The Visakhapatnam Bench of Income Tax Appellate Tribunal ( ITAT ) overturned the Assessing Officer’s ( AO ) additions for deemed rental income, emphasizing the validity of long-term lease agreements held by the assessee.
A.S. Raja Sons Enterprises ( P. ) Ltd., the appellant-assessee,involved in letting out residential and non-residential properties, filed its return for the assessment year ( AY ) 2018-19, declaring a total income of Rs. 70,36,870 on September 29, 2018. The case was subsequently selected for scrutiny, with the AO issuing notices under Sections 143(2) and 142(1), which were served through the Income Tax Business Application ( ITBA ) module.
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During the scrutiny, the AO identified discrepancies in the rental income reported by the appellant from three tenants: M/s. Visakha Hospitals & Diagnostics Limited, M/s. IndusInd Bank Ltd., and M/s. A.S. Raja Trust. The AO noticed that the rental income from M/s. Visakha Hospitals was significantly lower than that of the other tenants, prompting a letter on April 5, 2021, requesting justification for the lower rent and suggesting that deemed rent under Section 23(1)(a) be considered.
In its defense, the assessee explained that the lease with M/s. Visakha Hospitals had been in place for over ten years and that no prior assessments had questioned the rental income’s validity. They clarified that the hospital occupied the majority of the property ( 80,000 sq. ft. ), while the other two tenants leased much smaller spaces at higher rates. Nevertheless, the AO was not persuaded and proceeded to add Rs. 6,04,80,000 to the income based on the assumption of undervalued rent. Additionally, an interest expense claim of Rs. 12,50,000 was disallowed under Section 24(b) of the Act.
The assessee subsequently appealed to the Commissioner of Income Tax (Appeals) [CIT(A)], reiterating its arguments and citing an earlier favorable ITAT decision for the AY2015-16. However, the CIT(A) dismissed the appeal, referencing the High Court of Kerala’s ruling in Dr. K.M. Mehaboob’s case, which supported the revenue’s stance on deemed rental income.
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In the appeal to the ITAT, the assessee focused on the grounds challenging the addition of Rs. 3,49,43,660 related to the house property income. The Authorized Representative ( AR ) argued that the majority of the property had been rented to M/s. Visakha Hospitals, while only a small portion was leased to the other tenants, which was justified by the commercial context.
The Departmental Representative ( DR ) defended the AO’s position, asserting that the rent from M/s. Visakha Hospitals was excessively low compared to that of other tenants and argued for the application of Section 23(1) to ensure accurate income reporting.
Upon review, the tribunal noted that the AO’s assessment of rental income was based on perceived inconsistencies that failed to consider the long-term nature of the rental agreements. The ITAT referred to its previous ruling in favor of the assessee for the AY 2015-16, highlighting the relevance of the case’s circumstances, especially since the property was leased to unrelated parties.
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The two member bench comprising Duvvuru RL Reddy ( Judicial Member ) and S.Balakrishnan ( Accountant Member ) concluded that the AO’s addition of deemed rent lacked sufficient justification, considering the long-standing rental agreements and the absence of related-party transactions.
Consequently, the tribunal upheld the appeal filed by the assessee, allowing the claim for the contested rental income.
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