Many taxpayers assume that if a house remains vacant and earns no rental income during the year, there will be no tax liability arising from it. However, a recent ruling by the Ahmedabad bench of the Income Tax Appellate Tribunal (ITAT) highlights that the Income Tax Department can still seek to tax a property owner on “deemed rent” — an estimated rental income that the property could have generated.
In an important decision that could provide relief to owners of multiple residential properties, the ITAT deleted a deemed rent addition of Rs 7.43 lakh made on 5 vacant flats owned by a Mumbai taxpayer, holding that vacancy relief under Section 23(1)(c) of the Income Tax Act cannot be denied merely because the taxpayer failed to produce perfect documentary evidence of efforts made to rent out the properties.
What was the case about?
The case involved Mumbai resident Mohit Vijaykumar Gupta, who filed his income tax return for Assessment Year 2021-22 on October 2, 2021, declaring a total income of Rs 10.60 crore. His return was selected for scrutiny under the Computer Assisted Scrutiny Selection (CASS) system because of substantial deductions and exemptions claimed under various capital gains-related provisions, including Sections 54, 54B, 54EC, 54EE, 54F, 54G, 54GA and 54GB.
During assessment proceedings, the tax department made three major additions:
| Particulars | Amount |
| Long-term capital gain addition | Rs 21.03 lakh |
| Deemed rent on five Mumbai flats | Rs 7.43 lakh |
| Deemed rent on office property in Andheri | Rs 13.86 lakh |
As a result, the assessed income rose to about Rs 11.02 crore from the returned income of Rs 10.60 crore.
Why did the tax department levy deemed rent?
The dispute centred around five residential flats in Mumbai owned by Gupta.
The assessing officer noted that these flats were neither self-occupied nor actually rented out during the relevant year. Since only specified self-occupied properties enjoy tax relief, the officer treated the remaining vacant flats as deemed let-out properties and computed notional rental income of Rs 7.43 lakh, despite the fact that Gupta had not earned any rent from them.
ALSO READ
In simple terms, deemed rent is an estimated rent that a property is expected to generate. Even if no tenant occupies the property and no rent is received, tax authorities can assess income based on the property’s expected rental value.
What was the taxpayer’s defence?
Gupta argued that the flats were genuinely intended to be rented out during FY 2020-21 but remained vacant because of the disruption caused by the Covid-19 pandemic and weak rental market conditions.
He contended that brokers had been engaged to find tenants and that the flats eventually remained vacant throughout the year before being sold. Based on these facts, he claimed vacancy relief under Section 23(1)(c) of the Income Tax Act and declared the annual value of the flats as nil.
An interesting fact noted in the order is that Gupta had voluntarily offered deemed rental income from the same flats in earlier assessment years. For AYs 2019-20 and 2020-21, he had disclosed deemed rent of nearly Rs 19.71 lakh from these properties. This strengthened his argument that he was not routinely avoiding tax on the flats but was claiming vacancy relief only in the year when he attempted to rent them out.
Why did the tax department reject the claim?
The assessing officer and later the Commissioner of Income Tax (Appeals) were not convinced.
Their primary objection was that Gupta could not furnish documentary proof showing efforts to rent out the properties. No broker confirmations or other supporting documents were produced during the proceedings. Consequently, the claim of vacancy relief was rejected and the deemed rent addition was sustained.
What did the ITAT say?
The Ahmedabad ITAT took a different view.
The tribunal observed that Section 23(1)(c) provides relief where a property remains vacant despite efforts to let it out. The provision does not require taxpayers to prove actual letting of the property. Instead, the focus should be on the intention to let out the property and the bona fide efforts made in that direction.
Relying on earlier judicial precedents, including the Sachin R. Tendulkar case and the Premsudha Exports ruling, the tribunal held that expecting taxpayers to maintain infallible records or obtain formal acknowledgements from brokers for every rental effort is unrealistic and contrary to normal human conduct.
The bench also noted that the flats were eventually sold during the year and this supported the taxpayer’s explanation that he had been dealing with property brokers and actively exploring options relating to the properties.
Accordingly, the tribunal ruled that the addition of ₹7.43 lakh towards deemed rent on the five Mumbai flats was unsustainable and directed its deletion.
ALSO READ
What does the law say?
Section 22
Section 22 taxes income from house property, including notional or deemed rental income in certain situations.
Section 23(1)(a)
This provision generally determines annual value based on the rent a property is reasonably expected to earn.
Section 23(1)(c)
This section provides vacancy relief where a property intended for letting remains vacant despite genuine efforts to rent it out. In such cases, the annual value may be treated as nil.
What does this ruling mean for property owners?
According to Adesh Nandal, Legal Associate at Jotwani Associates, many taxpayers are unaware that additional residential properties can attract tax even when no rent is earned from them.
“Under the Income Tax Act, a taxpayer can treat up to two houses as self-occupied, and no notional rental income is charged on such properties. However, if a person owns additional residential properties, those properties may be treated as deemed to be let out even if they remain vacant,” he explains.
Nandal says tax authorities generally determine expected rental value using factors such as municipal valuation, prevailing market rent and other relevant considerations, and this estimated rent is taxed under the head “Income from House Property.”
A practical ruling, but documentation still matters
Commenting on the significance of the ruling, Nandal says the decision recognises the realities of the rental market.
“The Tribunal has recognized that there may be situations where a property owner genuinely tries to rent out a property but is unable to find a suitable tenant. In such cases, merely because the property remained vacant throughout the year should not automatically result in taxation of notional rental income,” he says.
According to him, the ruling shifts the focus from actual rental income to the genuineness of efforts made by the taxpayer to rent out the property.
However, he cautions that property owners should not interpret the ruling as a blanket exemption from deemed rent taxation.
What records should taxpayers maintain?
Nandal points out that one of the biggest mistakes taxpayers make is assuming that every vacant property automatically qualifies for vacancy relief.
To strengthen their claim, taxpayers should retain evidence such as property advertisements and online rental listings; communications with brokers; WhatsApp chats and emails with prospective tenants; rent negotiation records; property portal screenshots showing listing dates; and other documents demonstrating efforts to find tenants.
Such records can become crucial if the claim is scrutinised by tax authorities later.
ALSO READ
Summing up…
The Ahmedabad ITAT’s ruling provides an important reminder that vacancy relief under Section 23(1)(c) is a genuine benefit available under the law and cannot be denied solely because a taxpayer lacks perfect documentation. At the same time, the decision underscores the importance of maintaining at least basic evidence showing an intention to rent out a property.
For taxpayers owning multiple homes, especially in slow or weak rental markets, the ruling offers useful guidance on how deemed rent provisions may be applied and when vacancy relief can legitimately be claimed.
Disclaimer: The information provided in this article is based on the order of the Income Tax Appellate Tribunal (ITAT), Ahmedabad, in the case of Mohit Vijaykumar Gupta v. DCIT (ITA No. 1091/Ahd/2025, order dated November 6, 2025), and expert views shared for general informational purposes. The ruling is specific to the facts and circumstances of that case and should not be treated as a universal precedent applicable to all taxpayers. Tax laws are subject to amendments and varying judicial interpretations. Readers are advised to consult a qualified tax professional or legal adviser before taking any tax-related decisions based on this article.
Every financial journey has a turning point. What’s yours?
Financial Express is launching a new series highlighting real experiences with money, investments, and the taxman. Did a sudden tax rule catch you off guard? Did a piece of financial advice change your life? Your story could provide invaluable, practical lessons for thousands of fellow taxpayers. Share your experience with us. We respect your privacy: no stories will be featured without a direct conversation and your full consent. Thank you.
aniltikotekar4sme.com 