actually let’ in section 23(3)(a), during the whole
or any part of the previous year, clearly indicates that the legislature
whenever intended has in express terms provided for actual letting out of the
premises during the year itself. This aspect, though examined by the court, in
our respectful opinion, requires to be reviewed in as much as the fact
continues to be that the term ‘actually let’ has been used in contradiction to
only ‘let’ in the same section 23(3).
– it
is impossible to envisage a situation wherein a property is vacant for the
‘whole of the year’ and is still let out during the same year. The property is
either vacant or let out.
We are of the considered view that the
provisions of section 23(1)(c), when read in the manner in which it has been
read by the Andhra Pradesh High Court, results in unjust deprivation of a
deserving benefit in cases where the property had remained vacant throughout
the year and was not put to any use. The legislative intent therefore requires
to be clarified, or the law requires to be amended to restore the equity and
fairness.
