Assessee partly occupied property; ALV to be computed only on let-out portion

Assessee partly occupied property; ALV to be computed only on let-out portion

Issue

Whether the entire Annual Letting Value (ALV) of a property can be assessed as ‘Income from House Property’ when a part of the property is self-occupied and only a specific portion (the third floor) is let out, even if there is no separate electricity meter for the tenanted portion.

Facts

• Property: A residential building at Kautilya Marg, Chanakyapuri, consisting of ground + 3 floors.

• Assessee’s Claim: The assessee claimed that the property was self-occupied, except for the third floor (terrace), which was let out to M/s Gyan Enterprises Pvt. Ltd. at a monthly rent of Rs. 30,000/- with a security deposit of Rs. 10 Crores.

• AO’s Action (1st Round): The AO treated the entire building as let out because the lease deed did not specify the portion, and estimated the ALV at Rs. 1.79 Crores based on comparable properties.

• Tribunal’s Direction (1st Round): The ITAT remanded the matter to the AO to physically verify if only a part was let out.

• AO’s Action (2nd Round): The AO again assessed the entire ALV (Rs. 1.78 Crores) as income. The AO justified this by citing the absence of separate electricity/water meters for the tenanted portion.

• Evidence: A statement recorded from the caretaker of the building (Mr. Sushant Kumar) confirmed that the assessee occupied the first and second floors, while only the third floor was rented out (and later the ground floor from 2019).

Decision

• The Income Tax Appellate Tribunal (ITAT) set aside the assessment order.

• Partial Self-Occupation Proven: Relying on the caretaker’s statement (which the AO had recorded but ignored), the Tribunal held that the property was indeed partly self-occupied and partly let out.

• ALV Restriction: Consequently, assessing the ALV of the entire building was incorrect. The AO was directed to compute the ALV only for the let-out portion (the third floor).

• Valuation Method: The Tribunal criticized the AO’s valuation based on web listings (magicbricks.com) as “artificial and not scientific.” It directed the AO to determine the ALV based on standard rent principles laid down by the Supreme Court (e.g., Sheila Kaushish), considering the municipal ratable value.

• Outcome: The matter was remanded to the AO for a fresh calculation of ALV for the let-out portion only.

Key Takeaways

• Physical Verification Verification: When a taxpayer claims partial letting, physical facts (verified by statements or inspection) override assumptions based on missing details in a lease deed or shared utility meters.

• ALV Calculation: For properties covered by Rent Control Acts, the ALV cannot exceed the standard rent. For others, it should be a reasonable expected rent, not an arbitrary figure from property portals.

• Security Deposit Factor: A massive security deposit (Rs. 10 Crores) vs. low rent (Rs. 30,000) often triggers scrutiny for “notional interest” addition to ALV, but the primary assessment must still be restricted to the actual let-out area.