Taxation of Income from House Property–TAXSCAN

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INTRODUCTION

Taxation of House Property in India is governed by Income Tax Act,1961. Owning a house one day, everybody dreams of this, saves towards this and hopes to achieve this. However, owning a house property is not without responsibilities. Paying house property taxes annually is one of them.

Income from house property is one of the important heads of income under the Income Tax Act. The taxpayers have been, in particular, keen to know the exemptions and deductions available to them on repayment of interest and principal of the loan obtained to purchase the house property, if that house property is let out or self-occupied.

The scope of the income charged under this head is defined by section 22, the computation of income falling under this is governed by sections 23-27. Tax levied under section 22 is based on the Principle of Mutuality i.e, tax on income from house property and it is not a tax on house property. It is the notional income from the house property that is taxed.

CHARGEABILITY (SECTION 22)

The annual value of any property comprising building or land appurtenant thereto, of which the assessee is the owner, is chargeable to tax under the head ‘income from house property’.

The annual value of any building or a portion of building occupied by the assessee for the purpose of business or profession carried on by him is not chargeable to tax. It is to be specifically noticed that what is taxable under the head ‘Income from House Property’ is the annual value of a building property and not the rental income i.e, the earning capacity/ notional income from the property is taxed.

The Allahabad High Court in Wheeler Club Case1 held that:

“… liability to pay income tax arises from the mere fact of his owning the property having an annual letting value and not from his actually deriving any income from it.”

If all the following three conditions are satisfied then the property income will be chargeable to tax under the head income from house property:

1. Property should consists of any BUILDING or land appurtenant (means land connected with the building like garden, garage etc.) thereto;

BUILDING– means a permanent structure made of bricks, stones, concrete etc. and which has a foundation, walls and doors. It does not include temporary structures.

2. Assessee must be the owner of the property.

3. The property should not be used by the owner for the purpose of any business or profession carried on by him, the profit of which is taxable. The income earned by an assessee engaged in the business of letting out of properties on rent would also be taxable as business income and not as income from the house property.2

OWNER OF HOUSE PROPERTY (SECTION 27)

The word ‘owner’ means a legal owner.

In certain cases the legal ownership may vest with one person whereas the taxability is casted upon another person who is deemed to be the owner. Section 27 enumerates such cases which are given hereunder:-

An individual who transfers otherwise than adequate consideration any property;

To his or her spouse (not being a transfer in connection with an agreement to live apart)

To a minor child (not being married daughter)

Eg: Mr. A transfers his house property worth 10 lakhs to Mrs.A out of love and affection. In such a case, though Mrs. A is the legal owner, Mr.A will be liable to tax as deemed owner of such property.

The holder of an impartible estate (property which is not legally divisible) is treated as deemed owner of house property. Impartible estate, an estate to which assessee has succeeded by grant or covenant.

Property held by a member of a company, co-operative society or other association of persons to whom a building or a part thereof is allotted or leased under house building scheme of the company or association, is treated as deemed owner of that building or part thereof;

A person who is allowed to take or retain the possession of any building (or part thereof) in part performance of a contract under section 53A of The Transfer of Property Act,1882 is deemed as the owner of that building.

A person who acquires any right under section 269UA(f) in or with respect of any building or part thereof, by way of lease agreement for a period not less than 12 years is deemed as the owner of that building.

Eg: A lets out a property to Miss B on a lease of 9 years. However, Miss B has a right to renew the lease for a further period of 3 years. Here, Miss B shall be deemed as an owner of the property u/s 27.

PROPERTY INCOME EXEMPTED FROM TAX

Property income is exempted from tax in the following cases:-

I. Income from farm house [sec. 2(1a)(c) r/w sec.10(1)

II. Annual value of any one palace of an ex-ruler [sec.10(19A)]

III. Property income of a local authority [sec.10(20)]

IV. Property income of an approved scientific research association. [sec.10(21)]

V. Property income of a university or other educational institutions [sec.10(23C)]

In Gujarat State Co-operative Union v. CIT3 it was held that:

“The language of the provision emphasizes that the sole purpose of the existence of the institution should be educational. So the income of such institutions is contemplated. Therefore, mere existence of profit will not disqualify the institution if the sole purpose of its existence is not profit-making but is educational activity.”

VI. Property income of a hospital or other medical institution. [sec.10(23C)]

VII. Property income of a trade union. [sec.10(24)]

VIII. Property income in case of a person resident of Ladakh. [sec.10(26B)]

IX. House property held for charitable purposes. [sec.11]

In CIT v. Ashoka Charity Trust4 , it was held that “even though the assessee received voluntary contributions from non-charitable institutions, the expenditure incurred should be considered to have been met out from the income derived from property held under trust.”

X. Property income of a political party [sec.13A]

XI. Property used for own business or profession [sec.22]

The income earned by assessee from letting out of godowns and provision of warehousing services is chargeable to tax under the head ‘Profits and gains of business’5

XII. One self-occupied property [sec.23(2)]

COMPUTATION

All the building properties are divided into the following four categories for the purpose of knowing the principles involved in computation:

1. Let-out property

2. Self-occupied property (including deemed let-out)

3. Part let-out/ self-occupied property

4. Only one house and kept vacant

The provisions of section 23 deal with the computation of annual value of a building property. After computation of the annual value, deductions prescribed under section 24 are required to be allowed so as to arrive at the taxable income from house property. The provisions section 25 merely prescribe for disallowance of certain expenses deductible under section 24 in the event of non-fulfilment of certain requirements.

1. LET- OUT PROPERTY [section 23(1)]

In the case of a let-out property the procedure for determining taxable income is as follows:-

  • Find out gross annual value. Annual value is the artificial income. Annual value is the sum for which the property might reasonably be expected to let from year to year.

Gross annual value is determined by comparing fair rent or annual rent and adopting whichever is higher.

Fair rent means rent which similar property in the same location would fetch. But if municipal valuation is also furnished, fair rent is taken as municipal valuation or the rent which similar property in the same locality would fetch, whichever is higher. However, if standard rent is fixed for that property, then fair rent cannot exceed the standard rent.6

  • Annual rent is the actual rent received or receivable by the assessee during the relevant previous year. If the let-out property is vacant for part of the year, even then rent for the entire previous year should be calculated and adopted as annual rent.

Section 23(1) deals with the determination of the expected rent of a let out property for computing the income from house property. It provides that the expected rent is deemed to be the sum for which the property might reasonably be expected to be let-out from year to year.7 Income chargeable to tax under the head “income from house property” in the case of a let-out property is computed in the following manner:

ParticularsAmount
Gross annual valuexxxx
Less:- municipal taxes paid during the yearxxxx
Net Annual Value (NAV)xxxx
Less:- Deduction under section 24
-, Deduction u/s 24(a) @ 30% of NAV (standard deviation)-, Deduction u/s 24(b) on account of interest on borrowed capital(xxxx)
(xxxx)
Income from house propertyxxxx

2. SELF – OCCUPIED PROPERTY

1) Where the property consists of a house or part of a house in the occupation of the owner for his own residence or cannot actually be occupied by the owner by reason of the fact that owing to his employment, business or profession carried on at any other place he has to reside at that other place in a building not belonging to him. The annual value of such house shall be taken to be nil, under section 23(2) if the following conditions are satisfied:

a) The property is not actually let during any part of the previous year; and

b) No other benefit is derived therefrom.

In a decision Gujarat High Court observed that a firm, which is a fictional entity, cannot physically reside in a house property and therefore a firm cannot claim the benefit of self-occupied house property under section 23(2), which is available to an individual owner who can actually occupy the house. However, the HUF is a group of individuals related to each other. The said family can reside in the house, which belongs to HUF.8

Deemed let-out property

In case of a deemed let-out property, the nature of which is self-occupied property, the computation of income shall be similar to that of let-out property but subject to certain modifications:

a. Fair rent has to be adopted as gross annual value. If standard rent is fixed for the property, then fair rent cannot exceed standard rent.

b. Municipal taxes actually paid can be claimed.

c. Deductions under section 24can be claimed to the extent applicable (eg.vacancy allowance cannot be claimed.)

3. PARTLY LET- OUT AND PARTLY SELF- OCCUPIED PROPERTY

1) Where a house property is let out for part of the year and self-occupied for the remaining part of the year, or any other benefit therefrom is derived by the owner, then such a property will come under this category. Similarly, where one portion (part) of a unit is let out and the remaining portion is self–occupied, then also it shall be regarded as falling under this category.

The owner of the property has to use the property for his own residence so as to avail the benefit of deduction under the provisions of section 23(2).

It also appears that except an individual, no other person can claim deduction under the said provision.9 And thus a HUF cannot avail the benefit.

2) For the purpose of computing income from a house property which is partly let out and partly self-occupied, the following points should be remembered with reference to the standard format suggested for a let out property:-

a) Gross annual value has to be determined for the entire property as if the whole property has been let out throughout the previous year.

b) Municipal taxes paid can be claimed.

c) Net annual value attributable to the self-occupied portion and/or period should be excluded.

d) Deduction under section 24 can be claimed with reference to the entire property.

4. ONLY ONE HOUSE OWNED BUT KEPT VACANT

1) In case assessee who owns only one house property which is kept vacant as he has to reside at some other place in a building not belonging to him due to his employment, profession/ business, the annual value will be taken as nil.

2) Deductions under 24 shall be allowed only in respect of interest on loan borrowed or permissible in the case of one self-occupied property. Therefore,this category of property is treated at par with one self-occupied property.

➔ By insertion of sub-section (5) of section 23 according to which income from house property held as stock in trade would be exempt for a period of one year from the end of the financial year in which certificate of completion was obtained from competent authority. The same was held in New Delhi Hotels Capital Ltd. v. ACIT10 in the year 2014.

MUNICIPAL TAXES

Municipal tax includes services related tax like water tax and sewerage tax levied by any local authority in respect of any house property to the extent to which such taxes are borne and paid by the owner, and include enhanced municipal tax finally determined on appeal and payable by assessee11.

The following deductions are made, i.e. deduction of municipal taxes is permissible in respect of property taxes subject to following conditions:

  • It should be borne by assessee
  • It should be actually paid during the previous year.

Where the tax on property is enhanced with the retrospective effect by municipal or local authorities and the enhanced tax relating to the prior year is demanded during the assessment year12.

Surcharge on municipal tax collected by assessee from the tenants form part of annual value.13

DEDUCTION UNDER SECTION 24

The following deductions are made under section 24 from the net adjusted annual value in order to arrive at taxable income:-

1. a sum equal to thirty per cent of the annual value.

2. where the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital, the amount of any interest payable on such capital.

Deduction of the interest on borrowed capital, assessee has to prove nexus with acquisition/construction/ reconstruction/ repair/ renewal of property.14

Only interest is deductible, not interest on interest.15

AMOUNT NOT DEDUCTIBLE

The following amounts are not deductible:-

1. Any annual charge or interest chargeable under the act, payable out of India, or which tax has not been paid or deducted at source and in respect of which there is no person who may be treated as an agent, is not deductible.(sec.25)

2. No deduction can be claimed in respect of that expenditure which is not specified in section 24(1). For instance, no deduction can be claimed in respect of expenses on electricity, water supply, salary of liftman, etc.

DEDUCTION OF UNREALIZED RENT

Unrealized rent is the portion of your hour rent amount which is not realized from the tenant for some reason. While deriving actual rent received or receivable for the purpose of calculating gross annual value, the unrealized rent has to be deducted from it.16 For that following conditions has to be satisfied:

1. Tenancy is bona fide;

2. The defaulting tenant has vacated or steps taken to compel him to vacate;

3. The defaulting tenant is not in occupation of any other property of assessee;

4. The assessee has taken all reasonable steps to institute legal proceedings for recovery of unpaid rent.

Any unrealised rent realized subsequently will be taxable u/s 25AA in the year of realization, under the head, “Income from house property.”

CONCLUSION

Income from the house property is one of the major sources of income to be taxed under the provisions of the Income Tax Act,1961. Different provisions of the Income Tax Act, i.e, sections 22 to 27 deals with the taxation of house property.

Like any other sources of tax, property tax revenues have been a part in funding the development of our country. But by ignorance or deliberately some of them escape from the obligation to pay tax.

Computerized register of properties and taxpayer education helps to introduce online payment of tax. This helps in both avoiding the interface between taxpayer and collector and ensuring ease of tax payments.

Notes:-

1 (1963) 49 ITR 52 (All)

2 Rayala Corporation (P) Ltd. v. Asst. CIT (SC) (2016) 386 ITR 500

3 1992 SCC OnLine Guj 252

4 (1982) 135 ITR 556

5 CIT v. NDR Warehousing (P) Ltd [(2015) 372 ITR 690 (Mad)]

6 Tilak Raj v. CIT (1989) 178 ITR 327 (Punj. & Har.)

7 CIT v. Asian Hotels Ltd. (2010) 323 ITR 490 (Del.)

8 CIT v. Hariprasad Bhojnagarwala (2012) (Guj.)

9 Commissioner of Income Tax v. Jesingbhai I Sheth (31 July,2001)

10 (2014) 360 ITR 0187 (Del.)

11 Clive Buildings Cola Ltd. v.CIT (1989) 44 Taxman 160

12 CIT v. L Kuppu Swamy Chettiar [(1981) 132 ITR 416 (Mad)]

13 CIT v. Dhun D. Dalal (Mad) 233 ITR 143

14 Piccadily Holiday Resorts Ltd. v. DCIT (ITAT, Del) 94 ITD 267

15 Akash & Ambar Trust v. CIT (Cal.) 268 ITR 93

16 Section 25 A, Income Tax Act, 1961

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