PRINCIPLE OF
TAXATION
MODULE 11: INCOME FROM HOUSE
PROPERTY
BY: SUSHIL JAIN
ASSISTANT PROFESSOR, KPMSOL, NMIMS MUMBAI
BASIS OF CHARGE (SEC. 22)
INCOME IS TAXABLE UNDER THE HEAD “INCOME FROM HOUSE PROPERTY” IF THE
FOLLOWINGS THREE CONDITIONS ARE SATISFIED:
▶ 1. The property should consists of any buildings or lands appurtentant thereto.
▶ 2. The assessee should be the owner of the property.
▶ 3.The property should not be used by the owner for the purpose of any business
or profession.
PROPERTY CONSISTING OF ANY BUILDING AND
LAND APPURTENANT
•
If the property consists of any building or land appurtenant therto then it is chargeble to tax u/s 22
• “BUILDING” include residental house whether let out i.e let out for office use, music hall dance
hall, lecture halls, public auditoriums, etc or self occupied.
• “LAND APPURTENANT” is form road to a public streets, courtyard, compunds, playgrounds etc.
•
Income from vacant land would not be taxed under head House Property because there is no
building. It is either taxable under the head income from other sources or income from business depending
upon the case.
PROPERTY SHOULD NOT OCCUPIED BY OWNER FOR
HIS OWN BUSINESS OR PROFESSION.
▶ Annual value of house property is not chargeble to tax under “Income
from House Property” if the owner uses the building for the purpose of
carrying business or profession.
▶ On the other hand, house property can be let out for residential purposes
or for any commercial purposes. Even if the business of the assesse to own
and give houses on rent the annual value of the property will be taxable
under house property head.
Use of the House Property-
examples
▶X owns a house property. He uses the property as his office, factory or godown. As the property is used
for the purpose of carrying on own business or profession, nothing is taxable under section 22
▶ X ltd. is a manufacturing co. The factory of the co. is situated in Nagpur. Within the factory campus, there is
residential colony having 50 quarters for workers. These quarters are given to workers for residential
purposes. A nominal rent of Rs. 100 is charged per month from employees. As the purpose of letting out is
to run the business smoothly, the residential quarters wi l be treated as house property used by the
assesse for the purpose its business.
Nothing is taxable under section 22.
▶Y ltd. makes available few rooms in its factory on nominal rent to Government for locating a branch of
nationalized bank, post office and central excise office for carrying on its business efficiently and
smoothly. Nothing is taxable under section 22.
ASSESSEE SHOULD BE
OWNER OF PROPERTY
• Income is chargeble to tax under the head “Income
from House Property” only if the assessee is owner (or
deemed as owner) of house property.
• The owner may be individual, firm, company, co-
operative society, Association of Persons, etc.
DEEMED OWNER [Section
27 ]
▶ Bes ide the legal owner, Section 27 provides that the following persons are treated as
deemed
owner.
1. Transfer to a Spouse:
If an individual tranfered any house property to his/her spouse otherwise than for
adequate consideration, then the transferor is deemed as owner of property.
Exception: where a property is transferred to a spouse in connection with an agreement to live apart.
2. Transfer to a minor child:
If an individual tranfered any house property to his/her minor child otherwise than for adequate
consideration, then the transferor is deemed as owner of property.
Exception: where a property is transferred to a minor married daughter
DEEMED OWNER [Section
2 7 ]
3
of an.Himpartible
ol derestate
of an shall
impartible estate
be deemed (i.e.
to be the property
individualwhich
owneris
ofnot legally divisible):
all properties comprised The
in holder
the estate.
4. If property is allotted by group coperative housing society to its members under the housing
building scheme of the society. Similarly for AOP/Company. Then, those members shall be deemed owners for
the building or part thereof allotted to them.
5. If a person has aquired a property under “power of attorney transaction” by
satisfying the
condition of Sec 53A of Transfer of property Act.
((i)There is an agreement in writing between purchaser and the se ler.
ii) The purchaser has paid the consideration or he is ready to pay the consideration.
ii) The purchaser has taken the possession of the property.)
The buyer is deemed to be the owner of the house property although it is not registered his name.
DEEMED OWNER [Section
2 7 ]
6 .I f a person takes a property on lease for 12 years or more
Exception: where any right by way of lease is acquired from month to month basis or for a period
not exceeding one year.
HOUSE PROPERTY [Sec: 23]
LET OUT USED FOR
TO TENANT OCCUPIED USED BY THE
OWN
FOR OWN ASSESSEE AS
[May be used as BUSINESS OR
RESIDENCE STOCK – IN -
Residence or PROFESSION
TRADE
Business ]
COMES AND ASSESSED COMES AND ASSESSED
UNDER THE HEAD UNDER THE HEAD
“INCOME FROM HOUSE “PROFITS AND GAINS OF
PROERTY” BUSINESS OR
PROFESSION”
Applicability of section 22 in certain
typical cases:
▶ Composite Rent- Apart from recovering rent of the building, in some cases, the owner gets rent of other
assets or he charges for different services provided (like lift, security, etc) in the building. The amount so
recovered is known as “composite rent”. The tax treatment for the same is as follows:
o > Composite Rent is to be Split Up: Where composite rent includes rent of building and charges for
different services( like lift, air conditioning, etc). Rent of property to be
included in income from HP and Other rent to be a part of ‘Income from Other Sources’
or ‘PGBP’.
o > When composite rent is rent of letting out of building and letting out of other assets (machinery,
plant or furniture) and the two lettings are not separable. Such income is taxable as either
Business income or Income from Other Sources.
o > Where composite rent is rent of letting out of building andletting out of other assets (machinery, plant
or furniture) and the two lettings are separable. Rent of property to be included in income from HP
and Other rent to be a part of ‘Income from Other Sources’ or ‘PGBP’.
Applicability of section 22 in certain
typical cases:
▶ House property in a foreign country- A resident assesse is taxable under section 22 in respect of
a property situated in a foreign country.
▶ When house property is owned by co-owners[Section 26]- If respective shares of co-owners are definite
and ascertainable, the share of each such person shall be included in his total income. It may be noted that
co-owners are not taxable as an AOP.
When income from house property is not
charged to tax
▶ Farm house
▶ Property held for charitable purposes
▶ House property used for own business or profession
▶ House property of registered trade union/local authority
▶ Palace of ex-ruler- any one palace in occupation of an ex- ruler
WHAT IS THE BASIS
OF COMPUTING
INCOME FROM A
LET OUT HOUSE
PROPERTY
DIFFERENT VALUATION OF A PROPERTY :
1. MUNICIPAL VALUE : Valuation of a property made by the
local municipality.
2. FAIR RENTAL VALUE : Valuation of a property made on the
basis of the valuation of a same type of property (size,
specification etc.) in the same locality.
3. STANDARD RENT : It is the valuation of a property made on
the basis of the rent determined by the Rent Control Act of
the concerned State.
4. ACTUAL RENT RECEIVED / RECEIVABLE : It is the valuation of
a property made on the basis of the rent received /
receivable from the tenant.
Income from a Let Out House Property is
determined as under :
Rs.
Gross annual value XX
Less : Municipal taxes XXX
Net annual value XX X
Less : Deduction XXX
under section 24 XXX
- XXX
Standard
deduction
-
Interest on borrowed
capital Income from house
property
Gross Annual
Value
▶ Step 1: Find out Reasonable Expected Rent
a. Municipal Valuation of the Property
b. Fair Rent of the Property
Higher of (a) or (b) is generally taken as expected rent.
❖ Standard Rent: It is the maximum rent which a person can legally
recover from his tenant under a Rent Control Act. A landlordcannot
legally recover from his tenant more than standard rent, if a property is
covered by a Rent Control Act.
a) Municipal Valuation of the Property
b) Fair Rent of the Property
c) Higher of (a) or (b)
d) Standard Rent
e) Lower of (c) or (d)
StepI: Find Out Rent Actually Received or
Receivable
Rent of the P.Y. for which the property is XXX
availablefor letting out
Less: Loss due to vacancy XXX
Less: Unrealized rent if a few XXX
conditions are satisfied
Actual Rent Received/Receivable XXX
DETERMINETION OF GROSS ANNUAL VALUE OF A
PROPERTY :
STEP 1 :
Determine ‘’Reasonable Expected Rent’’ U/S :
23(1)(a) :
How To ?
Take The Highest Between :
1. MUNICIPAL VALUE
2. FAIR RENT
But Subject To Max. of (i.e. it should not Standard
Rent
exceed) -
RESULT FIGURE IS THE ‘’REASONABLE EXPECTED
RENT’’ U/S 23(1)(a)
STEP 2 :
DETERMINE ‘GROSS ANNUAL VALUE’’
HOW TO ?
CONDITION 1 :
a. When there is no unrealised rent and vacancy period and the
Property is actually let out:
GROSS ANNUAL VALUE IS THE HIGHEST ONE BETWEEN :
1. REASONABLE EXPECTED RENT
2. ACTUAL RENT RECEIVED / RECEIVABLE
b. Property is actually let out + vacancy period + but actual rent
received / receivable is more than RER : sec 23(1)(b)
Gross annual value =rent received / receivable
CONDITION 2 : Property is actually let out + actual rent received /
receivable is less than RER because of vacancy: sec 23(1)(c)
Explanation:
1. [(Annual Rent – Rent pertaining to vacancy) <
Reasonable Expected Rent]
2. [(Annual Rent – Unrealised Rent) > Reasonable Expected
Rent]
BUT
[(Annual Rent – Unrealised Rent - Rent pertaining to vacancy)
< Reasonable Expected Rent]
GAV = Actual Rent Received / Receivable
Note
s
1. If the tenant has undertaken to bear the cost of repairs, the amount spent by
the tenant cannot be added to rent received or receivable.
2. A non-refundable deposit wi l be included in rent received or
receivable on pro rata basis.
3. A refundable deposit cannot be included in rent received or receivable.
4. Advance rent cannot be rent received/receivable of the year of receipt.
5. Commission paid by the owner of a property to a broker is not
deductible from rental income.
6. Maintenance charges are not included.
NOT
E
▪ [SECTION 23(5)]
▪ Where the HP is held as stock-in-trade and it is not let during the whole or any
part of the P.Y., the annual value of such property (or part thereof) shall be taken as
NIL.
▪ This concession is available only for a period up to 2 years from the end of the
F.Y. in which the Certificate of Completion of Construction of the Property is
obtained from the Competent Authority.
Municipal Taxes (or taxes levied
by any local authority
▶ These are deductible from GAV only if,
▶ These taxes are borne by the owner.
and
▶ Actually paid by the owner during the P.Y.
NOTES:
▶ In other words, Municipal taxes due but not paid (i.e. outstanding) shall not be
allowed as deduction.
▶ Municipal taxes paid during the P.Y. are allowable as deduction even if they relate to
past years or future years.
▶ Even when the property is located outside India, taxes levied by local authority in that
country are deductible while calculating annual value of the property.
Deduction u/s
24
▶ Standard Deduction: 30% of Net Annual Value is
deductible
irrespective of any expenditure incurred by the taxpayer.
▶ Interest on borrowed capital is allowable as deduction, if capital is
borrowed for the purpose of purchase, construction, repair, renewal
or reconstruction of the property.
C
Interest on Borrowed ▶
a p ita l
It
is d e d uc tible on Accrual Basis.
▶ It is claimed on yearly basis, even if interest is not actually paid during the
year.
▶ It is available even if neither the principal nor the interest is a charge on
property.
▶ Interest on unpaid interest is not deductible.
▶ No Deduction for brokerage or commission.
▶ Interest on a fresh loan, taken to repay the original loan raised for the
aforesaid purposes, is a lowable as deduction.
▶ In case of Let out property, there is no maximum ceiling of
deduction.
Interest on Pre-Construction
Period
▶ Pre-Construction Period: The period commencing on the date of borrowing and ending on:
a)March 31 immediately prior to the date of completion of construction/date of
acquisition.
or
b) Date of repayment of Loan
whichever is earlier
▶ It is available in Five Equal Instalments in five successive financial years starting
from
the year in which acquisition/construction was completed.
House Property which is part of the year let and
part of the year occupied for own residence
▶ In this case, period of occupation of property for own residence shall be irrelevant and
annual value of such HP shall be determined as if it is let for part of the year.
▶ Therefore, expected rent shall be taken for full year but actual rent received or receivable
shall be taken only for the period let.
▶ Other provisions will remain same.
SELF-OCCUPIED
PROPERTY
1.A House Property is fu ly utilized
throughout the P.Y. for Self-Residential
Purposes
Rs
Net annual value .
Less : Deduction under section 24 Nil
- Ni
Standard deduction
l
-
Interest on borrowed capital [Note 1] XXX
Income from house property
-XXX
Note 1: Interest on Borrowed Capital
on Self-Occupied Property
If the following conditions are satisfied, interest on Borrowed Capital is
deductible upto Rs. 2,00,000.
Capital is borrowed
1) on or after April 1, 1999 for acquiring or
constructing a property.
2) Acquisition or construction should be completed
within 5 years from the end of financial
year in which the capital was borrowed.
3)
There is an interest certificate available for the interest payable on the loan.
Maximum Amount deductible is Rs. 30,000 in the following two
c➢as e s :
I f C apital is borrowed for any other purpose (eg. Reconstruction, repairs or
renewals of a HP.
□ If one or more of the above conditions are not satisfied.
2. A HP which is not actually occupied by
othwener owing to Employment carried or
Business/Profession on at any other
, Place.
a) The taxpayer owns one or two HP, which cannot actually occupied by the owner
owing to Employment or Business/Profession, carried on at any other Place.
b) He has to reside at any other place in a building not owned by him.
c) The property/properties are not let out during whole or any part of the P.Y.
d) No other benefit is derived from the above property/ properties by the owner.
If above conditions are satisfied, income from HP shall be determined according to SOP
Case 1.
3. When a part of property is SO and a part is
LO
Computed separately for each unit
1) Unit self- occupied for residential purposes throughout the previous year:
SOP Case 1.
2) A house property, which is not occupied owing to business/ profession carried
on at any other place: SOP Case 2.
3) Let Out units: LO Units Treatments
NOTES:
▶ Municipal value or fair rent if not given separately, shall be apportioned
between let out portion and self-occupied portion on built up area basis.
▶ Municipal tax and interest shall also be apportioned on the built up/floor
area space.
4. When a House is SO for apart of the Year
and LO for remaining part of the
▶ In co me wi l be calculated as the property is
Ye a r
LO.
Interest whennot deductible from “Income from
house Property” [Section 25]
▶ Any interest chargeable under this Act which is payable outside India shall not
be deducted if -
(a) tax has not been paid or deducted from such interest, and
(b) there is no person in India who may be treated as an agent under section
163.
Property owned by Co-owners
[Section 26]
Self-Occupied Property Let-Out Property
▶ The annual value of the property of each ▶ The income from such house Property shall be
co- owner will be Nil and each co-owner computed as if the property is owned by one
shall be entitled to deduction of ₹ 30,000 owner and thereafter the income so computed
shall be apportioned amongst each co-owner as
or ₹ 2,00,000, as the case may be, on account
per their specific share.
of interest on borrowed capital.
▶ However, if the co-owner owns another self-
occupied property, the aggregate interest
from the co-owned property and the other
self-occupied property cannot exceed ₹
30,000 or ₹ 2,00,000, as the case may be.
Can NAV benegative ?
▶ Yes, when municipal taxes paid by the owner
are more than GAV
Can there be loss under the head
House Property income?
▶ In case of Self-occupied house property, NAV is taken as Nil. Only
deduction of interest on borrowed capital is available.
Therefore, there may be loss upto maximum of
₹ 30,000 or ₹ 2,00,000, as the case may be.
▶ In other cases, loss can be there because of munic ipal taxes as
well as deductions.
▶ Deductions u/s 24 can be more than NAV.
PROBLEM 1
CIT v. H.L. Gulati
" Whether, on the facts and in the circumstances of the case, the
Tribunal was correct in holding that the provisions of Section 23(2)
of the Income-tax Act were applicable while applying the provisions
of Section 64(iii) and that if the wife of the assessee had no other
source of income then nothing could be added under Section 64(iii)
of the Income-tax Act, 1961, in the hands of the
assessee ? "
Estate of Ambalal Sarabhai v. CIT
(1) "Whether, on the facts and in the circumstances of the case, the Tribunal is right in
law in holding that the action of the ITO of assessing the applicant as "owner" in
respect of income from house property in question was justified when the applicant
as the executors were holding the property in question merely as trustees for and on
behalf of the beneficiaries and, therefore, the property income was rightly assessed in
the original assessment in the hands of Smt. Saraladevi Sarabhai, the beneficial
owner ?"
(2) "Whether, on the facts and in the circumstances of the case, the Tribunal is right in
law in holding that applicant was not entitled to deduction under
s. 23(2) of self-occupancy allowance when Tribunal itself having held that the
applicant was liable to be assessed in respect of income from house property in
question as the owner ?"
S. Kartar Singh v. CIT
"Whether, on the facts and in the circumstances of the case, the assessed was liable to pay
tax under the head 'income from property' under Section 9 of the Indian Income-tax Act,
1922, in respect of the bona fide annual value of the property known as No. 1/21, Asaf Ali
Road, New Delhi ?“
ITO v. Dr. K.K Bhatnagar
(i) The land and the building constructed thereon should be an indivisible unit and it should be enjoyed by the
persons occupying the building.
(ii) The Assessing Officer can make enquiry to find out whether any portion of the land connected with the building can
be put to an independent use without causing any detriment to the enjoyment of the building.
(iii) Whether any portion of the land connected with the building was being used independently for
any other purposes other than enjoyment of the building. If it is so, it will not be land appurtenant to the building.
(iv) Whether land connected with the building is yielding any income not assessable under the head 'Income from
house property'. It is so, it will not be land appurtenant to the building.
(v) Any other material to show that land is put to use other than enjoyment of the building.
(vi) A land would be called land appurtenant to the building if it is indivisible part and parcel of the building for its use
and enjoyment by the occupiers and the land is not put to any other use and is not yielding any income assessable
under the head other than 'Income from house property'.
(vii) Deduction under section 54 can be claimed even in a case where building is self-occupied by the owners and
income under the head 'House property' from such building is declared at nil on account of self-occupation.
(viii) Even where land appurtenant to the building is sold in piecemeal, it does not cease to be land
appurtenant to the building because condition of appurtenance has to be viewed as prior to the sale and use by the
occupiers of the building and not at the time of sale or after the sale.
ITO v. Dr. K.K Bhatnagar
The respondents owneda brick kiln which they leased out to the
appellants in 1950. They filed a suit against the appellants
claiming rent for the period October 1, 1952 to September 30 1953. The
appellants contended in defence that as a result of the operation of theU.P.
Zamindari Abolition and Land Reforms Act theLand in question
stood vested in the State of U.P. with effect from July 1, 1952 and no rent was
payable to the respondents thereafter.
Held: In the absence of a definition in the Act itself the question as to
what is a 'building' under s. 9 must alwaysbe question of degree a
question depending on the facts and circumstances of each
case. The brick kiln in the present case was a mere pit with some
bricks by its sides. It could not be said to be a 'building' within the meaning of S. 9
of the Act and the High Court therefore went wrong in holdingthat the land
did not vest in the State.
