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Actual Rent< Expected Rent, Vacancy Exists

Rohan Bhandare ( ) (73 Points)

03 February 2010  

When the expected rent is less than the actual rent we take actual rent as GAV

When the actual rent is less than expected rent  DUE TO vacancy  we take actual rent as GAV

When actual rent is less than expected rent DUE TO factors other than vacancy, we usually take expected rent as GAV

BUT,

Suppose actual rent is less than expected rent AND the property is vacant for some months,

EG: In other words Exp Rent=150  Annual Rent=120 Vacancy=2mts therefore actual rent=100

Will the expected rent be the GAV=150?

OR

Will the loss of vacancy be deducted from expected rent to calculate GAV (150-20=130)

 

Though most of our books give the 2nd option, the Income Tax Law(the actual text of the Law) gives an impression that the 1st option is right. The text of income tax does not say anything about such vacancy.

I heard from a friend that some CBDT Notif was there due to which the 2nd option is right. PLease let me know and increase your knowledge also


 25 Replies

C.Balaji (Learner) (1862 Points)
Replied 03 February 2010

Mr.Rohan

can't understand clearly....please provide Municipal value- Fair rent - Actual Rent - Standard Rent....details...

Amir (Learner) (4011 Points)
Replied 03 February 2010

Dear Rohan,

It is clear from the Section, the words "owing to such vacancy....."

Hareesh H Sharma (Cleared IPCC..now article)   (894 Points)
Replied 03 February 2010

Dear friend from what i studied its like check exp rent and actual..IF actual is less and the reason for the act to go below exp is cos of vacancy then act rent is taken as GAV..or els exp

Anuraag Sharma (Sr Executive Finance) (835 Points)
Replied 03 February 2010

Dear,

as Amir said "owing to such vavncy" i.e. only because of that vacancy ...actual inflow of cash is calculated.It is not a notional figure. If actul rent received/receivable is lower than reasonale expected rent and Lower collection is ONLY because of VACANCY, actual rent will be taken as Annual Value.

regards,

Rohan Bhandare ( ) (73 Points)
Replied 03 February 2010

True... i have understood that.

So do you imply that if the Actual rent /receivable is lower than expected rent because of factors other than vacancy But vacancy still exists, the loss due to such vacancy is not taken into account?

I wil present the problem again

Expected Rent=150

Annual Rent= 120

Vacancy=2 months

Actual Rent/Receivable=100

 

What is the GAV? Please tell me the answer step wise

Also mention if the loss of vacancy of 20 will be taken into calculation or not?

 

Waiting Anxiously...

Anuraag Sharma (Sr Executive Finance) (835 Points)
Replied 03 February 2010

in your case the ans will be Exp Rent-Loss due to vacancy i.e Rs130/-

 

Actually the calculation should be done as under

 

suppose

a. higher of MV and FV is Rs. 100 (suject to maximum of SR)

b. Annual rent = Rs. 120

c. Unrealized Rent=Rs. 40

d. Vacant =3 months
i.e. loss due to vacncy = Rs. 30

 

in such a case you should see only point a and point b- point d...if


(b-d)

GAV= b-c-d

:)

Anuraag Sharma (Sr Executive Finance) (835 Points)
Replied 03 February 2010

i should further add that in your particuklar query tha ans is Rs130 because Annual rent received/receivable is already lower than that of expected rent i.e. the other factors

 

i,.e GAv has been taken as Exp rent-loss due to vacncy

Rohan Bhandare ( ) (73 Points)
Replied 03 February 2010

completely agree with u anuraag

But the problem is the actual text of income tax does not state this method of deducting the loss of vacancy...

Thats the main purpose of starting this topic... It only talks about ONLY owing to vacancy and other factors and nothing about this loss being deducted.

 

So how does our methods,though correct, be defined in the Sec23 of act?...Is it some notification which says to deduct loss due to vacancy?

Nithin Chettoor (Assistant Manager) (388 Points)
Replied 04 February 2010

Actually speaking, the provisions in the law clearly talks about the same. It speaks about the higher of the actual rent or expected rent. No other circumstances other than clause (1)(c) of 23 we should give another thought for the same. And in ur case, the example u talk about, there is no provision in the law to deduct the loss of vacancy from expected rent.

That clause speaks of a situation where, the actual annual rent is higher than the expected rent. But, owing to vacancy, the actual realised amount is lesser than the expected rent then, the actual rent will be taken and not the expected rent. Eg

Expected rent - 100

Annual rent - 120

If there is no vacancy we take the actual rent for GAV calclation.

Suppose vacancy loss amounts to 30 rs for 3 months vacancy. The actual rent becomes 90. In this case, the clause (1)(c) of the Sec 23 comes into picture. Hope, the explanation is correct.

Rohan Bhandare ( ) (73 Points)
Replied 04 February 2010

explaination is correct except that You are not clearly regarding my example.

Though You are right saying that the there is no provsion in the law regarding dedution of loss due to vacancy we still deduct it to find the final GAV

My question is "WHY"?...

Please tell me the answer and also the answer to the example with figures

Anuraag Sharma (Sr Executive Finance) (835 Points)
Replied 06 February 2010

Sec 23(1)(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"

 

i.e.,

"If rent received or recievable (after deducting unrealized rent and loss due to vacancy) is lower than reasonable expected rent and lower collection is only because of vacancy, then such rent shall be taken as annual value."

Take for instance the following cases:-

                                                                                                 (Rs. in Thousands)

                                                                                                     X                                     Y

Municipal Value                                                                    96                                  215

Fair Rent (FR)                                                                     110                                  210

Standard Rent (SR)                                                             95                                  217

Annual Rent                                                                         156                                 192

Unrealized Rent                                                                    60                                   10

Loss due to vacancy                                                             13                                   16

(property remains vacant for one month because of non-availability of suitable tenant)

Annual Rent expected to be realized X: 156-13 = 143

                                                                  Y:  192-16 = 176

 

 

 

 

Anuraag Sharma (Sr Executive Finance) (835 Points)
Replied 06 February 2010

Computation of annual value according to our method:    (Rs. in thousands)

                                                                                                                        
Step I- Reasonable Expected Rent of the property[MV or FRwhichever is higher, but sbject to maximum of SR]:

                                                                                                                                                                                          X: 95  ;    Y: 215

 

Step II- Rent received/receivable after deducting UR but beforeadjusting loss due to vacancy

  X: 96  ;    Y: 182

 

Step III- Amt computed in Step I & Step II, whichever is higher                                                                          

X: 96  ;    Y:  215

 

Step IV- Loss due to vavcancy                                                                                                                                   

X: 13  ;    Y:   16

 

Step V- Gross Annual Value is Step III minus Stpe IV                                                                                         

X: 83  ;    Y:  199

 

Anuraag Sharma (Sr Executive Finance) (835 Points)
Replied 06 February 2010

Computation of annual value according to section 23:    (Rs. in thousands)


Sec23(1)(a)- Reasnable expected rent of the property is taken

 

X: 95;  Y : 215

 

Sec23(1)(b)- Find out rent received/receivable after deducting UR and loss due to vacancy; if it is higher; it will be taken as annual value, otherwise Sec23(1)(b) is not applicable

 

X: NA;  Y: NA


Sec23(1)(c)-

If rent received/receivable(after deducting UR and vacancy loss) is lower and lower collection is only because of vacancy, then such lower collection shall be taken as annual value.

 

X: 83;  Y :NA

 

If lower collection is partly because of vacancy and partly because of other factors, then loss due to vavcancy shall be deducted from reasonable expected rent [Refer : CIT v. Chandanben Maganlal[2002]]

 

X: NA;   Y: 199

 

If lower collection is because of other factors other than vacancy, then reasonable expected rent shall be taken as annual value:

 

X :NA; Y: NA

 

 

thus,

 

as per sec 23:

Annual Value:

X : 83;  Y:199

Anuraag Sharma (Sr Executive Finance) (835 Points)
Replied 06 February 2010

In CIT v. Chandanben Maganlal[2002]:

 

If due to vacancy, actual rent received/receivable is lower than reasonable expected rent, then such rent is taken as GAV. However,

if the shortfall is partly because of vacancy and partly because of other factors, then mode of computation is not provided by the Act.

 

It is a settled position in CIT v. Chandanben Maganlal[2002]:

  • The legislature has decided to give relief to an assessee whose property remains vacant.
  • You may laso refer to the mode of computation of annual value given in Income-Tax return forms i.e., the formula of computation of annual vale given in Item 1(a) of Schedule HP in ITR-1 to ITR-6, wherein rent received after deducting vacancy loss is taken as annual value if it is lower than reasonable expected rent regardless of the fact whether lower collection is only because of vacancy or otherwise.

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