Income From House PropertyChargebility (Section 22)The annual value of the property, consisting of any buildings or lands appurtenant thereto, of which the assessee owner, is chargeable to tax. If, however, house property is occupied by the assessee for the purpose of his business or profession carried on by him, the annual value of such property shall not be chargeable to tax under the head Income from House Property.

Thus, the following three conditions shall be satisfied :(1) The property should consist of any building or land appurtenant thereto.(2) The assessee should be 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 profits of which are chargeable to income tax.

BuildingThe world Building is neither defined in the Act nor in the Rules. In common sense building means box like construction having roof and used for any wide variety of activities such as living, entertainment or manufacturing. Thus, the word Building is wide enough to include residential house, office premise, factory, music hall, lecture hall and so on.

Land Appurtenant TheretoThe meaning of word appurtenance is something that goes with another thing. Hence, appurtenant land in respect of residential buildings may be in the form of approach road to and from public streets, compound, playground attached to and forming part of such buildings.

OwnerThe owner for the purpose of section 22 is a person who is entitled to receive income in his own right. The annual value of the property is assessed to tax under section 22 in the hands of owner even if he is not in receipt of income or even if income is received by some other person. For e.g. if a person makes a gift of rental income to his friend without transferring ownership of the property, the annual value of such property will be taxable in the hands of donar even if the rental income is received by the donee.

Deemed Owner (Section 27)Besides legal owner, the following persons are to be treated as Deemed Owner :(1) If a person transfer without adequate consideration any house property owned by him to his or her spouse, (not being a transfer in connection with an agreement to live apart) or to a minor child ( not being a married daughter), he shall be deemed to be owner of such transferred property.

Cont.(2) A person who is allowed to take or retain possession of any building or any part thereof in performance of a contract to buy ( referred to in section 53A of the Transfer of Property Act, 1882)(3) If a person acquires right in a building by virtue of transaction which is referred to in section 269UA(f). Broadly speaking section 269UA(f) covers giving of property on lease for a term not less than twelve years.

Cont.(4) The holder of impartial estate shall be deemed to be the individual owner of all the properties comprised in the estate.(5) A member of the co-operative society, company or other association of persons to whom a building or part thereof is allotted or leased under a house building scheme shall be deemed to be deemed owner of that building or part thereof.

Case LawsIf the conditions mentioned in section 22 are satisfied, property income is chargeable to tax under the head Income from House Property. It makes no difference even if the assessee company has been incorporated with the object of buying or developing landed properties S.G. Mercantile Corp. (P) Ltd. Vs CIT (1972) 83 ITR 100 (SC).

Case Laws Cont.It makes no difference if the property constitutes stock in trade or business of the assessee is to let out the house properties O.R.M.S.P.S.V. Firm Vs CIT (1960) 39 ITR 327 (Mad.)Where the prime object is to let out the property alongwith additional right of using furniture and fixtures and other common facilities, the income is chargeable under the head Income from House Property Shambhu Investment (P) Ltd. Vs CIT (2003) 129 Taxman 70 (SC).

Case Laws Cont.If an assessee carries on business of purchasing and selling buildings, income received from the buildings so long as they are owned by the assessee will be taxable under the head Income from House Property and not under the head Profits and gains of business or profession CIT Vs Chugandas & Co. (1965) 55 ITR 17 (SC).

Income from composite letting of building, machinery, plant or furniture (Section 56(2)(iii))Where an assessee lets on hire machinery, plant or furniture belonging to him and also buildings and the letting of the buildings is inseparable from letting of the said machinery, plant or furniture, income from such letting is taxable as Income from other sources, if the same is not chargeable to tax under the head Profits & gains of business or Profession.

Cont.Hence, the letting of machinery, plant, or furniture should be inseparable from the letting of the building.For instance, where a cinema building is given on lease under a lease deed which indicates that the lease is in respect of theatre as such which also includes furniture and other articles therein, the rental income therefrom is taxable under the head Income from other sources [CIT Vs D.L. Kanhare (1973) 92 ITR 535 (Mum)].

Property Income Exempt from Tax1. Income from farm house provided it is used for agricultural purpose [sec.2(1A)(c) r.w.s. 10(1)]2. Annual value of any one palace of an ex-ruler [sec.10(21)]3. Property income of a local authority [sec.10(20)]

Cont.4. Property income of an approved scientific research association [sec.10(21)]5. Property income of a University or other educational institutions [sec.10 (23C)]6. Property income of a hospital or other medical institution [sec.10(23C)] 7. Property income of a trade union [sec.10(24)]

Cont.8. House Property held for a charitable purpose [sec.11]9. Property income of a political party [sec.13A]Besides the aforesaid exemptions, income derived by a co-operative society from the letting of godowns or warehouses for storage, processing or facilitating the marketing of commodities is wholly deductible u/s 80P(2)(e).

Cont.Further, as per sec.80(P)(2)(f), if the gross total income of a co-operative society (not being a housing society or an urban consumers society or a society carrying on transport business or society engaged in the performance of any manufacturing operation with the aid of power) does not exceed Rs.20,000/-, any income from house property is fully deductible.

Computation of Income from Let out House Property Rs. Gross Annual Value[sec.23(1)] -- Less : Municipal Taxes actually paid -- [Proviso to sec.23(1)] _____ Net Annual Value -- Less : Deduction u/s 24 (i) Std. deduction-30% of -- N.A.V.[sec.24(a)] (ii) Interest on borrowed -- capital[sec.24(b)]______ Income from House Property --

Gross Annual ValueThe bonafide value of a property is the starting point for computation of income. As per section 23(1)(a), the annual value of the property shall be the sum for which property could reasonably be expected to let from year to year. Therefore, the inherent capacity of the property to yield income from year to year shall be considered.

Cont.The Gross Annual Value is to be determined as under :A] Find out the reasonable expected rent andB] Find out the actual rent received or receivable

A] Reasonable Expected RentFor determining the reasonable expected rent, several factors have to be taken in to consideration such as as location of the property, rent of similar property in neighbourhood, rent which the property is likely to fetch having regard to demand and supply and so on. The main factors to be considered for its determination are (a) Municipal Valuation and (b) Fair rent.

(a) Municipal ValuationIt is one of the test to be applied for determining the bonafide value of the property. Under the Municipal Corporation Act, the municipal authorities determine the municipal valuation of a property with reference to sum for which property could reasonably be expected to let from year to year.

(b)Fair RentThe Fair Rent of the property can be determined on the basis of a rent fetched by a similar property in the same locality. The higher of (a) i.e.municipal valuation or (b) i.e. fair rent can be considered as reasonable expected rent.If the property is covered by Rent Control Act, then the amount so computed cannot exceed the standard rent.

ExampleABCMunicipal Value(a)404950Fair Rent (b)464852Standard Rent (c)3546NA Reasonable Expected 354652[higher of (a) & (b) subject maximum of (c)]

B] Actual rent received or receivableIn respect of let out property, the actual rent received or receivable shall be considered.The higher of sum referred to in (A) or (B) shall be considered for the determination of G.A.V. of the property (provided the let out property was not vacant during the whole or any part of previous year)

(C) Rent of Vacant PeriodAs per sec.23(1)(c), the let out property was vacant during whole or any part of the previous year and owing to such vacancy, the actual rent received or receivable is less than the sum referred to in (A) i.e. reasonable expected rent, the sum so received or receivable shall be the annual value of property

Unrealised RentAs per explanation to sec.23(1), unrealised rent, which the owner could not realised, shall be excluded from the rent receivable/received only if the following conditions as per Rule 4 are satisfied :(i)The tenancy is bonafide.(ii)The defaulted tenant has vacated or steps have been taken to compel him to vacate the property.

Cont.(iii)The defaulting tenant is not in possession of any other property of the assessee and(iv)The assessee has taken all reasonable steps to institute legal proceedings for the recovery of the unpaid rent or he satisfies the Assessing Officer that the legal proceedings would be useless.

Municipal TaxesFrom the (gross) annual value of the property, taxes levied by the local authority shall be deducted. The deduction will be allowed in the previous year in which the taxes are actually paid by the assessee. The deduction is allowable even if the previous years taxes are paid.

Computation of income from Self Occupied Property (S.O.P.) Gross Annual ValueNil Less : Municipal TaxNil Net Annual ValueNil Less : Std. DeductionNil Interest on borrowed capital deductible [sec.24(b)] ______ Income from S.O.P. --

Computation of income from Self Occupied Property (S.O.P.)As per sec.23(2), the annual value of the house property shall be taken as nil, where the house property is in the occupation of the owner for the purpose of his own residence or (b) It could not occupied by the owner because his employment/business/profession is situated at other place.

Allowable Deductions (Sec.24)(1) Standard Deduction [sec.24(a)] : 30% of the net annual value is deductible irrespective of any expenditure incurred by the assessee. Standard deduction is not allowable for S.O.P.

Allowable Deductions (Sec.24)(2) Interest on borrowed capital [sec.24(b)] :Let out Property It is allowable as deduction if the capital is borrowed for the purpose of purchase, construction, repair, renewal or reconstruction of the house property.(a) It is deductible fully without any maximum ceiling.

Cont.(b) It is allowable on accrual basis. It can be claimed on yearly basis even if the interest is not actually paid during the year(c) Interest on pre-construction period Interest payable on borrowed capital for the construction or acquisition of house property pertaining to pre-construction or pre-acquisition period shall be deducted in five equal instalments commencing

Cont.from the previous year in which house property is acquired or constructed. However, if the deduction is allowed under any other provisions of the Act, no such deduction will be allowed.

Interest on borrowed capital [sec.24(b)]

(B) Self Occupied Property (i) Allowable on accrual basis as mentioned in (a) above.(ii) Interest on preconstruction or preacquisition period same as (b) above. (iii) The deduction not exceeding Rs.30000 shall be allowed in respect of interest payable on capital borrowed for the purpose of acquiring, constructing, repairing, renewing or reconstructing the self occupied property.

Cont.However, where such house property has been acquired or constructed with the borrowed capital on or after 1/4/99 and such acquisition or construction is completed within 3 years from the end of financial year in which capital was borrowed, then interest payable not exceeding Rs.150000/- shall be allowed [vide 2nd proviso to sec.24(b)].

Cont.(iv) In relation to A.Y. 2003-04 and onwards, deduction under 2nd proviso to sec.24(b) shall be allowed only if the assessee furnishes a certificate from the person to whom such interest is payable on borrowed capital, specifying the amount of interest payable by the assessee for the purpose of such acquisition or construction of the property or conversion of the whole or any part of the capital borrowed which remains to be repaid as loan.

When more than one house is occupied for own residential purpose [sec.23(4)] :- Where the person has occupied more than one house for his own residential purpose, only one house according to his choice will be treated as S.O.P. and all other houses will be deemed to be let out.

Special provisions when unrealised rent is realised susequently [sec.25A & 25AA] :- As per section 25, where a deduction has been allowed u/s 24(1)(x) in the A.Y. 2001-02 or earlier years in respect of unrealised rent & subsequently during any P.Y. relevant to A.Y. 2002-03 and subsequent year, the assessee has realised any amount in respect of such rent, the amount so realised shall be chargeable to tax (without allowing any ded. U/s 23 & 24).

Cont.Further, as per section 25AA, where assessee has not realised the rent during the P.Y. relevant to A.Y. 2002-03 or in any subsequent year from a property let to a tenant and subsequently, the assessee has realised any amount in r/o such rent, the amount so realised (to the extent it has not been included in annual value earlier) shall be deemed to be the income chargeable to tax. Further, it is not necessary that the assessee must be owner of such house property in the year of realisation of rent.

Special Provisions for arrears of rent received (sec. 25B) :- Arrears of rent, in respect of let out property, received by an assessee and which has not been charged to tax for any P.Y. will be deemed to be income from House Property in the P.Y. of receipt. Such arrears of rent after deducting a sum equal to 30 % of such sum will be charged to tax whether the assessee is the owner of such property in that year or not.

Property owned by Co-owners (sec.26) :- Where a property is owned by two or more persons and respective shares are determinable, such persons shall not be assessed in respect of such property as an A.O.P. but the share of each co-owner will be included in his total income. Where the property is occupied throughout the year by the co-owners for their self occupation, the annual value falling to the share of each co-owner shall be taken at Nil.

Interest not deductible from Income from House Property (sec.25) :- Any interest chargeable under the Act, which is payable outside India on which tax has been paid or deducted ( under chapter XVII-B) and in respect of which there is no person in India who may be treated as an agent (u/s163), shall not be deductible.

Loss from Income from House Property :- Loss in respect of house property (whether let out or self occupied) can be set off u/s 71 (1) and 71 (2) against any other head of income in the same assessment year. Such loss which can not be wholly set off against income from any other heads in the same A.Y. will be allowed to be carried forward and set off against Income from House Property of immediately succeeding eight assessment years (Sec 71B).