Taxation of Rental Income on Notional Basis : Since the property was legally not occupiable and not occupied, Charging of tax on notional rental basis do not arise at all.

 

Short Overview : Since during the period the property was legally not occupiable and not occupied because the building in which property was situated was not given Occupancy Certificate (OC), therefore, issue for charging of tax on notional rental basis and the question of interpretation of section 23(1)(a) did not arise at all.

Assessee had purchased a commercial property. The intention of assessee was to let out the property for earning rental income. The building was not given Occupancy Certificate (OC) and was issued later on. In the meantime, assessee had leased out the property.  Revenue alleged that, as assessee had leased out the property from the date when conveyance deed was executed without waiting for OC, therefore, the entire period during which the assessee could have let the said property, tax on notional basis should be charged.

it is held that Contention of revenue was fallacious. In plain terms, during the disputed period, for which revenue sought to charge notional rent, the property was legally not occupiable and not occupied. Charging of tax on notional rental basis and the question of interpretation of section 23(1)(a) did not arise at all. The issue only arose because assessee computed the notional rental receipts for the said period and claimed the vacancy allowance, which was under mistaken belief of law.

Decision: In assessee’s favour.

Referred: Vivek Jain v. Asstt. CIT (2011) 337 ITR 74 (AP) : 2011 TaxPub(DT) 1986 (AP-HC) and Sharan Hospitality (P) Ltd. v. Dy. CIT [ITA No. 6717/Mum/2012, dt. 12-9-2016] : 2016 TaxPub(DT) 4223 (Mum).

IN THE BOMBAY HIGH COURT

AKIL KURESHI & S.J. KATHAWALLA, JJ.

Sharan Hospitality (P) Ltd. v. Dy. CIT

Income Tax Appeal No. 557 of 2017

1 July, 2019

Appellant by: Priyanka Jain i/b. Vaish Associates

Respondent by: A. Sharma

P.C.

The Appeal is admitted for consideration of the following substantial question of law :–

“Whether in the facts and circumstances of the case, the Income Tax Appellate Tribunal was right in law in holding that the annual value of the property in question for the relevant previous year can be determined under section 23(1)(a) of the Income Tax Act, 1961?”

2. By consent of the parties as issue is small, we have heard the Appeal finally. Brief facts are as under:

3. The Appeal is filed by the assessee challenging the Judgment of the Income Tax Appellate Tribunal (‘the Tribunal’ for short) dated 12-9-2016. For the assessment year 2009-10, the assessee had filed the return of income. The assessee had purchased a commercial property from one M/s. Prime Property Development Corporation Limited under Conveyance Deed dated 18-12-2008. The intention of the assessee was to let out this property for earning rental income. The building in which this property was situated, was not given Occupancy Certificate (‘OC’ for short). This was issued by the local authority on 21-5-2009, only thereafter the remaining consideration of Rs. 8.75 Crores was made. In the meantime, the assessee had leased out the property with effect from 1-4-2009. Lease Agreement was executed in August, 2009, which also referred to the Lessee being put in possession of the property on 1-4-2009.

4. While assessing the return of income of the assessee for the said assessment year 2009-10, the assessing officer was of the opinion that for the period between 1-1-2009 till 31-3-2009, the assessee had to pay tax on the rental income of the property in question on notional basis. The assessing officer passed an order of assessment on 22-12-2011, in which he levied tax on sum of Rs. 1.16 Crores (rounded off). We may notice that the assessee had in fact declared the said amount as notional rent but claimed vacancy allowance for claiming no tax liability. This was rejected by the assessing officer on the ground that the same would be available only when the property or any part of the properties let and or was vacant during the whole year or any part of the previous year, which in the present case was absent.

5. The assessee carried the matter in Appeal before the Commissioner. The Commissioner rejected the Appeal. Upon which, the assessee carried out the matter further in Appeal before the Tribunal. The Tribunal by the impugned Judgment confirmed the view of the Revenue Authority and rejected the assessee’s Appeal. The Tribunal was of the opinion that the interpretation of the Revenue Authorities of section 23(1)(c) of the Act was correct. The Tribunal relied upon and referred to the decision of High Court of Andhra Pradesh in case of Vivek Jain v. Assistant Commissioner of Income Tax (2011) 337 ITR 74 (AP) : 2011 TaxPub(DT) 1986 (AP-HC).

6. We have heard the learned Counsel appearing for the parties and perused the documents on record. It is not necessary to enter into the interpretation of section 23(1)(c) of the Act, since this issue can be thrashed out on the facts and the first principles emerging from the statutory provisions. As noted, the facts are that though the assessee acquired the property in question under Conveyance Deed dated 18-12-2008, the OC for the property in question was obtained by the builder only in May, 2009. Under such circumstances, by operation of law, such property could not have been legally occupied by either the assessee or any other person under the license given by the assessee. It is a different matter that the assessee did execute a lease deed putting the leasee in possession of the property on 1-4-2009. The assessee’s explanation is that the same was only for completing the furniture and fixtures and not for occupation for commercial use. We are not in the present Appeal concerned with the correctness of this explanation. What we are however concerned about is the fact that the Revenue wishes to tax the assessee for the so-called occupation of the property between 1-1-2009 to 31-3-2009. This is the period during which the assessee had neither occupied the property nor put lessee in possession of the property nor earned any rental income. The property was in fact during the period in question legally not occupiable nor occupied. Under the circumstances, the question of charging tax on notional rental income during such period does not arise.

7. The Revenue appears to be raising a contention that since the assessee in any case leased out the property with effect from 1-4-2008 without waiting for OC, the entire period during which the assessee could have let this property, tax on notional basis should be charged. In our opinion, this is fallacious contention. In plain terms, between 1-1-2009 to 31-3-2009, the property was legally not occupiable and not occupied. Under such circumstances, charging of tax on notional rental basis and the question of interpretation of section 23(1) (a) of the Act did not arise at all. The issue perhaps arose because the assessee computed the notional rental receipts for the said period of three months and claimed the vacancy allowance, which in our opinion was under mistaken belief of law.

8. In the result, the question is answered in favour of the Appellant and against the Respondent. The impugned Judgment of the Tribunal is reversed. Appeal is allowed and disposed off accordingly.