ITAT Ahmedabad Ruling on Deemed Rent: A Landmark Relief for Property Owners

Introduction

In a significant and taxpayer‑friendly ruling, the Income Tax Appellate Tribunal (ITAT), Ahmedabad Bench, on 6 November 2025, deleted an addition of ₹7.43 lakh made by the Income Tax Department to a taxpayer’s income on account of deemed rental income from vacant residential properties. The case involved Mr. Gupta, a landlord who owned five residential apartments in Mumbai that remained vacant for multiple financial years despite his intention to rent them out.

This judgment has wide‑ranging implications for landlords, real estate investors, chartered accountants, and tax professionals, especially in cases where properties remain vacant due to genuine market conditions. The ruling clarifies how Section 23 of the Income Tax Act should be interpreted and applied in real‑life situations.

Background of the Case

Mr. Gupta owned five residential flats in Mumbai which remained vacant during FY 2018‑19 to FY 2020‑21. According to the taxpayer, these properties were held with the clear intention of earning rental income, and efforts were made to let them out. However, due to unfavorable market conditions and lack of suitable tenants, the flats remained unoccupied.

Despite the absence of any actual rental income, the Income Tax Department issued a notice proposing to add notional or ‘deemed rent’ to Mr. Gupta’s income under the head Income from House Property.

Action Taken by the Assessing Officer

The Assessing Officer (AO) rejected Mr. Gupta’s explanation primarily on two grounds:

1.     No documentary evidence was furnished to prove efforts to let out the flats, such as broker agreements, advertisements, or correspondence with potential tenants.

2.     The flats had remained vacant for three consecutive financial years, which according to the AO indicated that the properties were not genuinely intended to be let out.

Based on this reasoning, the AO computed a deemed rental value of ₹7,43,199 and added it to Mr. Gupta’s total taxable income.

Appeal Before the Commissioner of Income Tax (Appeals)

Aggrieved by the assessment order, Mr. Gupta filed an appeal before the Commissioner of Income Tax (Appeals) [CIT(A)]. However, the CIT(A) upheld the order of the Assessing Officer, agreeing that in the absence of documentary proof, the claim of efforts to rent out the flats could not be accepted.

With no relief at the first appellate stage, Mr. Gupta escalated the matter to the Income Tax Appellate Tribunal (ITAT), Ahmedabad Bench.

Key Legal Issue Before ITAT

The core issue before the ITAT was:

Whether deemed rental income can be added when a property is held with the intention to let out, but remains vacant despite genuine efforts, even if documentary evidence of such efforts is limited or unavailable.

This required interpretation of Section 23(1)(c) of the Income Tax Act, which deals with the determination of annual value of a house property.

Understanding Section 23 and Deemed Rent

Under Section 23 of the Income Tax Act:

1. If a property is actually let out, the actual rent received or receivable is considered.
2. If a property is intended to be let out but remains vacant, and due to such vacancy the actual rent received is nil or lower, the annual value can be taken as nil.
3. Deemed rent is generally applied when a property is capable of being let out but is kept vacant without genuine intention to earn rental income.

The law does not mandate that a property must be actually let out to qualify for vacancy allowance — intention and bona fide efforts are crucial.

ITAT Ahmedabad’s Observations

The ITAT carefully examined the facts and made the following important observations:

1. The taxpayer’s intention to let out the flats was not in doubt. Merely because the flats remained vacant for a few years does not automatically imply absence of intent.
2. In real estate markets like Mumbai, it is commercially plausible for properties to remain vacant due to market slowdown, pricing issues, or lack of suitable tenants.
3. The law does not require documentary evidence in every case to prove efforts to let out a property. Human conduct and commercial realities must also be considered.
4. Section 23(1)(c) clearly provides relief where a property remains vacant despite best efforts, and actual letting is not a precondition.

The tribunal also relied on earlier judicial precedents, including cases such as Sachin R. Tendulkar v. DCIT, where similar principles were upheld.

Final Decision of ITAT

Based on the above reasoning, the ITAT Ahmedabad:

1. Deleted the addition of ₹7,43,199 made towards deemed rental income.
2. Held that the Assessing Officer was not justified in taxing notional rent when the taxpayer had demonstrated bona fide intent to let out the properties.
3. Ruled in favour of the taxpayer, granting full relief.

Why This Judgment Is Important

This ruling is significant for several reasons:

1.     Clarity on Deemed Rent – It reinforces that deemed rent cannot be mechanically applied simply because a property is vacant.

2.     Relief for Genuine Landlords – Property owners facing prolonged vacancies due to market conditions get strong judicial backing.

3.     Commercial Reality Recognised – The tribunal acknowledged real‑world challenges in renting properties, especially in metro cities.

4.     Reduced Litigation Risk – Tax professionals can rely on this ruling to contest unjustified additions in similar cases.

Practical Takeaways for Taxpayers and Accountants

1. Always maintain basic records of intent to let out properties, such as broker communications or listing screenshots, wherever possible.
2. If documentation is limited, ensure a consistent and credible explanation is provided during assessment.
3. Do not accept deemed rent additions blindly — evaluate eligibility under Section 23(1)(c).
4. Use this ITAT ruling as a strong precedent while handling appeals involving vacant properties.

Conclusion

The ITAT Ahmedabad’s decision in Mr. Gupta’s case is a landmark ruling that balances legal interpretation with practical realities. It sends a clear message that taxation should be based on real income and genuine intent, not hypothetical assumptions.

For landlords and tax professionals alike, this judgment offers both clarity and confidence when dealing with deemed rent disputes under the Income Tax Act.

FQA

Q1. What was the issue in the ITAT Ahmedabad deemed rent case?

Answer:
The issue was whether the Income Tax Department was justified in adding ₹7.43 lakh as deemed rental income to Mr. Gupta’s taxable income for five residential flats that remained vacant, despite his claim that the properties were held with the intention to rent out but could not be let due to genuine market conditions.

Q2. Why did the Assessing Officer add deemed rent to Mr. Gupta’s income?

Answer:
The Assessing Officer added deemed rent on the grounds that:

1.     Mr. Gupta failed to produce documentary evidence such as broker agreements or advertisements to prove efforts to let out the flats.

2.     The flats remained vacant for three consecutive financial years (FY 2018–19 to FY 2020–21), which according to the AO indicated lack of genuine intention to rent them out.

Q3. What was the amount added as deemed rental income?

Answer:
The Assessing Officer computed and added ₹7,43,199 (approximately ₹7 lakh) as deemed rental income under the head Income from House Property.

Q4. What relief did Mr. Gupta seek before the CIT(A)?

Answer:
Mr. Gupta argued that the properties were held with a bona fide intention to earn rental income, and despite reasonable efforts, they could not be rented out due to unfavorable market conditions. He sought deletion of the deemed rent addition under Section 23(1)(c) of the Income Tax Act.

Q5. Why did the CIT(A) reject Mr. Gupta’s appeal?

Answer:
The Commissioner of Income Tax (Appeals) upheld the Assessing Officer’s order, stating that in the absence of documentary proof, the claim of genuine efforts to let out the properties could not be accepted.

Q6. What was the key legal question before the ITAT Ahmedabad?

Answer:
The key question was:
Can deemed rental income be taxed when a property is held with the intention to let out but remains vacant despite genuine efforts, even if documentary evidence is limited or unavailable?

Q7. Which provision of the Income Tax Act was examined by the ITAT?

Answer:
The ITAT examined Section 23(1)(c) of the Income Tax Act, which deals with determination of annual value of a property that is intended to be let out but remains vacant.

Q8. What does Section 23(1)(c) provide regarding vacant properties?

Answer:
Section 23(1)(c) provides that if a property is intended to be let out and remains vacant for part or whole of the year despite efforts, the annual value can be taken as nil or reduced, even if no actual rent is received.

Q9. What observations did the ITAT make regarding intention to let out?

Answer:
The ITAT observed that:

1. Mr. Gupta’s intention to let out the flats was not in doubt.
2. Mere prolonged vacancy does not automatically imply absence of intent.
3. Commercial realities, especially in metro cities like Mumbai, must be considered.

Q10. Is documentary evidence mandatory to prove efforts to let out property?

Answer:
No. The ITAT held that documentary evidence is not mandatory in every case. The law requires consideration of human conduct, surrounding circumstances, and commercial realities, not just paperwork.

Q11. What precedents did the ITAT rely upon?

Answer:
The tribunal relied on earlier judicial precedents, including Sachin R. Tendulkar v. DCIT, where it was held that actual letting is not compulsory to claim vacancy allowance under Section 23.

Q12. What was the final ruling of ITAT Ahmedabad?

Answer:
The ITAT Ahmedabad:

1.     Deleted the deemed rent addition of ₹7,43,199.

2.     Held that taxing notional rent was unjustified when bona fide intent to let out was established.

3.     Ruled in favour of the taxpayer, granting full relief.

Q13. Why is this judgment important for landlords?

Answer:
This judgment protects landlords from unfair taxation on hypothetical income when properties remain vacant due to genuine reasons beyond their control, such as market slowdown or lack of tenants.

Q14. How does this ruling benefit tax professionals and accountants?

Answer:
Tax professionals can use this ruling as a strong judicial precedent to contest unjustified deemed rent additions and reduce unnecessary litigation for clients with vacant properties.

Q15. What practical steps should taxpayers take after this ruling?

Answer:
Taxpayers should:

1. Maintain basic evidence of intent (emails, broker calls, listings).
2. Provide a consistent explanation during assessments.
3. Evaluate applicability of Section 23(1)(c) before accepting deemed rent additions.
4. Rely on this ruling while filing appeals in similar cases.

Q16. What is the key takeaway from the ITAT Ahmedabad ruling?

Answer:
The key takeaway is that income tax should be levied on real income, not hypothetical assumptions. Genuine intent and commercial realities matter more than mere vacancy or absence of formal documentation