house property ay0910

CA-Final (Income Tax)

1

ChapterChapterChapterChapter 5

INCOME FROM HOUSE PROPERTY

5.0 INTRODUCTION

Generally, only real income is taxable under the Income Tax Act. Where the

law provides for adopting notional figure as the basis of computation, it is possible

that notional income also gets taxed in view of such specific provision. For

example, perquisite in respect of interest free loan calculated at a specified rate of

interest results in notional income being taxed as part of salary. Similarly, Section

50C provides for adoption of guideline value of an immovable property as the

consideration if the real sale consideration is lesser than such value. On account of

this provision, it is possible that a notional capital gain may get taxed. On the

same basis, there are certain situations under this head of income, which renders

notional income taxable.

An assessee may be taxed on a notional income in the case of let out property

if fair rent exceeds actual rent. Again, where an assessee owns more than one

house property for self-occupation purposes, the annual value of only one such

house shall be taken as nil and in respect of the other properties income shall be

computed on a notional basis by deeming such properties as let out and by

adopting fair rent as the gross annual value.

The computation becomes easier if the student identifies the category of the

house property for which computation is sought to be made and then proceeds to

apply the respective methodology. The Provisions relating to this head of income

can be divided into three segments as follows :

SECTIONS 22 TO 27

Chargeability Sec. 22

Deemed Owner Sec. 27

Computation of Income

Sec. 23 to 25

Special Provisions

Sec. 25AA, 25B and 26

Although the nomenclature of this head of income uses the words “House

Property”, the chargeability does not confine to buildings which are residential

house properties. It extends to even other buildings such as offices, shops,

godowns and other commercial premises.

5.1 CONDITIONS TO BE SATISFIED FOR INCOME TO BE CHARGED TO TAX

UNDER THE HEAD ‘INCOME FROM HOUSE PROPERTY’ [Sec. 22]

As per Section 22, the following conditions are to be satisfied for an income to

be charged under the head “Income from House Property” –

(1) The property must consist of buildings or lands appurtenant thereto :

The appurtenant lands in respect of a residential building may be in the form

of approach roads to and from public streets, compounds, courtyards,

gardens, cattle-shed, etc.

(a) Vacant Plot : Vacant plot cannot be said to be a land appurtenant to a

building and thus, income from such vacant plot is not taxable u/s 22,

but u/s 56 as income from other sources.

(b) Income from well within the outer walls of house : A well within the walls of

a house cannot be said to be land appurtenant to house, as it is not


2

necessary for enjoyment of the house. Thus, income from sale of water of

well is not chargeable u/s 22, but u/s 56 as income from other sources –

M. Ramalakshmi Reddy V. CIT [1998] 232 ITR 281 (Mad)

(c) Display of advertisement hoarding on roof of building : Rent on account of

display of advertisement hoarding of various concerns on the roof of the

building cannot be taxed as ‘Income from House Property’ but will be

taxed as ‘Income from Other Sources’ because hoarding on roof of

building cannot be treated as part of the building. – Mukherjee Estate Pvt.

Ltd. v. CIT [2000] 244 ITR 1 (Cal.)

(2) The assessee must be the owner of such house property : For the purpose

of Section 22, ‘owner’ is a person who is entitled to receive income in his own

right. Owner includes deemed owner u/s 27.

(a) Registered ownership is not necessary : Where a house property is handed

over by contractor/builder to a purchaser, the purchaser is to be treated

as ‘owner’ of that property for purpose of Section 22 even though no

registered documents as required by Transfer of Property Act, 1882 or the

Registration Act, 1908 are executed. The requirement of registration of

the sale deed in the context of Section 22 is not warranted. [CIT v. Podar

Cement (P) Ltd. [1997] 226 ITR 625 (SC)]

(b) Dispute in title of property : In case there is dispute in relation to

ownership of the property, the income therefrom shall be assessed in the

hands of the person who is in respect of such income.

(3) The property should not be used by the owner thereof for the purpose of any business or profession carried on by him, the profit of which are

chargeable to tax : If the property is used by the owner thereof for any

business or profession carried on by him; and the profits of such business are

chargeable to tax, then income from such property shall not be chargeable to

tax under this head.

The following points are relevant to explain this point :

(a) Use for business must be by owner : E.g. if a company gives its house

property to its subsidiary for business of such subsidiary, then income

from such property shall be taxable under this head, as use for business

purposes is not by owner of house i.e. the company, but by its subsidiary.

(b) Letting out for business purposes is use for business purposes : For

example, when a house property owned by an assessee is occupied for

residence by its employees/directors, etc., whether on payment of rent or

otherwise, to enable them to discharge their functions efficiently and letting out of the property is subservient and incidental to the main

business of the assessee, such an occupation amounts to use of the

property by the assessee itself for the purpose of its business, even

though no business is actually carried on in such premises. Income from

such property is not assessable as ‘Income from House Property’, but as

income from business or profession. – CIT v. Modi Industries Ltd. [1994]

210 ITR 1 (Delhi) (FB)

(c) Partner’s Property in which firm carries on business is to be treated as used

by the partner for his business : When a partner gives his property for use

by the partnership firm for the purpose of carrying on business of the

firm, then it will be treated as use by the partner for the purpose of his


3

business and therefore, the income from such property shall not be

charged to tax under this head. – [CIT v. Rasiklal Balabhai [1979] ITR 303

(Guj); CIT v. Mustafa Khan [2005] 276 ITR 601 (All.)]

(d) Property of HUF let out to firm in which HUF is partner through the Karta :

In this case, the property will not be assessable under this head, as the

property is used by the owner (HUF) for its (firm’s) business – CIT v. Shri

Champa Lal Jeevraj [1995] 215 ITR 289 (Mad.).

However, in case premises owned by HUF is used by firm in which its

member/Karta is partner in individual capacity, then the bonafide annual

value of such property would be assessable under Section 22 in the hands

of HUF – CIT v. Shiv Mohan Lal [1993] 202 ITR 60 (All.)

Other points relating to charge of income under this head :

(A) Property held as stock-in-trade : Even if the property is held by the assessee as

a stock in trade, or is engaged in the business of letting out of property on

rent, or the assessee is a company incorporated for the purpose of owning

house property, the income falls under the head ‘Income from House Property’

because it is the specific head for charge income from house property.

(B) Sublet receipt : Income from sub-letting of property is not assessable as

income from house property as the person sub-letting the property is not the

owner thereof. Subletting receipt is taxable as income from other sources.

However, if sub-letting is carried on as a business activity, the income

therefrom will be chargeable as Profits and Gains of Business or Profession.

(C) Intention of the parties is also relevant : If the letting out of the property is for

earning rental income therefrom, then the income from such property will be

chargeable under Section 22, even if some additional facilities are also

provided and the monthly rent is inclusive of charges for such facilities and the

property, both. However, if letting out of the property is for the purposes of the

business of the assessee, the income from such property will not be taxable

under this head – Shambhu Investment P. Ltd. v CIT [2003] 263 ITR 143 (SC).

(D) Building constructed on leasehold land : The income from property being

building or land appurtenant thereto is assessable under this head. In case of

building constructed on a leasehold land, though the assessee is not the owner

of the land but he is the owner of the superstructure i.e. the building. Thus,

the income arising from building is assessable under the head ‘Income from

House Property’.

(E) Principle of mutuality: the assessee members club provided recreational and

refreshment facilities exclusively to its members and their guests. Its facilities

are not available to nonmembers. The club is run on no profit no loss basis.

Members are not entitled to any share in the profits. The assessee's business

is governed by the doctrine of mutuality and does not come within the scope of

business. In the case of such a mutual concern, It is not only the surplus from

the activities, but even the annual value of the clubhouse that shall be

excluded from the purview of the levy of income tax. Therefore, the annual

value of the building is not chargeable to tax-Chelmsford club versus CIT (SC)

(F) Exempted buildings: The following buildings are exempted subject to

satisfaction of the conditions prescribed under the relevant sections:

• farm houses outside the specified area-section 10 (1);


4

• Buildings owned by an educational or charitable institution - section

10(203C) or section 11;

• Buildings owned by a trade union-section 10 (24);

• buildings owned by a political party in-section 13A;

• buildings owned by a local authority-section 10 (20); and

• buildings owned by Approved scientific research institution-section 10

(21).

(G) Treatment of Composite Rent, which is received for letting of property as well as

other services and/or assets : Treatment of Composite rent is given as under :

(a) Composite rent on account of rent for the property and service charges for

various facilities provided along with the house : Composite rent is to be

split up and the sum that is attributable to the use of the property is to be

assessed in the form of annual value under Section 22. While the income

received fro services is chargeable under Section 28 or Section 56.

(b) Composite rent on account of rent for the property and hire charges of

machinery, plant or furniture belonging to the owner : If the letting of

property is separable from letting of other assets, then rent for house

property is taxable u/s 22 and rent for other assets is taxable u/s 28 or

56, as the case may be. If letting is inseparable, then the entire income is

taxable u/s 28 or 56, as the case may be.

5.0 CHARGEABILITY OF VARIOUS TYPES OF BUILDINGS AND LANDS

APPURTENANT THERETO

Sr. No.

Types of Buildings and Lands Chargeability

1. • Tiled house with mud walls or

cement walls;

• RCC buildings, Palaces;

• Apartments/Individual flats;

• Bungalows, Row House, Beach

House and Pent House;

• Auditoriums;

• Godowns, Warehouses;

• Offices, Commercial shops,

theatres;

• Farm houses; College/library

Buildings

The buildings referred here should

be of permanent nature. Temporary

structure shall not be considered as

buildings for the purpose of income

from house property. E.g. Circus

Tents, exhibition structures, etc.

2. Buildings does not include -

• Incomplete units;

• Buildings, which are in a

dilapidated condition

• The building is left incomplete as

the construction is not completed

due to litigation or any other

reason;

• Building, which is not capable for

self-occupation or letting out for

residential or commercial

purposes. E.g. Substantial


5

structure of the building is

destroyed due to earthquake.

3. Lawns, Gardens, parking places, etc.

attached to the buildings.

Chargeable as land appurtenant to

the buildings.

4. Buildings situated in foreign

country.

The income from such property shall

be computed similar to the

properties situated in India.

However, students may note that the

taxability of such buildings is based

on the residential status of the

assessee. In case the Double

Taxation Avoidance Agreement

provides for tax relief in respect of

such income, then Sec. 90 would

apply and subject to the terms of

such agreement, the income from

house property in foreign country

will be subjected to tax.

5.2 CONCEPT OF DEEMED OWNERSHIP [Section 27]

Generally, ownership itself is the criteria for assessment under the head

Income from House Property. However, there are instances in which the income

from property is assessable in the hands of an assessee, who is not the legal owner

thereof. These instances are covered under Section 27. As per Section 27, the

following persons shall be deemed to be the owners of the house property :

(1) An individual who transfers his house property otherwise than for adequate

consideration to –

(a) His or her spouse (not being a transfer in connection with an agreement

to live apart) or

(b) Minor child (not being married daughter)

is deemed to be the owner of such house property.

(2) The holder of impartible estate of an HUF is deemed to be individual owner of

all the properties comprised in the estate.

(3) A member of a co-operative society, company or an Association of Persons to

whom a building or part thereof is allotted or leased under a house-building

scheme of the society, company or associations, shall be deemed to be the

owner of that building or part thereof.

(4) A person who is allowed to take or retain possession of any building or part

thereof in part performance of a contract of the nature referred to in Section

53A of the Transfer of Property Act, 1882, shall be deemed to be the owner of

that building or part thereof.

(5) A person who acquires any rights in or with respect to any building or part

thereof, for a period of 12 years or more by virtue of any transaction referred to

under Section 269UA(f) shall be deemed to be the owner of that building or

part thereof.

Exceptions : The above provisions excludes any rights by way of a lease from

month to month or for a period not exceeding one year.

R w section 64


6

Illustration 1 – Deemed Ownership : Answer the following –

(a) Mr. Ram transfers a property of market value of Rs.10,00,000 to his wife only

for Rs.4,00,000. The income from such property is Rs.1,50,000. How will the

property income be taxed?

(b) Mr. Rohan gifts a property valuing Rs.5,00,000 to his minor child being a

married daughter. The annual income from such property is Rs.25,000. How

will the property income is taxed?

(c) Mr. Sohan gifts Rs.20,00,000 to his wife and the wife purchases a house

property of Rs.20,00,000 out of such money. Will Mr. Sohan be the deemed

owner of the house property?

(d) Mr. A gives his house property on lease to Mr. B for a total period of 13 years,

but the lease is to be renewed by Mr. B annually during this period. In whose

hands will the property income be assessed?

(e) Mr. X gives his house property on lease to Mr. Y for a period of two years. Mr.

Y can get the lease renewed for another two years on payment of a specified

sum and so on for indefinite period. In whose hands will the property income

be assessed?

(f) Mr. P leases his house property to Mr. Q for 8 months, which can be renewed

every six months for indefinite period. In whose hands will the property

income be assessed?

Solution : The above issues can be answered as follows :

(a) Here, Mr. Ram has transferred his house property to his spouse otherwise

than for adequate consideration. Therefore, he will be deemed to be owner of

property to the extent of such inadequacy of consideration i.e. 60% of house

and the part of those representing the consideration i.e. 40% of the house shall

be assessed in the hands of spouse. Thus, property income will be assessed as

follows :

In the hands of Mr. Ram : Rs.1,50,000 × 6,00,000 ÷ 10,00,000 = Rs.90,000

In the hands of Mrs. Ram : Rs.1,50,000 × 4,00,000 ÷ 10,00,000 = Rs.60,000

(b) In case of property transferred by way of gift to minor child being a married

daughter, the transferor shall not be deemed to be the owner of the property

because Section 27 specifically excludes married daughter from this purview.

Hence, the property income will be assessed in the hands of the minor married

daughter by way of her representative assessee.

(c) Section 27(i) speaks of transfer of house property and not the transfer of any

other asset. In this case, Mr. Sohan doesn’t transfer house property but what

is transferred is money. It is immaterial that out of such money Mrs. Sohan

purchases a house property. The owner of the house property will be Mrs.

Sohan. Mr. Sohan cannot be deemed to be the owner of such house property.

(d) In this case, the lease is for a period exceeding 12 years, but the same is to be

renewed annually i.e. for a period not exceeding one year. Hence, the same

doesn’t fall u/s 27 and therefore, Mr. B is not the deemed owner of the

property u/s 27. The property income will be assessed in the hands of Mr. A.

(e) The lease is to be renewed after every two years but the lessee i.e. Mr. Y has a

right to get it renewed after every two years for indefinite period. Hence, the


7

total period of lease can be more than 12 years and therefore, Mr. Y will be

deemed to be the owner of the house property and property income will be

assessed in his hands.

(f) Since the lease is to be renewed after six months, i.e. for a period not

exceeding one year, therefore, lease doesn’t fall under Section 27 and Mr. Q

cannot be deemed to be the owner of the house property. Thus, the property

income will be assessed in the hands of Mr. P.

5.3 TYPES OF PROPERTIES AND TREATMENT :

All the building properties are divided into the following three categories for the

purpose of knowing the principles involved in computation :

(i) let-out property – Section 23(1);

(ii) self-occupied property or unoccupied property – Section 23(2)(a) and (b); and

(iii) deemed let out property – Section 23(4)

The provisions of Section 23 deal with computation of annual value of a

building property. After computation of the annual value, deductions prescribed

u/s 24 are required to be allowed so as to arrive at the taxable income from house

property. These two sections deal with all the above mentioned categories of

properties. The provisions of Section 25 provides for disallowance of interest,

otherwise allowable u/s 24, if it is payable outside India and if the tax is not

deducted or paid.

The expression “unoccupied property” used above refers to a property which

cannot be occupied by the owner by reason of his employment, business or

profession at a different place and he resides at such other place in a building not

belonging to him. Such property is treated at par with a self-occupied property.

Once the student is familiar with the mode of computation of income in respect

of let-out property then the format needs to be suitably modified for the other

category of properties. The concepts as explained for let out property equally apply

for other types of properties except to the extent modified and accordingly stated

under the respective categories. Further, students can remember that the net

result of computation of the above mentioned three categories of properties shall be

as follows :

Nature of Property Net result of computation

1. Let out Property Any amount of income or loss

2. Self-occupied property or

unoccupied property

Either nil or loss subject to a maximum of Rs.30,000

or Rs.1,50,000 as the case may be, as indicated in

the note herebelow.

3. Deemed let-out property Any amount of income or loss

Note : In respect of property mentioned in 2 above deduction up to Rs.30,000 is

allowable on account of interest on loan borrowed for purchase construction,

repairing, renovation, etc. of such property. However, if such property is acquired

or constructed out of loan borrowed on or after 1.4.1999, interest shall be allowed

as deduction up to Rs.1,50,000 instead of the limit of Rs.30,000 provided such

acquisition or construction is completed within 3 years from the end of the financial

year in which loan was borrowed.


8

5.4 LET-OUT PROPERTY – Section 23(1)

The format given hereunder can be used to determine the taxable income from

house property :

Rs. Rs.

Gross Annual Value (GAV)

Less : Property taxes paid to local authority

XXX

XXX

Net Annual Value (NAV)

Less : Deductions u/s 24 –

(a) 30% of the net annual value

(b) Interest on capital borrowed (loans)

XXX

XXX

XXX

XXX

Income from House Property XXX

Each of the above steps involved in computation of income from house

property needs to be conceptually understood. The principles involved in

quantification of each of the above mentioned items are indicated in the following

elucidation.

5.6 STEPS FOR DETERMINING ANNUAL VALUE U/S 23

Chart page 179

Unrealised Rent :

In adopting to “actual rent”, the following adjustment is called for in respect of

unrealized rent :

If any amount of rent is not capable of being realized, then such portion of rent

shall not be included in computing the actual rent received or receivable. In order

to exclude such unrealized rent, the conditions prescribed in the relevant rule

should be satisfied.

Exclusion of unrealized rent is permissible if the following conditions

prescribed under Rule 4 are satisfied :

(i) The tenancy is bonafide;

(ii) The defaulting tenant has vacated or steps have been taken to compel him to

vacate the property;

(iii) The defaulting tenant is not in occupation of any other property of the

assessee; and


9

(iv) The assessee has taken all reasonable steps to institute legal proceedings for

the recovery of the unpaid rent or satisfies the Assessing Officer that legal

proceedings would be useless.

Municipal Taxes :

Deduction is permissible in respect of property taxes subject to the following

two conditions :

(i) It should be borne by the assessee; and

(ii) It should be actually paid during the previous year.

If property tax levied by a local authority for a particular previous year is not

paid during that year, no deduction shall be allowed in the computation of house

property income for that year. However, if in a later year, the entire arrears are

paid, then actual amount paid during such later year shall be fully allowed as

deduction in the computation of house property income for that later year.

5.8 DEDUCTIONS – Section 24

30% of the Net Annual Value – Section 24(a) :

Section 24(a) allows deduction, i.e. 30% flat deduction on the net annual

value. 30% of net annual value being allowed as deduction is automatic and does

not depend on the quantum of actual expenditure incurred. This deduction is

allowed even if no expenditure is incurred by the assessee. Assessee can avail this

deduction even if tenant undertakes to do the repairs. However, this deduction is

not available for self-occupied property.

Illustration :

Mr. X owns a house property which is let-out for Rs.5,000 per month. The fair

rent of the property is Rs.72,000. Municipal taxes paid during the year for each

half year is Rs.3,600. The tenant has undertaken to do the repairs. Compute the

income from house property.

Ans : Computation of income from House Property

Particulars Amount

Rs.

Gross Annual Value

Less : Municipal Taxes paid

72,000

7,200

Net Annual Value

Less : Deduction u/s 24(a)

30% of net annual value

64,800

19,440

Income from House Property 45,360

5.9 INTEREST ON LOANS – Section 24(b)

(i) Interest payable on loans borrowed for the purpose of acquisition,

construction, renovation, repairing or reconstruction can be claimed as

deduction.


10

(ii) Interest relating to the year of completion of construction can be fully claimed

in that year irrespective of the date of completion.

(iii) Interest accrued during the construction period preceding the year of

completion of construction can be accumulated and claimed as deduction over

a period of 5 years in equal instalments commencing from the year of

completion of construction.

(iv) According to Explanation to Section 24, any subsequent loan borrowed to

repay the original loan shall also be entitled to the same treatment as the

original loan. Therefore, the interest payable in respect of the second loan

would also be admissible as deduction in the computation of income from

house property.

(v) Where a person acquires a property and pays only part of the sale

consideration, interest payable on the unpaid purchase price qualifies for

deduction in the computation of income from such property. – CIT vz. R.P.

Goenka and J.P. Goenka, 233 ITR 123 (Cal.)

SNAPSHOT OF INTEREST PROVISIONS

The following provisions will give a Birds Eye view, of the provisions under section

24:

No Scenario Maximum Amount

Deductible

Restricted to

PART A - SELF OCCUPIED PROPERTY

1. Property acquired before 1-04-99

• interest paid for ACQUISITION or

CONSTRUCTION

• interest paid for REPAIR or

RENEWAL

• 1/5 of PRE-CONSTRUCTION

period interest

30,000

30,000

30,000

Total deduction restricted to Rs.30,000

2. Property acquired after 1-04-99

• interest paid for ACQUISITION or

CONSTRUCTION

• interest paid for REPAIR or

RENEWAL

• 1/5 of PRE-CONSTRUCTION

period interest

1,50,000

30,000

1,50,000

Total deduction restricted to Rs.1,50,000

PART B - LET OUT PROPERTY / DEEMED LET OUT PROPERTY

There are no restrictions on the maximum amount that can be claimed as interest

in the case of let out or deemed let out property


11

Illustration :

Mr. Rajan constructed a house property for which he borrowed a loan of Rs.2

lakhs at 12% per annum on 1.10.1999. The construction of the house was

completed by end of January, 2001. The house property has been let-out for

Rs.6,000 per month from September, 2001. Municipal taxes paid during the

previous year 2006-07 is Rs.7,500. Repairs incurred Rs.12,500. Insurance

premium due for the year but outstanding is Rs.1,500. Collection charges incurred

is Rs.100 per month. Current year interest on the loan is outstanding.

Compute the income from house property for the assessment year 2007-08.

Ans :

Computation of income from house property for the assessment year 2007-08

Particulars Amount

Rs.

Amount

Rs.

Gross Annual Value

Less : Municipal taxes paid

72,000

7,500

Net Annual Value

Less : Deduction u/s 24

(i) 30% of Net Annual Value

(ii) Interest on Loan

29,350

24,000

64,500

43,350

Income from House Property 21,150

Notes : Interest pertaining to the period from 1.10.1999 to 31.3.2000 amounts to

Rs.12,000. This amount should have been claimed in equal instalments over a

period of 5 years commencing from the year 2000-01 which is the year of

completion of construction, relevant to the assessment year 2001-2002 and ending

with assessment year 2006-07. Therefore, no deduction is claimed for the

assessment year 2007-08.

5.10 SELF-OCCUPIED PROPERTY OR UNOCCUPIED PROPERTY – Sec. 23(2)

The annual value of self-occupied property can be adopted as Nil. Similarly, if

a property cannot be actually occupied by reason of the fact that owing to his

employment, business or profession carried on at any other place, the assessee has

to reside at that other place in a building not belonging to him, the annual value of

such house shall also be taken to be nil. Accordingly, the municipal and other

taxes levied by the local authority and the adhoc deduction of 30% are not

deductible. However, interest on loans borrowed up to a maximum of Rs.1,50,000

(or Rs.30,000 in certain specific situations) shall be allowed as a deduction.

Therefore, computation in the case of self-occupied property shall be as follows :

Rs.

Annual value as per Sec. 23(2)

Less : Deduction u/s 24(b) – Interest on Loan Borrowed

Nil

XXX

Loss from house property XXX

In case such a property is acquired or constructed out of loan borrowed on or

after 1.4.1999 and where such acquisition or construction is completed within 3

years from the end of the financial year in which such loan is borrowed, then

interest shall be allowed up to Rs.1,50,000 instead of Rs.30,000. In respect of self-


12

occupied property not falling in this category, the limit of such deduction shall

continue to be Rs.30,000.

If the assessee owns more than one house property falling under the above

mentioned category, then the income from any one such property, at the option of

the assessee, shall be computed as indicated above. The other self-occupied

property shall be treated as “deemed let-out property”.

Students may note that the enhanced limit of Rs.1,50,000 applies only if the

loan is used for the purpose of acquisition or construction of house property and

not for any other purposes. Whereas the normal limit of Rs.30,000 is available not

only for acquisition or construction but also for repair, renovation or reconstruction

of the house property. In order to claim interest in respect of self-occupied property

up to Rs.1,50,000 as deduction, assessee shall furnish a certificate, from the

person to whom interest is payable on the capital borrowed towards construction or

acquisition of the property, specifying the amount of interest payable.

Deemed Let-out Property – Sec. 23(4)

In the case of a deemed let-out property, the nature of which is self-occupied

property or unoccupied property, the computation of income shall be similar to that

of let-out property but subject to certain modifications. The relevant points are

listed herebelow :

(a) Fair rent has to be adopted as gross annual value. The question of considering

actual rent received or receivable does not arise. Consequently, no adjustment

arises on account of property remaining vacant or on account of unrealizable

rent.

(b) Municipal taxes actually paid can be claimed as deduction.

(c) Both the deductions permissible u/s 24 can be claimed as available in the case

of a let out property. The ceiling prescribed for one self-occupied property in

respect of interest on loan borrowed does not apply to a deemed let out

property.

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.

Where an assessee owns two or more house properties meant for self-

occupation, he can opt to treat one such house property as self-occupied. The

remaining house or houses shall be deemed as let out properties. This option can

be changed year after year in a manner beneficial to the assessee. Generally, the

house with the higher gross annual value shall be treated as self-occupied so that

the house with lesser gross annual value shall be liable to tax as deemed let out

property. However, one more aspect that has to be considered before exercising

this option is the amount of interest on loan borrowed in respect of each property.

While interest can be claimed without any limit as deduction in the case of a

deemed let out property, deduction in respect of interest gets restricted in the case

of self-occupied or unoccupied property subject to a maximum amount of

Rs.30,000 or Rs.1,50,000, as the case may be.


13

House Property – A portion let-out and a portion self-occupied :

Any portion or part of a property which is let out shall be computed separately

under the ‘let out property’ category and other portion or part which is self-occupied

shall be computed under the ‘self-occupied property’ category. For instance, if a

building or a floor in a building of which assessee is the owner comprises of

independent, self-contained flats/units of residence/apartments, then income from

each unit can be computed separately where one flat is self-occupied and the other

unit/units is/are let-out. There is no need to treat the whole property as a single

unit for computation of income from house property unless the entire house if self-

occupied. Municipal valuation or fair rent, is not given separately, shall be

apportioned between the let out portion and self-occupied portion either on plinth

area or built-up floor space or on such other reasonable basis.

Similarly, where in a building, the ground floor is let-out and the first floor is

self-occupied or vice versa, such a property need not be recognized as a single unit.

Instead, income from the floor, which is let-out can be computed separately subject

to the principles applicable to a let-out property and income from the floor which is

self-occupied can be computed separately by applying the principles relating to self-

occupied property as if each such floor is an independent property. On the other

hand, if both the ground floor and first floor are occupied wholly for self-occupation,

the entire house should be treated as a single unit and computation should be done

accordingly.

Property taxes if given on a consolidated basis, can be bifurcated as

attributable to each such portion or floor on a reasonable basis. Floor area or

annual value can be considered as the appropriate basis for such bifurcation.

Interest expenditure relating to the let out floor can be claimed fully without any

restriction and the interest attributable to the self-occupied floor shall be allowed

up to Rs.30,000 or 1,50,000 as the case may be. The analogy applicable to self-

occupied property equally applies to unoccupied property mentioned under clause

(b) of sub-section (2) of Section 23.

House Property – Let out for a period and self-occupied for a period :

If a single unit of property (house, flat or apartment) is self-occupied for few

months and let out for the other months, then fair rent of the property for the whole

year will be taken into account for determining the annual value. The fair rent for

the whole year shall be compared with the actual rent and whichever is higher shall

be adopted as the annual value. In this case, the actual rent shall be the rent for

the period for which the property was let-out during the previous year. Even in

such a case, property taxes and interest on loan for the whole year shall be allowed

as deduction.

If a property is let for whole or any part of the previous year then such

property shall be covered by the category ‘let out property’. It cannot be brought

under the category of self-occupied property or unoccupied property covered by

Section 23(2). This is made clear by sub-section (3) of Section 23 which provides

that the provisions of sub-section (2) shall not apply if the house is actually let

during the whole or any part of the previous year or any other benefit is derived by


14

the owner from it. Therefore, such a property has to necessarily be governed by

sub-section (1) of Section 23 and annual value shall be determined accordingly.

Inadmissible Expenses – Sec. 25

In the case of interest on loan borrowed payable outside India, deduction will

be allowed only if tax is deducted at source or tax is paid.

Unrealised rent received subsequently to be charged to Income Tax – Sec.

25AA :

Where the assessee cannot realize rent from a property let to a tenant and

subsequently the assessee has realized any amount in respect of such rent, the

amount so realized shall be deemed to be income chargeable under the head

“Income from House Property” and accordingly charged to income tax as the income

of that previous year in which such rent is realized whether or not the assessee is

the owner of that property in that previous year.

Arrears of Rent Received – Sec. 25B

Where the assessee is the owner of any property which has been let to a tenant

and he receives any amount by way of arrears of rent from such property which was

not charged to tax earlier, the amount so received shall be chargeable to tax under

the head “Income from House Property”. It shall be charged to tax as the income of

the previous year in which such rent is received even if the assessee is no loner the

owner of such property. In computing the income chargeable to tax in respect of

the arrears so received, 30% shall be allowed and consequently, 70% alone shall be

chargeable to tax. The deduction of 30% is irrespective of the actual expenditure

incurred.

Illustration :

Mr. L has received a sum of Rs.15,000 from a defaulted tenant during July,

2006 out of the arrears of Rs.25,000 due from him. Mr. L had claimed the

unrealized rent of Rs.25,000 for the assessment year 2003-04, which the Assessing

Officer fully allowed as deduction u/s 24. Incidentally, Mr. L had sold his property

during March, 2006. Advise him about the chargeability of the amount of

Rs.15,000 realised from the defaulted tenant. What will be your answer if the

Assessing Officer had allowed only Rs.20,000 as deduction instead of Rs.25,000?

Ans : Computation of taxable quantum of unrealized rent recovered

Where the Assessing Officer allowed the entire claim of unrealized rent as

deduction, the sum of Rs.15,000 recovered is chargeable to tax in the year of

receipt. The position does not change even if Mr. L had disposed off the property in

March, 2006. The sum of Rs.15,000 becomes chargeable under the head “Income

from House Property” for the assessment year 2007-08.

However, if the Assessing Officer allowed only Rs.20,000 as unrealized rent as

against the arrears of Rs.25,000, the amount chargeable to tax out of the sum of

Rs.15,000 recovered is Rs.10,000 computed as below :

Particulars Rs.

Unrealised Rent recovered 15,000


15

Less : Unrealised rent for which no deduction was allowed

Deduction claimed (Rs.25,000) less deduction allowed (Rs.20,000)

5,000

Taxable amount recovered 10,000

Unrealised rent is excluded from actual rent, subject to fulfillment of

conditions under Rule 4, in the determination of annual value u/s 24.

Subsequently, when the amount is realized, it gets taxed u/s 25AA in the year of

receipt. On the other hand, the assessee may have sought enhancement of rent

from the tenant and same could have been in dispute. Subsequently, as and when

the additional rent is realized, the same is liable to tax as it was not charged to tax

in any earlier years. Such an amount is assessable u/s 25B. The basic difference

between Sec. 25AA which deals with unrealized rent received subsequently and Sec.

25B which deals with arrears of rent received is that 30% of the amount is not

available as deduction u/s 25AA, whereas it is allowed as deduction u/s 25B.

Co-ownership – Sec. 26

(1) If two or more persons jointly own a property and if their shares are definite

and ascertainable, then the income from such property cannot be taxed as

income of an association of persons.

(2) The share income of each such co-owner should be determined and included

in his individual assessment. Each co-owner is entitled for the concessional

computation relating to one self-occupied property with reference to his share

of property under this occupation.

(3) When property is owned by two or more persons whose shares are definite and

ascertainable, the share of each such person in the income from the property

is includible in his respective total income u/s 22, even if the co-owners are

also receiving charges from the lessees for air conditioning facility which is

assessable as income from other sources u/s 56. D.C. Shah Vs. CIT 118 ITR

419 (Kar.). Property held by co-owners are assessable individually in respect of

lease rent and not as an association of persons – CIT Vs. Shivsagar Estate, 257

ITR 59 (SC).

house property ay0910

Documents