The Income-Tax Appellate Tribunal (ITAT) Mumbai has ruled that a property which has remained vacant for a year is entitled to vacancy allowance. This means that you will not have to pay tax on the rental value of your property if it has been vacant for a full year.
This decision goes against the practice of tax officers who levy tax on the rental value of a property even if the property remained vacant for a full year. They normally allow vacancy allowance if the property is vacant for a part of the year. In the department's view, since the property is vacant for a full year, it's not let out at all and therefore the question of vacancy allowance does not arise.
The ITAT ruling was given in the case of Amrit Petroleum for the assessment year 2001-02 . The company was represented by tax lawyer Jignesh R Shah. Mr Shah argued that the property remained vacant despite the best efforts of the owner to find a client and therefore the owner is entitled to the vacancy allowance for full year.
The department usually takes a stand that such vacancy allowance is allowable only when the property is vacant for a part of the year and not for the full year. According to the provisions of the Income-Tax Act, if a taxpayer owns an immovable property which is not used for the purposes of his business, he is liable to pay tax on the annual letting value (ALV) of the property.
The tax is levied on the income-earning potential of the property, and not on the income generated from the property. However, if the property is let out and is vacant for a part of the year, the assessee is entitled to proportionate relief called "vacancy allowance" — earlier under Section 24(1)( ix) of the IT Act and now under Section 23(1)( c) of Act. The tribunal held that when vacancy allowance was allowed under Section 24(1)( ix), the same is allowable even if the property is vacant for the whole year.