Definition of Annual Value As per Section 2(2) ‘Annual Value’, in relation to any property, means its annual value as determined under section 23;
According to section 23(1) ‘Annual Value’ is defined as:
For the purpose of section 22, the annual value of any property shall deemed to be –
(a) the sum for which the property might reasonably be expected to let from year to year; or
(b) where the property or any part of the property is let and the actual rent received or receivable by the owner in respect thereof is in excess of the sum referred to in clause (a), the amount so received or receivable; or
(c) where the property or any part of the property is let and was vacant during the whole or any part of the previous year and owing to such vacancy the actual rent received or receivable by the owner in respect thereof is less than the sum referred to in clause (a), the amount so received or receivable.
Your doubt pertains to Section 23(1)(c) which related to Vacancy Allowance. This section is used when the property remains vacant for a part of the year. It means if the house property remains vacant for a part of the year, then rent received or receivable for the period during which the house propeerty was rented out will be considered for the calculation of Annual Value. Let us understand with the help of an example:
Reasonable Letting Value (Rs.10000 X 12) = Rs.120000
Actual Rent Received (Rs.12000 X 12) = Rs.144000
In this case ‘Annual Value’ will be Rs.144000 because it is more than RLV (Rs.120000).
Actual Rent Received (12000 X 8) = Rs.96000
In this case ‘Annual Value’ will be Rs.96000 as actual rent received or receivable is less than RLV (Rs.120000).
If you look reasonably, tax should not be charged for an income which could not be earned despite reasonable efforts of the owner of the property.
Annual Rent means rent which could be earned if property is let out for the full year. Actual rent is the amount of rent received or receivable. This could be either equal to or less than Annual Rent (less if propertly is vacant for some months).