1. The assesses is a co-owner of a property known as Ward of Hotel, Bombay. She has l/4th interest. The property was tenanted and it appears from the materials placed before us that the rent remained unpaid. The assessee therefore claimed her portion of the rental income as irrecoverable rent while computing the annual letting value of the property. This claim of hers was rejected up to the stage of the Tribunal, for the assessment year 1975-76. The assessee once again claimed deduction of the amount on the ground that the rent is irrecoverable for the assessment year 1976-77, which is the year under appeal. The additional factor which has been brought on record so far as this year is concerned is that the assessee filed a suit for recovery of the amount while in the preceding year the suit was not yet instituted. The claim was again disallowed by the ITO on the ground that mere institution of legal proceedings cannot be a ground for allowing the amount as irrecoverable rent. The AAC held that since the assessee instituted legal proceedings, she is entitled to the deduction. The revenue has come up in appeal.
2. Mr. Dave, senior departmental representative for the revenue, contended that unless there is a finding based on proper material that the rent is irrecoverable, the assessee cannot get the benefit. He further pointed out that merely because one of the conditions in Rule 4 of the Income-tax Rules, 1962, mentions institution of legal proceedings, it is not enough for claiming a deduction. On the other hand, the learned Counsel for the assessee, Shri Vinod Chandiok, argued that the assessee complied with all the conditions mentioned in Rule 4 including the condition regarding the institution of legal proceedings and, therefore, the claim is to be allowed. It may be mentioned that he has not suggested in any manner that the rent otherwise became irrecoverable nor is there any material to come to such a finding except legal proceedings instituted against the tenant.
3. The Income-tax Act, 1961 ('the Act') envisages assessment of property income under Sections 22 and 23 of the Act. The deductions which an assessee is entitled in computing the income from house property are mentioned in Section 24 of the Act. One of the deductions as mentioned in Section 24(1)(x) is: (x) subject to such rules as may be made in this behalf, the amount in respect of rent from property let to a tenant which the assessee cannot realise.
4. Under Clause (x) of Sub-section (1) of Section 24, deduction shall be allowed of such part of income in respect of which tax is payable under the head 'Income from house property' as is equal to the amount of rent payable but not paid by a tenant, of the assessee and so proved to be lost and irrecoverable where-- (b) the defaulting tenant has vacated, or steps have been taken to compel him to vacate the property; (c) the defaulting tenant is not in occupation of any other property of the assessee; (d) the assessee has taken all reasonable steps to institute legal proceedings for the recovery of the unpaid rent or satisfies the Income-tax Officer that legal proceedings would be useless; and (e) the annual value of the property to which the unpaid rent relates has been included in the assessed income of the previous year during which that rent was due and tax has been duly paid on such assessed income: Provided that the deduction to be allowed on this account shall not exceed the income under the head 'Income from house property' included in the total income as computed without making any deduction under this rule.
Undoubtedly, the assessee complied with the cumulative conditions (a) to (e) but that would not be sufficient to allow an assessee a deduction unless there can be a finding that the assessee cannot realise the rent. It is only on this basic condition that one has to go to the various other subsidiary conditions mentioned in Rule 4. All that we get from the record is that the assessee filed a suit for recovery of the rent. There is not even a suggestion that the rent cannot be realised or that rent became irrecoverable. The suit is pending. Even Rule 4 clearly mentions that the assessee must prove that the rent is lost and irrecoverable. It is impossible to hold that the assessee has lost the rent or that it became irrecoverable. Merely because the assessee instituted legal proceedings for the recovery of the unpaid rent, it cannot be held for a moment that the rent was lost or that it became irrecoverable. In order to prove that the rent is lost or that it became irrecoverable, the rule making authority thought fit to provide that the assessee must satisfy the ITO that he took reasonable steps to institute legal proceedings. The various subsidiary conditions mentioned in Rule 4 are some sort of rules of evidence or guidelines for the purpose of recording the basic and essential finding that the rent is lost or that it is irrecoverable.
4. In view of the above, the assessee cannot get the benefit of deduction and the AAC erred in directing the deduction claimed by the assessee. The order of the AAC is reversed and that of the ITO restored.