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Can there be income from vacant property?

One of my clients has constructed a five-floor complex during the year of account relevant to the assessment year (AY) 2004-05. The above assessee could not secure any tenants for occupation.

The assessing officer proposes to assess the income from property in respect of unoccupied portion also by adopting annual value. Even today the fourth and fifth floors are vacant.

I seek opinion on the above whether the assessing officer is justified in assessing the income in respect of unoccupied floors in question.

The law prior to assessment year (AY) 2002-03 had provided for vacancy allowance, so that one could get deduction for the period for which the property was vacant.

This provision for deduction, however, was interpreted too narrowly by understanding vacancy to mean that the property should have been let out earlier to become vacant.

It was even understood that vacancy allowance is available only if it is vacant for part of the year and not the whole year, as was decided in Liquidator, Mahamudabad Properties P. Ltd. v CIT (1980) 124 ITR 31 (SC).

From AY 2002-03, there is a change in law. Rental income will no doubt continue to be notional in the sense that if the actual rent received is less than the annual letting value, that is the rent which can be reasonably expected, if let out from year to year, such value will be adopted.

If the actual rent received is higher, it is such higher value, which will be adopted. Where the rent received is less than the annual rental value, because of the vacancy for the whole or part of the year, the actual rent received will be the taxable annual value. It follows that where it was not let out at all during the year, the annual value will be zero.

The new scheme is explained in Paragraph 29.2 of Circular No.14 of 2001 (2001) 252 ITR (St.) 65 as under:

"29.2 The substituted section 23 retains the existing concept of annual value as being the sum for which the property might reasonably be expected to be let from year-to-year that is, annual letting value (ALV). However, in case of let out property, the concept of "annual rent" has been removed.

The new section provides that where the property or any part of the property is let and the actual rent received or receivable is in excess of the ALV, the amount so received or receivable shall be the annual value. This will be the case even if the property (or part of the property) was vacant for a part of the year, but the actual rent received or receivable during the year is still higher than the ALV. Where the property or any part of the property is let and was vacant during the whole or any part of the previous year and owing to such vacancy, the actual rent received or receivable is less than the ALV, the sum so received or receivable shall be the annual value.

In case the actual rent received or receivable during the year is less than the ALV, but not because of vacancy, it is the ALV which shall be taken to be the annual value".

The assessing officer's proposal in the case of reader's client indicates that he has not considered the amended law from AY 2002-03.

S. RAJARATNAM

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