Tax on Rental Income of Vacant Flat Limited to Municipal Value: ITAT restricts ₹5,026 as Rental Income [Read Order]

Ravi K Sheth (assessee) owned two flats in the "Manek" building in Mumbai Flat No. 12B and Flat No. 14B. For the Assessment Year (AY) 2017-18, the assessee had gifted Flat No. 12B to his son in January 2017. The assessee failed to compute the deemed let-out rent for this flat for the period April 1, 2016, to January 31, 2017 (10 months)

During assessment proceedings, the AO issued notice as to why market rent should not be considered to flat 12B. The assessee realised the error and requested the AO to consider the deemed rent for Flat No. 12B based on the Municipal Rateable Value.

The Municipal rateable value amounted to ₹5,026 for the 10-month period, based on certificates from the co-operative society and the Mumbai Municipal Corporation.

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The AO rejected this submission and adopted the market rent for 10 months. The AO increased it by 10%, thereby assessing the income from house property at ₹25,12,440. Aggrieved by the AO’s order, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) [CIT(A)]. The CIT(A) confirmed a revised addition of ₹19,40,400.

Aggrieved by the CIT(A), the assessee filed an appeal before the ITAT. The counsel for the assessee argued that the addition was excessive, arbitrary, and ignored judicial precedents, including the Tribunal's own order in the assessee's case for AY 2011-12, where the relief had been granted based on municipal valuation.

The two-member bench comprising Sandeep Gosain (Judicial Member) and Girish Agrawal (Accountant Member) observed that the matter was squarely covered by the assessee’s own case and the decision of the Bombay High Court in the case of CIT v. Smt Laxmi Jain.

The tribunal observed the Bombay High Court case which affirmed that when a property was never let out and can be treated as self-occupied or vacant, the tax on rental income can be calculated only on the basis of the rateable value assessed by the Municipal Corporation.

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The tribunal also relied on its earlier decision in the assessee's own case for AY 2011-12, where it had been held that in case of vacant property, the deemed Annual Letting Value (ALV) should be computed as per the municipal rateable value.

The Tribunal deleted the excessive addition made by the AO respectfully following the jurisdictional High Court and its own binding precedent. The tribunal directed that the income from house property for Flat No. 12B be restricted to ₹5,026 (the municipal valuation for 10 months). The appeal of the assessee was partly allowed.

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