The DCIT, Central Circle-1, Baroda v. Shri Dhaval D. Patel,, Baroda, Income Tax Appellate Tribunal, Judgment, Law, casemine.com

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ITA 1461/AHD/2018

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Factual and Procedural Background

These consolidated appeals (IT(SS)A Nos. 207 & 1461/Ahd/2018) were filed by the Revenue against the orders of the Commissioner of Income Tax (Appeals)-12, Ahmedabad (order dated 27/03/2018) in respect of assessment years 2013-14 and 2014-15. The Assessing Officer (AO) had made additions in the assessments relating to (i) notional Annual Lettable Value (ALV) disclosed as income from house property for certain properties that were vacant during the relevant year(s), and (ii) disallowance of certain interest expenditures claimed by the assessee. The CIT(A) deleted the ALV additions and also deleted an addition relating to interest expenditure for AY 2013-14; Revenue appealed to the Income Tax Appellate Tribunal (Ahmedabad "D" Bench). The appeals were heard on 02-11-2022 and pronounced on 10-11-2022.

Legal Issues Presented

Whether the Assessing Officer was correct in computing and adding notional Annual Lettable Value (ALV) of specified properties under section 23(1)(a) of the Income-tax Act where those properties remained vacant during the entire year, despite earlier years in which they were let and despite efforts to let them during the year under consideration.
Whether the Assessing Officer was justified in disallowing interest expenditure (aggregating to specified amounts) on the ground that the assessee failed to demonstrate a direct nexus between interest-bearing borrowings and interest-earning loans made to third parties (i.e., whether interest expense was allowable under section 57, having regard to proof of utilisation of borrowed funds to earn interest income).

Arguments of the Parties

Revenue (Department / Appellant)

The Assessing Officer computed notional ALV under section 23(1)(a) for properties that remained vacant during the year and added the net amount to the assessee's income; the Department contended that the CIT(A) erred in deleting these additions without examining facts of each property and reasons for vacancy.
With respect to interest expenditure, the Department submitted that the CIT(A)'s deletion of the addition was cryptic and failed to discuss how the assessee established correlation/nexus between interest-bearing loans taken and the interest income earned on loans advanced to third parties. The Department argued that CIT(A) did not independently verify facts nor explain how earlier orders on other assessment years applied to the present facts.
The Department relied on High Court decisions (Vivek Jain; Susham Singla) to support the proposition that where a property has not been let out at all during the previous year, section 23(1)(c) does not apply and notional rent may be taxable under section 23(1)(a).

Assessee (Respondent)

The assessee argued that many of the properties had been let in earlier years but remained vacant in the relevant assessment year for reasons beyond the assessee's control (e.g., lack of parking, global recession, non-availability of tenants) despite the assessee's best efforts (advertisements, engagement of agents, etc.). Therefore, section 23(1)(c) applied and the annual letting value should be taken as nil.
On the interest issue, the assessee relied on prior orders in its own case (A.Y. 2010-11 and A.Y. 2012-13) where facts had been considered and the interest expense treated favorably; the assessee contended that supporting details of interest received and paid were on record and that CIT(A) properly deleted the addition.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Vivek Jain (14 taxmann.com 146) (Andhra Pradesh)	Held that where property has not been let out at all during the previous year, section 23(1)(c) does not apply; the provision uses the word "let" and it cannot be read as "intended to be let".	Relied on by Revenue to argue against allowing NIL ALV where properties were vacant; Tribunal noted the decision was before it but analyzed contrary authorities and facts of the case.
Susham Singla (76 taxmann.com 349) (Punjab & Haryana)	Held that section 23(1)(c) would not apply to properties which remained vacant throughout the previous year (interpreting "is let" literally).	Relied on by Revenue; Tribunal considered this precedent but distinguished it in light of other authorities and facts showing properties had been let in earlier years and that assessee had made efforts to let them.
Asfa Technologies & BPO (P.) Ltd. [2022] 143 taxmann.com 170 (Chennai - Trib.)	ITAT held that if a property was let in earlier years and was vacant for the impugned previous year owing to non-availability of tenants, section 23(1)(c) applies; AO erred in applying section 23(1)(a) in such circumstances.	Applied by the Tribunal to support the view that properties let in earlier years but vacant during the relevant year fall within section 23(1)(c), permitting annual value to be computed as actual rent received (which could be nil).
Metaoxide (P.) Ltd. [2018] 92 taxmann.com 302 (Mumbai - Trib.)	Held that to avail benefit of clause (c) of section 23(1), it is not necessary that the property should have been actually let out in the relevant previous year or during any time prior to the relevant previous year.	Referenced by the Tribunal as supportive authority for a broader interpretation of clause (c) in favour of the assessee where efforts/intention to let exist.
Vikas Keshav Garud [2016] 71 taxmann.com 214 (Pune - Trib.)	Where assessee intended to let property and took appropriate efforts but failed to let it, ALV under section 23(1)(c) may be treated as nil.	Used by the Tribunal to bolster the proposition that intention and efforts to let are relevant to apply section 23(1)(c) and treat ALV as NIL.
Ms. Priyananki Singh Sood [2019] 101 taxmann.com 45 (Delhi - Trib.)	Held that where assessee intended to let property and took appropriate efforts but failed due to fall in property prices, the assessee was entitled to benefit under section 23(1)(c).	Referenced by the Tribunal in support of allowing NIL ALV where there were bona fide efforts and reasons beyond the assessee's control.
Sachin R. Tendulkar [2018] 96 taxmann.com 253 (Mumbai - Trib.)	Held that where a house property remained vacant throughout the relevant year because a suitable tenant could not be found despite writing various letters, the assessee was eligible to claim vacancy allowance under section 23(1)(c).	Relied on by the Tribunal to support finding that documented efforts to obtain tenants can justify NIL ALV under section 23(1)(c).
Sonu Realtors (P.) Ltd. [2018] 97 taxmann.com 534 (Mumbai - Trib.)	Held that the term 'property is let' in section 23(1)(c) is intended to avoid misuse but cannot be stretched; a property which was let earlier but remained vacant for whole year, and not self-occupied, continues to be governed by section 23(1)(c).	Applied by the Tribunal to justify that properties let in earlier years but vacant in the impugned year should be assessed under clause (c), permitting ALV to be computed on actual rent receivable (which may be nil).
Kamal Kumar [2022] 140 taxmann.com 106 (Delhi - Trib.)	Held that where a commercial property remained vacant because it was unauthorized and subject to government sealing drive, section 23(1)(c) would not be applicable (i.e., facts can defeat clause (c)).	Noted by the Tribunal as an example where clause (c) would not apply because of specific adverse facts (unauthorised/sealed property), illustrating that factual matrix matters.

Court's Reasoning and Analysis

The Tribunal considered rival submissions, statutory text and multiple authorities and proceeded in two distinct analytical strands corresponding to the two principal issues.

1. Annual Lettable Value (ALV) issue (section 23)

The Tribunal reproduced section 23(1) (clauses (a), (b) and (c)) and focused on the wording of clause (c): 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 sum referred to in clause (a)".
It examined authorities that interpret clause (c) and the meaning of the phrase "is let". Some authorities relied upon by Revenue (Vivek Jain; Susham Singla) read "is let" narrowly, concluding clause (c) would not apply where property was not let at all during the year. Other authorities (Asfa Technologies; Vikas Keshav Garud; Metaoxide; Sonu Realtors; Priyananki Singh Sood; Sachin Tendulkar) supported a more purposive construction allowing clause (c) to apply where the property had been let in earlier years or where the assessee had made bona fide efforts to let it in the relevant year but could not find tenants.
The Tribunal emphasized the plain wording and the purpose of clause (c): the phrase "the property is let and was vacant during the whole…of the year" should not be interpreted in a manner that prevents relief where the property was let in prior years but remained vacant in the impugned year despite the assessee's efforts. The Tribunal observed that the words "let" and "vacant" are mutually exclusive if read rigidly and that a contextual, reasonable construction points to considering prior letting and genuine attempts to let as relevant for clause (c).
Applying those principles to the facts, the Tribunal noted that the assessee produced documentary evidence of efforts to let (advertisements, correspondence with agents) and that some properties were let in earlier years. Given the factual matrix and persuasive authorities, the Tribunal concluded that the AO erred in applying section 23(1)(a) (notional ALV) and that the CIT(A) did not err in deleting the addition of Rs. 63,37,765/- (AY 2013-14). Accordingly, the Tribunal dismissed Ground No.1 of the Department's appeal for AY 2013-14 (and applied the same conclusion to AY 2014-15, since facts were common).

2. Disallowance of Interest Expenditure issue (section 57)

The AO had disallowed interest expenditure (detailed amounts aggregating to Rs.99,21,084/- for AY 2013-14) because the assessee did not furnish documentary evidence to show that interest-bearing amounts borrowed from certain parties were on-lent to third parties to earn interest (i.e., the AO found lack of direct nexus between borrowings and interest income).
The CIT(A) deleted the addition, relying in part on earlier orders in the assessee's own case (A.Y. 2010-11 and A.Y. 2012-13) and noting that income under section 56 exceeded expenses under section 57 for some years; however, the Tribunal found that the CIT(A)'s order did not set out a clear factual analysis explaining how the interest-bearing funds were utilized to earn interest income.
The Tribunal held that demonstrating a nexus between borrowed interest-bearing funds and their utilisation to earn interest income is a pre-requisite for allowance under section 57. Because the CIT(A) had not independently examined the factual matrix (parties involved, flow of funds, documentary proof) or explained how earlier decisions applied to the present year, the Tribunal concluded that the matter required further enquiry.
Therefore, rather than deciding the claim on merits in favour of either party, the Tribunal restored the file to the CIT(A) with directions to conduct an acceptable enquiry into the nexus between interest-bearing loans taken and the utilisation of those funds to earn interest income, and to examine the eligibility of the assessee's claim under section 57.

Holding and Implications

Holding:

On the ALV issue (Ground No.1) for AY 2013-14: The Tribunal dismissed the Department's ground and upheld the CIT(A)'s deletion of the ALV addition of Rs.63,37,765/-.
On the Interest Expenditure issue (Ground No.2) for AY 2013-14: The Tribunal allowed the Department's ground for statistical purposes by restoring the file to the CIT(A) for further enquiry into the nexus between interest-bearing loans and interest income; the CIT(A)'s deletion was set aside for reconsideration.
Assessment Year 2014-15: The Tribunal applied the same conclusions to AY 2014-15 (Ground No.1 dismissed; Ground No.2 allowed for statistical purposes), noting the facts and issues were common for both years.
Final result: Both appeals filed by the Revenue were partly allowed for statistical purposes; in combined effect, the ALV additions were deleted and the interest-disallowance issue remanded for further enquiry by the CIT(A).

Implications: The direct effect on the parties is that the notional ALV additions contested by the Revenue were deleted by the Tribunal (on the factual matrix presented), while the question of allowance of interest expenditure remains open and requires further fact-finding by the CIT(A). The Tribunal did not purport to lay down a novel binding precedent; it applied and distinguished existing authorities and directed further factual enquiry in relation to interest expenses.

Order pronounced on 10-11-2022 by the Income Tax Appellate Tribunal (Ahmedabad "D" Bench). The summary above is strictly based on the content of the provided opinion and does not add or infer facts beyond that text.

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The DCIT, Central Circle-1, Baroda v. Shri Dhaval D. Patel,, Baroda

THE INCOME TAX APPELLATE TRIBUNAL

AHMEDABAD "D" BENCH

Before: Shri P.M. Jagtap, Vice President And Shri Siddhartha Nautiyal, Judicial Member IT(SS)A No. 207/Ahd/2018

Assessment Year 2013-14

The DCIT, Shri Dhaval D. Central Circle-1, Patel, Aayakar Bhavan, Vs 901, Arundeep, Race Course Circle-1, Race Course Circle, Baroda-390007 Vadodara-390007 (Appellant) PAN: AEKPP4961R

(Respondent)

ITA No. 1461/Ahd/2018 Assessment Year 2014-15

The DCIT, Shri Dhaval D. Central Circle-1, Patel, Aayakar Bhavan, Vs 901, Arundeep, Race Course Circle-1, Race Course Circle, Baroda-390007 Vadodara-390007 (Appellant) PAN: AEKPP4961R

(Respondent)

Assessee by: Shri Sunil Talati, A.R. Revenue by: Shri Atul Pandey, Sr. D.R.

Date of hearing : 02-11-2022 Date of pronouncement : 10-11-2022

I.T(SS)A No. 207 & 1461/Ahd/2018 A.Y. 2013-14 & 2014-15 Page No.² DCIT vs. Shri Dhaval D. Patel

आदेश/ORDER PER : SIDDHARTHA NAUTIYAL, JUDICIAL MEMBER:-

These two appeals filed by the Revenue are against the order of the ld. Commissioner of Income Tax (Appeals)-12, Ahmedabad in Appeal no. CIT(A)-12/27 to 33/CC-1/2016-17 vide order dated 27/03/2018 passed for the assessment year 2013-14 & 2014-15.

2 . Since common issues are involved for both the assessment years under consideration i.e. assessment years 2013-14 and 2014-15, both appeals are being taken up together. 3. The Department has raised the following grounds of appeal:- IT(SS)A No. 207/Ahd/2018 A.Y. 2013-14 "1. On the facts and in the circumstances of the case, the Ld.CIT(A) has erred in deleting the addition made on account of Annual Lettable Value (ALV) as income from House Property of Rs. 63,37,765/-. 2. On the facts and in the circumstances of the case, the Ld.CIT(A) has erred in deleting the addition made on account of disallowance of interest expenditure of Rs.99,21,084/-. 3. It is, therefore, prayed that the order of the Ld.CIT(A) may be set-aside and that of Assessing Officer may be restored to the above extent. 4. The appellant craves leave to add, alter, amend and/or withdraw any ground(s) of appeal either before or during the course of hearing of the appeal." ITA No. 1461/Ahd/2018 A.Y. 2014-15 "1. On the facts and in the circumstances of the case, the Ld.CIT(A) has erred in deleting the addition made on account of Annual Lettable Value (ALV) as income from House Property of Rs.69,52,499/-.

I.T(SS)A No. 207 & 1461/Ahd/2018 A.Y. 2013-14 & 2014-15 Page No.³ DCIT vs. Shri Dhaval D. Patel

2. On the facts and in the circumstances of the case, the Ld.CIT(A) has erred in deleting the addition made on account of disallowance of interest expenditure of Rs.86,78,028/-.

3. It is, therefore, prayed that the order of the Ld.CIT(A) may be set-aside and that of Assessing Officer may be restored to the above extent.

4. The appellant craves leave to add, alter, amend and/or withdraw any ground(s) of appeal either before or during the course of hearing of the appeal."

We shall first take up assessment year 2013-14. Ground 1: Addition on account of annual lettable value (ALV) as income from house property of 63,37,765/-

4. The brief facts in relation to this ground of appeal are that during the course of assessment, the AO observed that the assessee had shown "income from house property" from various properties in different years, however, in some of the years, income from some of the properties were not shown/ shown at "Nil". For the impugned assessment year 2013-14, the AO held that for the properties which remained vacant for throughout the year under consideration, the provisions of section 23(1)(a) of the Act were attracted and notional annual lettable value (ALV) was required to be added to the total income of the assessee. The notional ALV for assessment year 2013-14 was computed by the AO at

90,53,950/- and after deduction under section 24, the net income from house property of

63,37,765/-was added to the total income of the assessee.

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5. In appeal, the assessee submitted that the AO could should not have worked out notional ALV of various vacant properties since the properties were not capable for being let out during the impugned assessment year for various reasons like lack of parking space, global recession and non- availability of tenant despite the best efforts put by the assessee. The assessee placed reliance on several case laws in support of the contention that if for reasons beyond the control of the assessee, the property could not be let out, then the provisions of section 23(1)(a) of the Act are not attracted so as to attribute the notional value to the rent which the assessee would have received. The Ld. CIT(Appeals) accepted the assessee's arguments and deleted the additions with the following observations:

"8.2 In view of the aforesaid decisions of Hon'ble ITAT and the A.O. having not mentioned any contrary decision, I am inclined to agree that if property has remained without being occupied and let out then owing to such vacancy the actual rent received or receivable by the owner in respect thereof is less than a sum for which property might reasonably be expected to let from year to year is to be considered. As the actual rent received is NIL, the ALV of the same has to be taken as NIL as envisaged u/s 23(l)(c) of the Act. Therefore the A.O. is direct to consider the A.L.V at NIL in respect of each such property which has remained vacant and to delete addition of Rs.63,37,765/-. The appeal succeeds on this ground."

6. The Department is in appeal before us against the aforesaid order passed by Ld. CIT(Appeals) deleting the ALV computed by the Ld. Assessing Officer. The Ld. DR submitted that Ld. CIT(Appeals) has not gone into the facts of the case while allowing assessee's appeal. The Ld. CIT(Appeals) simply accepted the assessee's contention and the judicial precedents placed before him and has not gone into the details of each of the individual properties and has not ascertained separately as to the reasons

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why the same were lying vacant. The Ld. DR placed reliance on decisions of

Vivek Jain 14 taxmann.com 146 (Andhra Pradesh), wherein the High Court held that where property has not been let out at all during the previous year under consideration, there is no question of any vacancy allowance being provided under section 23(1)(c) of the Act. Further, the High Court held that the words in section 23(1)(c) of the Act is "let" and the same cannot be read as "where the property is intended to be let". Further, the Ld. DR placed reliance on the case of Susham Singla 76 taxmann.com 349 (Punjab and Haryana), in which the High Court held that section 23(1)(c) of the Act would not apply to properties which remained vacant throughout the previous year.

7. In response, the counsel for the assessee submitted that the assessee had retained certain unsold properties, which could not be rented out for reasons beyond the control of the assessee. In some case, the property were not being capable of let out on account of lack of certain infrastructure facilities, and in other cases, though the assessee had made best efforts to let out the property, however due to recession and the reasons beyond the control of the assessee, the same could not be let out. The counsel for the assessee submitted that a total of 12 properties remained vacant throughout the year under consideration. The counsel for the assessee drew our attention to pages 1-255 of the paper book (copies of advertisements given by the assessee etc.) and submitted that though the assessee had put its best efforts to lease out the property, the same could not be done during the impugned year under consideration. The assessee placed reliance on several case laws in support of his contention that if the assessee "intended" to let out the

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property and despite the best efforts put in by the assessee, the properties could not be let out, then the assessee was entitled to the benefits of section 23(1)(c) of the Act.

8. We have heard the rival contentions and perused the material on record. In this respect, it would be useful to reproduce the relevant part of section 23 of the Act, for ready reference:

Annual value how determined.

23. (1) For the purposes of section 22, the annual value of any property shall be deemed to be—

(a) the sum for which the property might reasonably be expected to let from year to year; or

(b) where the property or any part of the property is let and the actual rent received or receivable by the owner in respect thereof is in excess of the sum referred to in clause (a), the amount so received or receivable; or

(c) 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 by the owner in respect thereof is less than the sum referred to in clause (a), the amount so received or receivable :

8.1 In the case of Asfa Technologies & BPO (P.) Ltd.[2022] 143 taxmann.com 170 (Chennai - Trib.), the ITAT has held that if property is let out for two or more years and was vacant for whole or any part of

I.T(SS)A No. 207 & 1461/Ahd/2018 A.Y. 2013-14 & 2014-15 Page No.⁷ DCIT vs. Shri Dhaval D. Patel

previous year, then said property would come within ambit of provisions of section 23(1)(c).The ITAT further held that where property owned by assessee was let right from assessment years 2008-09 to 2011-12, however, same was vacant due to non-availability of tenants for impugned assessment year alone, Assessing Officer had erred in computing annual value of property in terms of section 23(1)(a) and, thus, he was to be directed to delete addition made towards income from house property. While passing the order, the ITAT held as below:

■ As per provisions of section 23(1), for the purpose of section 22, annual value of any property shall be deemed to be sum for which property might reasonably be expected to let from year-to-year and where property or any part of property is let and was vacant during whole or any part of previous year and owing to such vacancy, actual rent received or receivable by the owner in respect thereof is less than sum referred to in clause (a) amount so received or receivable will be annual value of the property. As per plain reading of section 23(1)(c), if any property was let and was vacant during whole or any part of previous year, then annual value of said property should be computed in terms of provisions of section 23(1)(c). In the instant case, there is no dispute with regard to fact that property owned by the assessee was let right from assessment years 2008-09 to 2011-12, however, same was vacant due to non-availability of tenants for the assessment year 2012-13 to assessment year 2013-14. But, same property was again let out from the assessment year 2015-16 onwards. The assessee has computed nil annual letting value of the

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property in terms of provisions of section 23(1)(c), whereas the Assessing Officer has determined annual value in terms of provisions of section 23(1)(a). According to the Assessing Officer, in order to apply provisions of section 23(1)(c), property must be let out during the previous year and it should be vacant for any part of the previous year.

■ There is no merit in the reasons given by the Assessing Officer for simple reason that in order to attract section 23(1)(c), following requirements must be fulfilled: (i) the property or any part thereof must be let out; (ii) It should have been vacant during the whole or part of the previous year; and (iii) Owing to such vacancy actual rent received or receivable by the owner in respect thereof should be less than the sum referred to in clause (a). From the above, it is very clear that provisions of section 23(1)(c) does not apply, in case where property is not let out at all. However, if the property is let out for two or more years and was vacant for whole or any part of the previous year, then said property would come within ambit of provisions of section 23(1)(c). In the instant case, property was let out earlier; however, it was vacant during the impugned assessment year owing to non-availability of tenants. It is not the case of the Assessing Officer that property was not at all let out. In fact, the Assessing Officer has admitted the fact that property was let out, but was vacant for the impugned assessment year alone. Further, the assessee has made his best efforts to let out the property which is evident from e-mail correspondence between the assessee and agents however, could not get tenants for relevant period. Therefore, the

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assessee has rightly computed annual letting value of the property as per provisions of section 23(1)(c). The term 'property is let' used in section 23(1)(c) is solely used with intent to avoid misuse of determination of annual value of self-occupied property by taking recourse to section 23(1)(c), however, same cannot be stretched beyond that and thus, annual value of property which was let, but thereafter remains vacant for whole year under consideration, subject to condition that same is not put under self-occupation of the assessee and is held for the purpose of letting out of the same would continue to be determined under section 23(1)(c).

8.2 In the case of Metaoxide (P.) Ltd.[2018] 92 taxmann.com 302 (Mumbai - Trib.), the ITAT held that in order to avail benefit of clause (c) of section 23(1), it is not necessary that property should have been actually let out in relevant previous year or during any time prior to relevant previous year.

8.3 In the case of Vikas Keshav Garud[2016] 71 taxmann.com 214 (Pune - Trib.), the ITAT held that where assessee intended to let property and took appropriate efforts in letting property but ultimately failed to let same, in terms of section 23(1)(c) its ALV had to be treated as nil being less than sum referred to in section 23(1)(a) of the Act. The ITAT made the following observations while passing the order:

Section 23(1)(c) by its literal wording include a situation where a property which was vacant during the whole year by saying that

I.T(SS)A No. 207 & 1461/Ahd/2018 A.Y. 2013-14 & 2014-15 Page No.¹⁰ DCIT vs. Shri Dhaval D. Patel

'when a property is let and was vacant during the whole or part of the previous year actual rent received or receivable by the owner is less than sum referred to in clause (a), the amount so received or receivable'. It goes without saying that a situation cannot co-exist wherein the property is let during the previous year and is also simultaneously vacant for the whole year. The word 'let' and 'vacant' are mutually exclusive. To appreciate it further, the underlying principle of this provision has to be viewed with regard to the intention together with efforts put by assessee in letting out the property, etc. and then gross annual value is required to be determined.

8.4 In the case of Ms. Priyananki Singh Sood [2019] 101 taxmann.com 45 (Delhi - Trib.), the ITAT held that where assessee intended to let out property and took appropriate efforts in letting property, however, due to fall in property prices failed to let out same year after year because of which property remained vacant, assessee was entitled to claim benefit under section 23(1)(c) of the Act.

8.5 In the case of Sachin R. Tendulkar [2018] 96 taxmann.com 253 (Mumbai - Trib.), the ITAT held that where assessee owned a house property which remained vacant throughout relevant year as he could not find a suitable tenant despite writing various letters to concerned builder, he was eligible to claim vacancy allowance under section 23(1)(c) and, thus, rental income from said property was rightly declared at nil.

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8.6 In the case of Sonu Realtors (P.) Ltd.[2018] 97 taxmann.com 534 (Mumbai), the ITAT held that though term 'property is let' used in section 23(1)(c) is solely with intent to avoid misuse of determination of 'annual value' of self-occupied properties by assessee by taking recourse to section 23(1)(c), however, same cannot be stretched beyond that and, thus, 'annual value' of a property which is let, but thereafter remains vacant for whole year under consideration, subject to condition that same is not put under self- occupation of assessee and is held for purpose of letting out of same, would continue to be determined under section 23(1)(c).

8.7 In the case of Kamal Kumar[2022] 140 taxmann.com 106 (Delhi - Trib.), the ITAT held that where commercial property of assessee remained vacant during whole of previous year due to facts that property was unauthorized property and Government was having a sealing drive on unauthorized property, provisions of section 23(1)(c) would not be applicable and tax authorities below had thus fallen in error in taxing assessee on basis of notional rent.

8.8 Now coming to the instant facts, we observe that the counsel for the assessee has submitted that the properties under question were let out in earlier years, but due to reasons beyond the control of the assessee, the same could not be let out during the year under consideration. The counsel for the assessee placed on record various documents in support of the contention that the assessee had made substantial efforts by way of newspaper advertisements etc. to lease out the properties, however, despite best efforts, the properties could not be let out during the year under consideration. We

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are of the considered view that in light of the judicial precedents highlighted above, the provisions of section 23(1)(a) of the Act cannot be invoked in case the properties have been let out in some earlier year, however, the same were lying vacant for the entire year under consideration, despite efforts being made by the assessee. The provisions of section 23(1)(a) of the Act can be invoked in the event the properties are lying vacant all throughout and have not been let out either in the prior or succeeding assessment years and also the assessee has made no effort to let out the same. Further, notably the words used in section 23(1)(c) of the Act are "the property is let and was vacant during the whole…of the year", which necessarily implies that the same property cannot be "let out" and yet remain "vacant" during the same assessment year. Therefore, as noted above, the reasonable construction/interpretation of section 23(1)(c) of the Act would be that if the property has been let out in any of the previous years, but the same could not be let out despite the best efforts by the assessee, the assessee would be entitled to avail the benefits of section 23(1)(c) of the Act. Accordingly, in our considered view, the Ld. CIT(Appeals) has not erred in facts and in law in allowing the assessee's appeal on this issue.

9. In the result, Grounds No.1 of Department's appeal for assessment year 2013-14, is dismissed.

Ground No. 2: Disallowance of Interest Expenditure of Rs. 99,21,084/-

10. The brief facts in relation to this ground of appeal are that the assessee had claimed total interest expenditure of

1,42,98,568/-. During the course of assessment, the AO observed that in respect of amounts taken from

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individuals/HUF/companies, the assessee has not furnished any documentary evidence to show that the same interest bearing borrowed amount had been given as loan to third party to earn interest. The AO observed that the assessee has failed to establish direct nexus between the interest expenses of

71,86, 866/- towards the loan taken during assessment year 2012-13. Further, the AO observed that the assessee, without taking any loan, has given interest payment of

26,14,218/- towards M/s Klasse consultants and

120,000/- paid to Vinubhai Shah (HUF). Accordingly, the AO held that since the assessee has failed to establish clear nexus between the interest expenditure of

99,21,084/- (comprising of

71,86, 866/- +

26,14,218/- +

120,000/-), the same is being disallowed and added back to the total income of the assessee.

11. In appeal, Ld. CIT(Appeals) allowed the assessee's appeal with the following observations:

"8.4 The Ld. AR has relied upon his submission of A.Y. 2010-11 against the assessment u/s 153C r.w.s. 143(3), wherein the Ld: AR has submitted that the appellant had incurred interest expense towards loans taken and same were extended to other parties on which interest income has been earned that interest income earned during the year and offered to tax u/s 56 of the Act is Rs.1,06,06,189/- as against interest expense of Rs.93,97,212/- that interest expense that is claimed as expenditure u/s 57 of the Act while computing income from other sources. It is also submitted that CIT(A)-5 Baroda vide order dated 05/10/2016 in the appellant's own case for A.Y. 2012-13 [against earlier assessment order u/s 143(3)] held on the identical issue, in the appellant's favor and that on absolute identical facts the principle applied to A.Y. 2010-11 also.

8.5 I find that there is income u/s 56 which is more than the expenses claimed u/s

57. Following the decision of CIT(A)-5 Baroda, the AO is directed to delete the addition of Rs.99,21,084/-. The appeal on the ground succeeds."

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12. The Department is in appeal before us against the aforesaid additions deleted by the Ld. CIT(Appeals). The Ld. DR argued that the Ld. CIT(Appeals) has passed a cryptic order and has not discussed as to how the assessee has established correlation/nexus between the interest-bearing loans taken and the interest income earned on the same. The Ld. DR drew our attention to 8.4 of page 21 of Ld. CIT(Appeals) and submitted that the Ld. CIT(Appeals) has simply passed a cryptic order, without independently verifying the facts of the case or establish how the interest bearing those were utilised for earning interest income.

13. In response, the counsel for the assessee submitted that Ld. CIT(Appeals) has placed reliance on the order for assessment year 2010-11, in which all the facts have been discussed in detail. He drew our attention to pages 1 and 4 of the paper book, and submitted that all details regarding interest received and paid have been filed. Accordingly, Ld. CIT(Appeals) has not erred in facts and in law in deleting addition in the instant facts.

14 . We have heard the rival contentions and perused the material on record. In our considered view, the Ld. CIT(Appeals) has not clearly brought out the facts on record and has not discussed how interest-bearing funds have been utilised for earning interest income, which is a pre-requisite for claiming expenditure under section 57 of the Act. The Ld. CIT(Appeals) has granted relief to the assessee on the basis firstly that income under section 56 of the Act is more than the expenses claimed under section 57 of the Act and secondly, on identical facts Ld. CIT(Appeals) has granted relief to the

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previous assessment years AY 2010-11 and AY 2012-13. However, there is no discussion in the order regarding the interest expenditure claimed by the assessee and how and where such interest-bearing funds were utilised for earning interest income. The Ld. CIT(Appeals) has not discussed how the facts in earlier years were identical/applicable to the facts of the present year i.e. no enquiry/ discussion is done with respect to parties from whom the interest bearing loan was taken and to which parties, the loan was given on interest to earn interest income. Further, Ld. CIT(Appeals) has not controverted the specific findings made by the Ld. Assessing Officer in the assessment order under consideration. In view of the above facts, in the interest of justice, we are restoring the file to Ld. CIT(Appeals) so as to conduct an acceptable enquiry into the nexus between the interest-bearing loans and how the same were utilised to earn interest income, so as to examine the eligibility of claim made by the assessee. In the result, the file is being restored to the Ld. CIT(Appeals) with the above directions.

15 . In the result, Ground No.2 of the Department's appeal is allowed for statistical purposes. 16. Grounds numbers 3 and 4 of Department's appeal for assessment year 2013-14 are general in nature and do not require any specific adjudication. 17. In the result, the appeal of the Department for A.Y. 2013-14 is partly allowed for statistical purposes. Assessment year 2014-15:

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18. Since the facts and issues for consideration for both the years are common, our findings for assessment year 2013-14 would apply to assessment year 2014-15 as well.

19. In the result, Grounds No.1 of Department's appeal for assessment year 2014-15, is dismissed.

20. Ground No. 2 of Department's appeal for assessment year 2014-15 is allowed for statistical purposes.

21. Grounds numbers 3 and 4 of Department's appeal are general in nature and do not require any specific adjudication.

22. In the result, the appeal of the Department for A.Y. 2014-15 is partly allowed for statistical purposes.

23. In the combined result, both the appeals filed by the Revenue are partly allowed for statistical purposes.

Order pronounced in the open court on 10-11-2022

Sd/- Sd/- (P.M. JAGTAP) (SIDDHARTHA NAUTIYAL) VICE PRESIDENT JUDICIAL MEMBER Ahmedabad : Dated 10/11/2022 आदेश क तल प अे षत / Copy of Order Forwarded to:-

I.T(SS)A No. 207 & 1461/Ahd/2018 A.Y. 2013-14 & 2014-15 Page No.¹⁷ DCIT vs. Shri Dhaval D. Patel

1. Assessee

2. Revenue

3. Concerned CIT

4. CIT (A)

5. DR, ITAT, Ahmedabad

6. Guard file. By order/ आदेश से, उप/सहायक पंजीकार आयकर अपीलय अ धकरण, अहमदाबाद

The DCIT, Central Circle-1, Baroda v. Shri Dhaval D. Patel,, Baroda

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Revenue (Department / Appellant)

Assessee (Respondent)

Table of Precedents Cited

Court's Reasoning and Analysis

1. Annual Lettable Value (ALV) issue (section 23)

2. Disallowance of Interest Expenditure issue (section 57)

Holding and Implications

The DCIT, Central Circle-1, Baroda v. Shri Dhaval D. Patel,, Baroda

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