Income tax - Whether when certain flats are leased out for certain period but tenant vacates some flats before contracted period, addition is warranted for additional rental receivable - YES, rules ITAT
PUNE, DEC 19, 2011: THE issue before the Bench is - Whether when certain flats are leased out for certain period but tenant vacates some flats before period mutually agreed upon, AO is legally right in making addition for additional rental receivable. YES is the Tribunal's answer.
Facts of the case
Assessee company had earned rental income from its various properties. It had leased out 19 flats to Patni Computer Systems Ltd. In all these 19 flats, the last Leave and License agreement was effective upto 31st December 2005. In respect of four flats, Patni Computer Systems Ltd. intimated that they had discontinued the use of the property w.e.f. 1.7.2005. Accordingly, they did not pay rent from that date. The AO did not accept this submission of the assessee and computed the additional rent receivable for the period July 2005 to December 2005 at Rs. 2,29,497/- for the 2 flats at Takshila, Andheri East, Mumbai; Rs. 2,07,750/- for the flat No. 301-H at Kukreja Complex, Bhandup West, Mumbai and Rs. 1,38,666/- for flat No. 501F at Kukreja Complex. The A.O observed that Patni Computer Systems Ltd. (PCS) in their surrender letter mentioned that it did not require the premises and will hand over the vacant possession of the flats on expiry of the lease agreement on 1.1.2006. The assessee was thus not right in showing rent from PCS only for 3 months i.e. upto June 2005 whereas it should have shown for 9 months upto December 2005, even if the rent had actually not been received. The CIT(A) upheld the same. The CIT(A) also approved the action of the A.O that this case fell u/s. 23(1)(a) and not u/s. 23(1)(c) of the Act as pleaded by the assessee since as per the A.O, it was a case where the property was never vacant.
The A.O observed that the flats were also given on rent to PCS Industries Ltd. from 1.1.2006 to 31.3.2006 on low rent. The two flats at Takshila, Andheri East were given at a monthly rent of Rs. 10,000/-, whereas till 31st December 2005, it was given to PCS at Rs. 38,249/- per month. The other two flats at Kukreja Complex were let out to the sister concern at a monthly rent of Rs. 6000/- and Rs. 8000/- per month respectively whereas earlier, these 2 flats were given at the rate of Rs.34,626/- and Rs. 23,111/- per month. The assessee explained before the A.O that they could not find suitable tenants, and, therefore, instead of keeping the flat vacant, they had given it on low rent at lower rate to another sister concern of PCS Ltd. It was also contended by the assessee that it was covered u/s. 23(1)(c) and not u/s. 23(1)(a). The A.O. rejected this explanation. The A.O stated that there was no reason for this drastic decrease in the rent for the period w.e.f. 1.1.2006. It was stated that it was merely to help the sister concern PCS (formerly PCS Industries Ltd.). A.O. calculated the rent receivable for the entire year at the same rate as the property was hired to PCS for the period April 2005 till December 2005. For this purpose, provisions of section 23(1)(a) were relied upon. It resulted in the gross addition to income from house property by an amount of Rs. 11,06,124/-. The A.O, also did not agree with the contention of the assessee that case was covered u/s. 23(1)(c) and not u/s. 23(1)(a) of the Act. The same was upheld by the CIT(A). Regarding confirmation letter dated 15.6.2009 filed from PCS, the CIT(A) held that it was not filed before the A.O nor any application was filed before him under Rule 46A of the I.T. Rules for the admission of this additional evidence.
After hearing the parties ITAT is held that,
++ we find that since beginning, it remained contention of the assessee that the above stated 4 flats were surrendered by the tenant PCS vide their letter dated 28.11.2005 making it clear that they had discontinued the use of the property w.e.f. 1.7.2005 and they did not pay rent from that date upto 31st December 2005 till which date leave and license agreement was effective. The 4 flats referred to above and 15 other flats were given on rent to PCS since January 2000. The last leave and license agreement was effective upto 31st December 2005. Out of the remaining 15 flats, in respect of 13 other flats at Mumbai, PCS had issued a formal letter in respect of all the flats stating that the agreements expired on 31st December 2005 and they did not wish to renew the said arrangements. The fact of non-user of these flats and non-payment of rent in respect thereof from July 2005, is mentioned in the letter in respect of the above 4 flats only and not in the letters in relation to other flats. Having gone through the contents of these letters dated November 28, 2005, some of which have been placed at page No.9 , and 16 of the paper book, we find that the contents of these letters are contradictory. In para No. 3, it mentions as "earlier in June, 2005, we had intimated to you that the said premises were no longer in our use and accordingly, w.e.f. July 2005, we have stopped paying the rent in respect of the said premises." Whereas in para No. 2, it mentions as "the term of the said agreement is upto December 31, 2005. As we no longer require the said premises referred under the said agreement, we, shall hand over vacant and peaceful possession of the above flat on expiry of the term on January 1, 2006 to your authorized representative." On the basis of above contents of the letter, the authorities below did not agree with the contention of the assessee that the above stated 4 flats were vacant from July 2005 till December 2005;
++ the contention of the A.R. in this regard remained that the formal handing over of the possession was kept in abeyance till the refund of the deposit since this was done for all the 17 flats collectively. It was pointed out that the deposits were refunded on 3.2.2006. The Ld. A.R. also tried to define the word "vacant" as per the law Lexicon as un-filled, empty, unoccupied. He also tried to define the word "unoccupied" as per order 20, rule 8 of Civil Procedure Code & Article 89(2) of the Constitution of India. He submitted that word "vacant" used in the Act means that the tenants should have ceased to occupy the accommodation with the intention of not coming back to it again. The above facts indicate that the above referred 4 flats were vacant from July 2005 in a sense that the tenant was not intended to lose the premises but handing over the possession was kept in abeyance till the refund of deposits since it was to be done for all the 17 flats collectively. In other words, in our view, those flats were not available with the assessee to let it out. Thus, we are not inclined to agree with this submission of the ld. A.R. that these flats were vacant;
+ under these circumstances, we concur with the approach of the authorities below that the tenant was still in possession of the flat upto 31st December 2005 and thus, the A.O has rightly computed the rent thereof upto 31st December 2005. Since the above flats were not vacant, during the period July 2005 to December 2005 and it is not the case of the assessee that these premises were let out on higher rent, the explanation of the assessee cannot be accepted that these flats were let out for the period 1.1.2006 to 31st March 2006 on decreased rent as suitable tenants were not available. Thus, there is no question of application of the provision of section 23(1)(c ) of the Act as pleaded by the A.R;
+ the A.O thus has rightly applied the provision of section 23(1)(a) of the Act for computing the rent for this period. We thus do not find reason to interfere with the orders of the authorities below in this regard. The same is upheld. The decisions relied upon by the Ld. A.R. are not helpful to the assessee as they are having distinguishable facts. In the case of Premsudha Exports (P) Ltd. Vs. ACIT (Supra), as per the resolution of the Board of Directors of assessee company and various correspondence placed on record, it was shown that the property in question was indicated to be let out and despite efforts made, it remained vacant for the whole of the relevant previous year. Similar was the position in the case of Vijay Mukund Athavale Vs. DCIT (Supra) where rented property remained vacant for the whole year. The issues raised in the grounds regarding the validity of application of notional income and the provisions of Section 23(1)(a) of the Act are thus decided in favour of the revenue.
PUNE, DEC 19, 2011: THE issue before the Bench is - Whether when certain flats are leased out for certain period but tenant vacates some flats before period mutually agreed upon, AO is legally right in making addition for additional rental receivable. YES is the Tribunal's answer.
Facts of the case
Assessee company had earned rental income from its various properties. It had leased out 19 flats to Patni Computer Systems Ltd. In all these 19 flats, the last Leave and License agreement was effective upto 31st December 2005. In respect of four flats, Patni Computer Systems Ltd. intimated that they had discontinued the use of the property w.e.f. 1.7.2005. Accordingly, they did not pay rent from that date. The AO did not accept this submission of the assessee and computed the additional rent receivable for the period July 2005 to December 2005 at Rs. 2,29,497/- for the 2 flats at Takshila, Andheri East, Mumbai; Rs. 2,07,750/- for the flat No. 301-H at Kukreja Complex, Bhandup West, Mumbai and Rs. 1,38,666/- for flat No. 501F at Kukreja Complex. The A.O observed that Patni Computer Systems Ltd. (PCS) in their surrender letter mentioned that it did not require the premises and will hand over the vacant possession of the flats on expiry of the lease agreement on 1.1.2006. The assessee was thus not right in showing rent from PCS only for 3 months i.e. upto June 2005 whereas it should have shown for 9 months upto December 2005, even if the rent had actually not been received. The CIT(A) upheld the same. The CIT(A) also approved the action of the A.O that this case fell u/s. 23(1)(a) and not u/s. 23(1)(c) of the Act as pleaded by the assessee since as per the A.O, it was a case where the property was never vacant.
The A.O observed that the flats were also given on rent to PCS Industries Ltd. from 1.1.2006 to 31.3.2006 on low rent. The two flats at Takshila, Andheri East were given at a monthly rent of Rs. 10,000/-, whereas till 31st December 2005, it was given to PCS at Rs. 38,249/- per month. The other two flats at Kukreja Complex were let out to the sister concern at a monthly rent of Rs. 6000/- and Rs. 8000/- per month respectively whereas earlier, these 2 flats were given at the rate of Rs.34,626/- and Rs. 23,111/- per month. The assessee explained before the A.O that they could not find suitable tenants, and, therefore, instead of keeping the flat vacant, they had given it on low rent at lower rate to another sister concern of PCS Ltd. It was also contended by the assessee that it was covered u/s. 23(1)(c) and not u/s. 23(1)(a). The A.O. rejected this explanation. The A.O stated that there was no reason for this drastic decrease in the rent for the period w.e.f. 1.1.2006. It was stated that it was merely to help the sister concern PCS (formerly PCS Industries Ltd.). A.O. calculated the rent receivable for the entire year at the same rate as the property was hired to PCS for the period April 2005 till December 2005. For this purpose, provisions of section 23(1)(a) were relied upon. It resulted in the gross addition to income from house property by an amount of Rs. 11,06,124/-. The A.O, also did not agree with the contention of the assessee that case was covered u/s. 23(1)(c) and not u/s. 23(1)(a) of the Act. The same was upheld by the CIT(A). Regarding confirmation letter dated 15.6.2009 filed from PCS, the CIT(A) held that it was not filed before the A.O nor any application was filed before him under Rule 46A of the I.T. Rules for the admission of this additional evidence.
After hearing the parties ITAT is held that,
++ we find that since beginning, it remained contention of the assessee that the above stated 4 flats were surrendered by the tenant PCS vide their letter dated 28.11.2005 making it clear that they had discontinued the use of the property w.e.f. 1.7.2005 and they did not pay rent from that date upto 31st December 2005 till which date leave and license agreement was effective. The 4 flats referred to above and 15 other flats were given on rent to PCS since January 2000. The last leave and license agreement was effective upto 31st December 2005. Out of the remaining 15 flats, in respect of 13 other flats at Mumbai, PCS had issued a formal letter in respect of all the flats stating that the agreements expired on 31st December 2005 and they did not wish to renew the said arrangements. The fact of non-user of these flats and non-payment of rent in respect thereof from July 2005, is mentioned in the letter in respect of the above 4 flats only and not in the letters in relation to other flats. Having gone through the contents of these letters dated November 28, 2005, some of which have been placed at page No.9 , and 16 of the paper book, we find that the contents of these letters are contradictory. In para No. 3, it mentions as "earlier in June, 2005, we had intimated to you that the said premises were no longer in our use and accordingly, w.e.f. July 2005, we have stopped paying the rent in respect of the said premises." Whereas in para No. 2, it mentions as "the term of the said agreement is upto December 31, 2005. As we no longer require the said premises referred under the said agreement, we, shall hand over vacant and peaceful possession of the above flat on expiry of the term on January 1, 2006 to your authorized representative." On the basis of above contents of the letter, the authorities below did not agree with the contention of the assessee that the above stated 4 flats were vacant from July 2005 till December 2005;
++ the contention of the A.R. in this regard remained that the formal handing over of the possession was kept in abeyance till the refund of the deposit since this was done for all the 17 flats collectively. It was pointed out that the deposits were refunded on 3.2.2006. The Ld. A.R. also tried to define the word "vacant" as per the law Lexicon as un-filled, empty, unoccupied. He also tried to define the word "unoccupied" as per order 20, rule 8 of Civil Procedure Code & Article 89(2) of the Constitution of India. He submitted that word "vacant" used in the Act means that the tenants should have ceased to occupy the accommodation with the intention of not coming back to it again. The above facts indicate that the above referred 4 flats were vacant from July 2005 in a sense that the tenant was not intended to lose the premises but handing over the possession was kept in abeyance till the refund of deposits since it was to be done for all the 17 flats collectively. In other words, in our view, those flats were not available with the assessee to let it out. Thus, we are not inclined to agree with this submission of the ld. A.R. that these flats were vacant;
+ under these circumstances, we concur with the approach of the authorities below that the tenant was still in possession of the flat upto 31st December 2005 and thus, the A.O has rightly computed the rent thereof upto 31st December 2005. Since the above flats were not vacant, during the period July 2005 to December 2005 and it is not the case of the assessee that these premises were let out on higher rent, the explanation of the assessee cannot be accepted that these flats were let out for the period 1.1.2006 to 31st March 2006 on decreased rent as suitable tenants were not available. Thus, there is no question of application of the provision of section 23(1)(c ) of the Act as pleaded by the A.R;
+ the A.O thus has rightly applied the provision of section 23(1)(a) of the Act for computing the rent for this period. We thus do not find reason to interfere with the orders of the authorities below in this regard. The same is upheld. The decisions relied upon by the Ld. A.R. are not helpful to the assessee as they are having distinguishable facts. In the case of Premsudha Exports (P) Ltd. Vs. ACIT (Supra), as per the resolution of the Board of Directors of assessee company and various correspondence placed on record, it was shown that the property in question was indicated to be let out and despite efforts made, it remained vacant for the whole of the relevant previous year. Similar was the position in the case of Vijay Mukund Athavale Vs. DCIT (Supra) where rented property remained vacant for the whole year. The issues raised in the grounds regarding the validity of application of notional income and the provisions of Section 23(1)(a) of the Act are thus decided in favour of the revenue.
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