PERSONAL TAX: Vacancy allowance even if flat not let

An individual had filed his return of income for assessment year 2012-13. During assessment, it was observed that the taxpayer owned two properties in Pune worth Rs 60 lakh (Flat A) and Rs 82.80 lakh (Flat B). Flat A was let out for nine months at Rs 15,000 per month during the year.

However, the taxpayer had shown Flat B as vacant, for the whole year for the reason that a suitable tenant could not be found. Accordingly, the taxpayer had claimed Vacancy Allowance and declared nil income. Under the provisions of the Income Tax Act, 1961, if any property is let out and was vacant during the whole, or any part of a year, and owing to such vacancy the actual rent received or receivable by the owner, in respect thereof is less than the amount for which the property might reasonably be expected to let out; then the taxable income from such property can be claimed at the reduced amount. This benefit of being allowed to offer a lower rental income is referred to as Vacancy Allowance.   

The tax officer rejected the explanation that a suitable tenant was not found and calculated the rental income at Rs 8.60 lakh, which is 6% of the value of both flats aggregating to Rs 1.43 crore. 

At the first level of appeal, the taxpayer submitted copies of letters written to the builder, requesting him to identify tenants for Flat B. The appellate authority observed that these letters were written on plain paper and there was no evidence available on record for dispatch, as well as receipt of these letters. There was no response received from the builder too.  Hence, authority treated the letters as insufficient evidences to support the taxpayer’s claim. He also observed that an individual desirous of letting out a house property would approach real estate agents available instead of simply writing few letters to the builder. However, the appellate authority granted some relief to the taxpayer by holding that as per the information sourced from magicbricks.com portal; the probable rate for Flat B should be Rs 15,000 per month. Accordingly, the tax officer was instructed to restrict the rental income from the said flat at Rs 1,26,000 (after deducting standard deduction @ 30% of the total rent of Rs 1,80,000) instead of Rs 8.60 lakh as computed by the officer.

At the second level of appeal, the taxpayer submitted that in the first letter dated May 15, 2011 to the builder, he had thanked him for identifying the tenant for his Flat A and also requested him to identify the tenant for his other flat. Subsequently, reminder letters were sent to the builder on August 18 and December 4, 2011. The tribunal observed that the words ‘property is let’ as used in the Income Tax Act cannot be interpreted to mean ‘property actually let out’. Thus, if a property is held with an intention to let out, coupled with efforts made for letting it out, the benefit of Vacancy Allowance should be available. This case was decided in favour of the taxpayer.

The writer is a Sebi-registered investment adviser