In the ITAT
Smt. Poonam Sawhney
v.
Assessing Officer, Ward 31(2),
Vimal Gandhi, President
And Deepak R. Shah,
Accountant Member
IT Appeal No. 4885 (
[Assessment year 2002-03]
October 19, 2007
Section 23 of the Income-tax Act, 1961 - Income
from house property - Annual value - Assessment year 2002-03 - Whether if owner
of a house has no intention to let out house and does not occupy same for large
part of a particular year or for years together, such houses, although not in
actual physical possession of owner, would be deemed to be under
self-occupation of owner and their annual letting value (ALV) would be
determined as per clause (a) of section 23(1) - Held, yes - Whether such
category of houses which are maintained by owner with an intention for letting
out, rent received or receivable in such case, being in excess of reasonable
sum assessable under clause (a) of section 23(1), would be liable to be
assessed and their ALV would be determined as per clause (b) of sub-section (1)
of section 23 - Held, yes - Whether where owner of property with intention to
earn rent has let out property but for reasons beyond control of owner or for
some other good reasons, property (whole or in part) remains vacant during
whole or any part of previous year, and actual rent received or receivable is
less than ALV referred to in clause (a), then such houses would be assessed
under clause (c) of section 23(1) - Held, yes - Whether, in view of abovesaid
position, in every case a finding has to be recorded by revenue authorities
under what category house property falls in relevant previous year for
determining ALV of property - Held, yes [Matter remanded back]
Circulars and
Notifications - CBDT Circular No. 14 of 2001
Facts
The assessee
was the owner of a house property situated at
On appeal, the
Commissioner (Appeals) upheld the impugned order.
On second
appeal :
Held
On a reading the provisions of section 22, it is
evident that owner of any building and land appurtenant to such building is
liable to be charged to income-tax under the head ‘Income from house property’
on what is known as annual value of property. The annual value is computed for
purposes of taxation as per section 23. [
A reference to the history of development would
show that earlier only provision similar to section 23(1)(a) was on the statute and ALV of the house
property was taken which the property might “reasonably” be expected to fetch,
when let out from year to year. Similar provision for computation of levies
also existed under Municipal Laws of various States. The Supreme Court in the
case of Corporation of
Following the decision in the case of Smt. Padma Debi (supra) and similar other decisions that it was
not lawful (having regard to the word “reasonable”) for a landlord to recover
more than the standard rent, and that it was penal for the landlord to receive
any rent higher than the standard rent fixed under the Act, Courts took the
view that even under the Income-tax Act, only standard rent could be assessed
and any rent received or recovered by the landlord beyond the standard rent
being unlawful, could not be assessed under the Income-tax Act. The Legislature
changed above position, and amended section 23 and clause (b) was inserted through the Taxation Laws
(Amendment) Act, 1975 with effect from 1-4-1976 to assess rent received or
receivable, although it was more than the fair rent. The provision of section
24 allowed deduction for vacancy and for un-realized rent. But this scheme did
not work and accordingly Statute was amended and clause (1) of section 23 was
substituted by a new section. The purpose and role of the new substituted
provision is explained by Central Board of Direct Taxes in their Circular No.
14 of 2001. The said circular provides for rationalization of provisions
relating to income from house property.
In the said circular it was clarified that the
existing provisions contained in section 23 provided for determination of
annual value of the property in certain circumstances including where the
property is let, or is self-occupied, or is vacant, or is partially let, or is
let for part of the year. The annual value so determined was subject to
deductions allowable under section 24, including deductions on account of
vacancy for any part of the year in respect of the property let, and on account
of rent which could not be realized. With the various amendments made over the
years in this section, the provisions had become quite complicated, disjointed
and difficult for the taxpayer to understand. With a view to rationalize these
provisions, the Act has substituted section 23 so as to provide for a
simplified determination of annual value after allowing deductions in computing
the annual value itself on account of vacancy and unrealized rent.
The substituted section 23 retains the existing
concept of annual value as being the sum for which the property might reasonably
be expected to be let from year to year, i.e.,
Annual Letting Value (ALV). However, in case of let out property, the concept
of “annual rent” has been removed. The new section provides that where the
property or any part of the property is let and the actual rent received or
receivable is in excess of the ALV, the amount so received or receivable shall
be the annual value. This will be the case even if the property (or part of the
property) was vacant for a part of the year, but the actual rent received or
receivable during the year is still higher than the ALV. 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 is less than the ALV, the sum so received or receivable shall be the
annual value. In case the actual rent received or receivable during the year is
less than the ALV, but not because of vacancy, it is the ALV which shall be
taken to be the annual value.
The Explanation
to the substituted section provides that unrealized rent shall not be included
in the actual rent receivable and shall, therefore, not form part of the
annual value subject to rules made in this behalf by the Board. Conditions to
be satisfied for such exclusion are specified in rule 4, which has been
suitably modified.
The section also provides that the taxes levied
by a local authority in respect of the property shall be deducted in determining
the annual value for that previous year in which such taxes are actually paid,
irrespective of the previous year in which the liability to pay such taxes was
incurred by the owner. Under the existing provisions, this deduction was
allowable only in respect of property, which was in the occupation of a tenant.
As per the amended provisions, however, the deduction is available in every
case where annual value is determined under sub-section (1) including the case
of a second self-occupied house not falling under sub-section (2) of the
section.
Under the existing provisions contained in
section 24, the income chargeable under the head “Income from house property”
was computed after making deductions of one-fourth of the annual value in
respect of repairs of, and collection of rent from the property, interest on
capital borrowed
for acquiring, constructing, repairing, renewing or reconstructing the
pro-perty, as also a number of other deductions on account of insurance
premium, ground rent, annual charge, etc. The various deductions made the
computation of income from house property a cumbersome process.
With a view to rationalize the deductions and
simplify the computation, the Act has substituted the said section so as to
provide for only two deductions, namely a deduction of thirty per cent of the
annual value (which takes into account all expenses and outgoings for
maintaining the property), and interest paid on capital borrowed for acquiring,
constructing, repairing, renewing or reconstructing the property. The limit on
deduction of interest payable on housing loans for acquiring or constructing a
self-occupied house has been enhanced from the existing rupees one lakh to
rupees one lakh fifty thousand in cases where the capital is borrowed on or
after 1-4-1999. In other cases, the existing limit of rupees thirty thousand
shall continue. [
On going through the history of the enactment
relating to assessment of properties under the head ‘Income from house
property’, it is clear that assessment is made of ALV under the head ‘Income
from house property’. The portion of house property used for purposes of
business or profession is excluded under the scheme. The following type of
houses are subjected to tax:
(1) Houses owned by the assessee, which are
under self-occupation. In other words, the house is being used by the assessee
for his own residence and is not let out. Subject to policy of the Legislature,
ALV of such house property is taken as standard rent of the property. ALV of
such houses is taken at Nil
as per sub-section (2) of section 23 with exceptions provided in sub-section
(3).
There are rich and affluent people who have
houses at more than one places and none of them is let out, although they
mainly carry on business from a particular place but retain houses in hill
stations, on beaches, religious places or other places of interest to them. The
owner has no intention to let out the house and may not occupy the same for
large part of a particular year or for years together. Their servants or agents
maintain the house on behalf of the owner. Such houses, although not in actual
physical possession of the owner, are deemed to be under self-occupation. A
distinction is drawn between such type of houses and houses, which remain
vacant in spite of best efforts of the owner. First category of houses would be
assessed and their ALV would be determined as per clause (a) of section 23(1).
(2) The houses of other category are maintained
by the owner for letting out. The owner has intention to earn rental income
from the house. The rent received or receivable in such cases, being in excess
of the reasonable sum assessable under clause (a)
of section 23(1), is liable to be assessed under clause (b) of sub-section (1) of section 23. In
such cases, actual rent realized from the tenant or other occupier is the
letting value of the property. From the ALV, the rent received or receivable
but not realized, is deducted and net amount computed is subjected to tax.
(3) The third category of houses are where the
owner of the property with intention to earn rent has let out the property, but
for reasons beyond the control of the owner or for some other good reasons, the
property (whole or in part) remains vacant during the whole or any part of the
previous year, and the actual rent received or receivable is less than the ALV,
referred to in clause (a),
then such houses would be assessed under clause (c).
[
It is evident from above, that clause (c) of section 23(1) has to be considered
conjunctively with clause (a)
of section 23(1). Therefore, where property is let out but was vacant during
the whole or part of the previous year, one has to see what is its letting
value under clause (a),
what is the actual rent received or receivable of such property and what is
the sum which the owner could not realise owing to vacancy of the property in
the previous year. If after deducting non-realized rent due to vacancy, the
actual amount out of the rent received or receivable is less than the sum
assessable under clause (a),
then such reduced amount is ALV to be subjected to tax. There could be no
dispute that in respect of a property, which is a let out property but remains
vacant during the whole of the previous year, the ALV of such property would be
‘nil’ as per clause (c) of sub-section (1). But in every case a
finding has to be recorded under what category the house property falls in the
relevant previous year. To attract clause (c),
it has to be shown that the property was intended to be let out, but remained
vacant due to circumstances not in the control of the owner. Clause (c) would not cover cases where the house property
is maintained by the assessee for self-use or for other use and has no
intention whatsoever to let out the property to earn rent therefrom. To arrive
at an appropriate finding, it may be necessary to see the position of the
property in the preceding as also in the subsequent assessment year. The
aforesaid clause would not be applicable to properties, which are vacant but
under the law would be deemed to be under self-occupation. Owner’s intention
not to let out the properties is a material factor. [Para 7.1]
In the instant case, the Assessing Officer did
not examine the issue from proper perspective. Detailed facts were not recorded
to show whether the property was a let out property or it was never intended to
be let out and was a self-occupied property. Therefore, the impugned order was
set aside and the matter was restored to the file of the Assessing Officer to
re-determine the issue in accordance with law and in the light of observations
made above. [Para 8]
Cases
referred to
Corporation
of Calcutta v. Smt. Padma
Debi [1962] 3 SCR 49 (para 6) and Dewan Daulat Rai Kapoor v. New
Delhi Municipal Committee [1980] 122 ITR 700 (SC) (para 6).
V.P. Gupta for the Appellant. Smt. Sheela
Chopra for the Respondent.