29 September 2016
Vacancy allowance is available only for a property that was
‘let out’; ‘intention to let’ is not relevant
Background
The Income-tax Act, 1961 (the Act) allows for a
1
deduction (vacancy allowance) from the taxable rental
value in cases where a let-out property was vacant
during the year. Recently, the Mumbai Bench of the
Income-tax Appellate Tribunal (the Tribunal) in the
2
case of Sharan Hospitality Private Limited (the
taxpayer) held that a vacancy allowance cannot be
availed where a property was not let out during the
year, irrespective of the ‘intention to let’ such a
property.

Facts of the case

The taxpayer was the owner of two properties in
Mumbai. One of the properties was acquired in
December 2008 with the intention of letting the
property in order to earn rental income.

The taxpayer entered into an agreement with
Super Religare Laboratories Limited (the tenant) in
February 2009 for letting the said property
effective 1 April 2009. The property was in fact let
to the tenant from April 2009.

The taxpayer filed its Income Tax Return (ITR) for
the financial year 2008-09 claiming the Annual
Value (AV) of the said property as nil.

Upon assessment, the Assessing Officer (AO)
computed the AV of the property for the three
month period (January to March 2009) based on
the annual rent of the property as per the lease
agreement with the tenant.
The taxpayer placed reliance on the decision
3
in the case of Premsudha Exports and other
4
judicial precedents in claiming the AV as nil
on the following grounds:

The property was held with an intention to
let. Hence, the condition of ‘being let’ was
satisfied.

The Legislature did not require the
property to be actually let out for the
purpose of claiming vacancy allowance.
Where required, the Legislature had stated
so, as in Section 23(3)(a) of the Act.

In case vacancy allowance is not allowed
for a property which was vacant for the
entire year, it would result in an anomaly
wherein a property that was vacant for the
entire year would have a higher AV (based
on a notional value) than a property which
was vacant for part of the year (actual rent
for the period of letting).
____________________
3
Premsudha Exports Private Limited v. ACIT [2007] 295 ITR (AT) 341
(Mum)
4
________________________
1
2
Section 23(1)(c) of the Act
Sharan Hospitality Private Limited v. DCIT (ITA No. 6717/Mum/2012)
Kamal Mishra v. ITO [2008] 19 SOT 251 (Del); Smt. Poonam Sawhney
v. AO [2008] 20 SOT 69 (Del); ACIT v. Dr. Prabha Sanghi [2012] 139
ITD 504 (Del); DLF Office Developers v. ACIT [2008] 23 SOT 19 (Del);
Indu Chandra v. DCIT (ITA No. 96/2011 (Luck.); Shakuntala Devi v.
DDIT (ITA No. 1524/Bang/2010); Aryabhata Properties Ltd. v. ACIT (ITA
No. 6928/Mum/2011); and ACIT v. Suryashankar Properties Ltd. (ITA
No. 5258/Mum/2013)
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International”), a Swiss entity. All rights reserved.

On an appeal by the taxpayer, the
Commissioner of Income-tax (Appeals) [CIT(A)]
upheld the order of the AO on the basis that the
cases relied upon by the taxpayer were factually
distinct from the taxpayer’s case.

Aggrieved by the order of the CIT(A), the
taxpayer went on appeal before the Tribunal.

The tax department relied on the decision of the
Andhra Pradesh High Court in the case of Vivek
5
Jain where it was held that ‘where the property
is let’ cannot be read as ‘where the property is
intended to let’.

The tax department contended that the AV of
the property in question was to be computed as
per the AO’s order on the following grounds:

AV of a property is the income which a
property would potentially earn. The laws
bring to tax AV of property, regardless of
whether the property was let out or not. As
decided by the Supreme Court in the case
6
of Sultan Brothers , only where the actual
rent from a property is higher than its AV,
then the actual amount is considered as
income for taxation.

In the case of let out properties, the law
seeks to tax the AV of a vacant property
based on a notional sum representing its
potential income. This is so, irrespective of
the actual rent from the property or of the
fact whether the property was actually let
out or not.
Section 23(1) of the Act which deals with
taxation of income from a property provides for
the following:

AV of one property could be considered as
nil in cases where such a property could
not be occupied by the owner by reason of
his/her employment or
business/profession.

Where the rent received from a property is
higher than the FRV, then the actual rent
becomes the AV for such a property.
Further, in case the rent received is lower
than the FRV owing to the property being
vacant, the actual amount realised/
realisable is taken as the AV, irrespective
of the FRV.

The law as it stood in 1976-77 allowed
vacancy allowance as a deduction only where
the vacancy occurred after the property had
been let out. The law was amended in 1977-78
in order to grant vacancy allowance
irrespective of whether the vacancy allowed
prior to or following the period in which the
property had been let out. Hence, vacancy
allowance was available only if the property
was let out for at least a part of the relevant
year. Accordingly, in case a property was not
let out at all during the entire year, vacancy
allowance cannot be availed. This was a wellsettled principle.

The question before the Tribunal was whether
the provision of the law relating to vacancy
allowance extends to a property which was not
let but was intended to be let, especially on the
grounds that the Finance Act, 2001 amended
the language of Section 23(1)(c) so as to
include ‘during the whole or any part of the
previous year’.

In the case of Vivek Jain, the High Court held
that in case a property was not let out at all
during the year, no vacancy allowance could be
claimed on the following basis:
Tribunal’s ruling


Income from a property is taxed based on
its AV, which is the income potential (Fair
Rental Value – FRV) of the property. This is
so, irrespective of whether the property was
actually let or not.
7

The provisions of a taxing statute were to
be strictly construed.
_________________
5
6
Vivek Jain vs. ACIT [2011] 337 ITR 74 (AP)
Sultan Brothers Private Limited v. CIT [1964] 51 ITR 353 (SC)
______________________
7
Section 24(1)(ix) of the Act prior to the amendment made by the
Finance Act, 2001 effective 1 April 2002
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

The intention of Section 23(1)(c) was not to
exclude self-occupied properties from the
ambit of taxable AV as such properties were
already covered under Section 23(2)(a) of
the Act.
The said provision was introduced to
mitigate the hardship faced by a taxpayer
where the actual rent earned from the
property was lower than its AV due to its
vacancy. Such a case was not dealt with by
Section 23(1)(b) of the Act.

The Central Board of Direct Taxes (CBDT) had
clarified that the amendment made by the
Finance Act, 2001 was with a view to rationalize
the provisions of section 23 and 24 of the Act as
these provisions had become complicated on
account of various amendments. Hence, the
position of the law relating to vacancy allowance
had not changed. Vacancy allowance was
allowed as a deduction from AV prior to the said
amendment. After the amendment, the vacancy
allowance has the effect of reducing the AV.

The purpose of the vacancy allowance was to
provide relief to the taxpayer to the extent of rent
which could not be earned owing to its vacancy,
despite being let.

As observed in the case of Vivek Jain, the
concept of vacancy was intrinsically linked with
the actual letting of the property. The Tribunal
observed that a property which had not been let
out any time since assuming its ownership could
not be regarded as a property let.

The Tribunal noted that in the case of
Premsudha Exports, it was held that ‘intention to
let’ was sufficient for a property to qualify as
being let and eligible for vacancy allowance. It
held that ‘where the property is let’ represents
actual letting of a property and cannot be
extended to a state of ‘intended letting’. The
words ‘actually let’ are of no significance in this
regard.

The Tribunal upheld the order of the AO in
computing the AV of the property for the
period January to March 2009 without
considering any vacancy allowance.
Our comments
The Tribunal had denied vacancy allowance in
the present case on the grounds that a property
that had not been let out is not eligible for
vacancy allowance and the scope of the
provisions relating to ‘actual letting’ could not be
expanded to cover ‘intention to let’. The Tribunal
has arrived at its decision based on the
provisions of the Act relating to the taxation of
house property and on the principle laid in the
case of Vivek Jain by the Andhra Pradesh High
Court. This decision is divergent to the other
8
judicial precedents in support of the view that
‘intention to let’ was sufficient to claim a vacancy
allowance.
________________
8

The decision in the case of Vivek Jain by the
High Court has higher precedential value than
the decision in the case of Premsudha Exports
which was rendered by the Mumbai Tribunal.
Premsudha Exports Private Limited v. ACIT [2007] 295 ITR (AT) 341
(Mum), Kamal Mishra v. ITO [2008] 19 SOT 251 (Del); Smt. Poonam
Sawhney v. AO [2008] 20 SOT 69 (Del); ACIT v. Dr. Prabha Sanghi
[2012] 139 ITD 504 (Del); DLF Office Developers v. ACIT [2008] 23
SOT 19 (Del); Indu Chandra v. DCIT (ITA No. 96/2011 (Luck);
Shakuntala Devi v. DDIT (ITA No. 1524/Bang/2010); Aryabhata
Properties Ltd. v. ACIT (ITA No. 6928/Mum/2011); and ACIT v.
Suryashankar Properties Ltd. (ITA No. 5258/Mum/2013)
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.
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