Penalty on DLOP
Penalty on DLOP

    Whether Penalty can be levied on Assessee for failing to disclose rental income for deemed let out property?

    In common parlance, property is understood in wide sense. It is not only the thing which is the subject matter of ownership but is taken to mean ‘dominon’ or right of ownership or even partial ownership. Lord Longdale in John v. Skinner (1836) 5Lg 67-90 (Ch) has described it as the most comprehensive of all the terms which can be used in as much as it is indicative and descriptive of every possible interest which a person can have. However, for purposes of taxation under sections 22 to 27 of the Income Tax Act, 1961 such wider definition of property is not relevant. The income to be taxable should be “Income from House Property”.

    Conditions necessary to tax income from House Property are:
    • The property should consist of any building or land appurtenant thereto
    • The assessee should be the owner of the property
    • The property should not be used by the owner for the purpose of any business or profession carried on by him, the profits of which are chargeable to tax.

    Unless all the aforesaid conditions are satisfied, the property income cannot be charged to tax under the head ‘Income from House property’.
    Sec 23 provides ways in which the Annual Let out Value is determined in case of let out properties. The property owned and used by an assessee obviously cannot be a let out property. So Sec 23(2) provides that the rental income on the same shall be NIL. Sec 23(4) also provides that in case more than one property, option shall be available for an assessee to opt for one property as a Self Occupied Property on which the let out value shall be NIL. However the other vacant property shall be deemed let out property (DLOP) on which rent shall be assumed to have been received. The amount of rental income shall be calculated as laid down in Sec 23.

    Now, inadvertently, it is possible that an assessee would not have added rental income on DLOP in his Income Tax Return. Can this negligence result into levy of penalty U/S 271(1((c)? Nowadays many an Assessing Officers (AO) are passing orders U/S 271(1)(c) in respect of rental income on DLOPs. Let us approach this issue first by understanding Sec 271(1)(c). Sec 271(1)(c) is leviable in case the assessee has concealed particulars of his income or furnished inaccurate particulars of his income. Explanation to the same is reproduced as below:

    "Explanation 1.- Where in respect of any facts material to the computation of the total income of any person under this Act,-
    (A) such person fails to offer an explanation or offers an explanation which is found by the Assessing] Officer or the [Commissioner (Appeals)] [or the Commissioner] to be false, or

    (B) such person offers an explanation which he is not able to substantiate [and fails to prove that such explanation is bona fide and that all the facts relating to the same and material to the computation of his total income have been disclosed by him]. Then, the amount added or disallowed in computing the total income of such person as a result thereof shall, for the purposes of clause (c ) of this sub- section, be deemed to represent the income in respect of which particulars have been concealed."

    Thus penalty U/S 271(1)(c) is a levy for concealment or non disclosure of income. As has been discussed above, rental income for DLOP is not as a matter of fact any real income. It is merely a notional income deemed to have been earned for Income Tax purposes. In such a situation, it is incorrect to say that there has been any concealment of income. Non offering of notional income to tax does not mean concealment of income.

    Now, in order to determine whether there has been non disclosure of income, let us have a look at the return of income and the Balance Sheet. The Balance Sheet is filed with the ROC and Income Tax Department. Return of Income is filed with the Income Tax Department. So in case a proper disclosure is made of the property as an asset in either the Income Tax Return or the balance Sheet, the question of non disclosure of income does not arise.


    Now let us look at a recent Tribunal Case in Pune, Kamalkar M. Havel, Kolhapur vs Assessee on 30 December, 2011 (1 ITA Nos. 1170 to 1173/PN/2010), it was held that:

    “In the present case before us, the explanation submitted by the assessee that the assessee had reflected all his 4 different house properties in the balance sheet and no actual rent was received from these properties has not been found by the A.O to be false. Admittedly, the addition on account of rental income from those house properties has been made on notional and estimate basis. Thus, it cannot be said beyond doubt that there was concealment of particulars of income or furnishing inaccurate particulars thereof on the part of assessee towards the income from those house property to attract the penal provision u/s. 271(1)(c ) of the Act. On having gone through the provisions of Explanation 1 reproduced hereinabove, we also note that there is word "or" between the clauses (A) and (B) to the Explanation 1 of the Section 271(1)(c ) of the Act. We are thus of the view that there was no justification for the A.O to levy penalty in question, upheld by the Ld CIT(A). We thus while setting aside orders of the authorities below in this regard direct the A.O to delete the penalty in question levied during the A.Ys. under consideration. The ground is accordingly allowed in favour of the assessee.”

    The Honourable Bombay High Court has also held in the case of CIT vs. Shivlal Desai & Sons. (1978) (114 ITR 377), that merely because there are certain additions/ disallowances in the assessment proceedings, penalty cannot be levied.

    Thus the above analysis clearly elucidates that the AO has to apply his mind before levying penalty on rental income on DLOPs U/S 271(1)(c). The penalty is not automatic. The assessee can take recourse to the fact that adequate disclosure about the property is made in the Income Tax Return, which is filed with the department and hence there has been full disclosure. Also, notional income is not an income earned by the assessee in reality. So it cannot be said that there has been any concealment of income.