CA-Final (Income Tax)

Chapter
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 Computation of Income Special Provisions Deemed Owner Sec. 27 Sec. 23 to 25 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 1

CA-Final (Income Tax) 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.) 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. 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) Partners 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 2

(2)

(3)

CA-Final (Income Tax) 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.)] 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 (firms) 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.)

(d)

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); 3

CA-Final (Income Tax) 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 APPURTENANT THERETO TYPES OF BUILDINGS AND LANDS

Sr. No. 1.

Types of Buildings and Lands 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 Buildings does not include Incomplete units; Buildings, which are in a dilapidated condition

Chargeability 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.

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 4

CA-Final (Income Tax) structure of the building is destroyed due to earthquake. Lawns, Gardens, parking places, etc. Chargeable as land appurtenant to attached to the buildings. the buildings. Buildings situated in foreign The income from such property shall country. 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.

3. 4.

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 R w section 64 (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. 5

CA-Final (Income Tax) 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 doesnt 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 doesnt 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 6

CA-Final (Income Tax) 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. Since the lease is to be renewed after six months, i.e. for a period not exceeding one year, therefore, lease doesnt 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.

(f)

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 Either nil or loss subject to a maximum of Rs.30,000 unoccupied property 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. 7

CA-Final (Income Tax)

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) XXX Less : Property taxes paid to local authority XXX Net Annual Value (NAV) XXX Less : Deductions u/s 24 (a) 30% of the net annual value XXX (b) Interest on capital borrowed (loans) 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 8

CA-Final (Income Tax) (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

Gross Annual Value Less : Municipal Taxes paid Net Annual Value Less : Deduction u/s 24(a) 30% of net annual value Income from House Property

Amount Rs. 72,000 7,200 64,800 19,440 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. 9

CA-Final (Income Tax) (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 Restricted to Amount Deductible PART A - SELF OCCUPIED PROPERTY Property acquired before 1-04-99 1. interest paid for ACQUISITION or CONSTRUCTION 30,000 interest paid for REPAIR or 30,000 RENEWAL 30,000 1/5 of PRE-CONSTRUCTION period interest Total deduction restricted to Rs.30,000 Property acquired after 1-04-99 2. interest paid for ACQUISITION or CONSTRUCTION 1,50,000 interest paid for REPAIR or 30,000 RENEWAL 1,50,000 1/5 of PRE-CONSTRUCTION period interest 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

10

CA-Final (Income Tax) 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 Amount Rs. Rs. Gross Annual Value 72,000 Less : Municipal taxes paid 7,500 Net Annual Value 64,500 Less : Deduction u/s 24 (i) 30% of Net Annual Value 29,350 43,350 (ii) Interest on Loan 24,000 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) Nil Less : Deduction u/s 24(b) Interest on Loan Borrowed 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 self11

CA-Final (Income Tax) 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 selfoccupation, 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. 12

CA-Final (Income Tax) 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 selfoccupied. 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 selfoccupied 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 selfoccupied 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 13

CA-Final (Income Tax) 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 14

CA-Final (Income Tax) Less : Unrealised rent for which no deduction was allowed Deduction claimed (Rs.25,000) less deduction allowed (Rs.20,000) Taxable amount recovered 5,000 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).

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