Project Report on Taxation Law

INCOME FROM
HOUSE PROPERTY

SUBMITTED TO:

SUBIMTTED BY:

Mrs.Supreet Gill Sidhu

SHUBHAM GOYAL
153/11
9thSemester
Section C

Project Report on Taxation Law

ACKNOWLEDGMENT
I owe a great many thanks to a great many people who helped and supported me during the
writing of this project.
My deepest thanks to our teacher Ms.Supreet Gill Sidhu, for guiding me and correcting
various documents of mine with attention and care.She has taken pain to go through the
project and make necessary corrections as and when needed.
I would also thank my Institution and my faculty members without whom this project would
have been a distant reality. I also extend my heartfelt thanks to my family and well-wishers.

Project Report on Taxation Law

TABLE OF CONTENTS
Introduction
1. Chargeability
1.1. Essentials of Section 22
1.2. Deemed Owner
2. Determination of house property
2.1. Gross Annual Value of House Property
3.1.1.Computation of income from a let out house property
3.1.2 Computation of income from self-occupied property
3. Deductions (Section 24)
3.1. For Let out House Property
3.2. For Self occupied House Property
4. Rent
4.1. Arrears of rent received subsequently
4.2. Arrears of rent received in current previous year
5. House property jointly owned by two or more persons
5.1. Ascertained share
5.2. Unascertained share
6. Recovery of Unrealized Rent [Section 25AA]
7. Receipt of Arrears of Rent [Section 25B]
8. Bibliography

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1.

Introduction

Section 4 of the Income tax Act 1961 (Act hereinafter) provides for charge of income tax.
However, this section by itself does not create any liability. It has been observed by the
Supreme Court in CIT Vs. K. Srinivasan 1 that although section 4 is the charging section, yet
income tax can be charged only when the central Act, which normally is the Finance Act,
enacts that income tax shall be charged for any assessment year at the rate or rates specified
therein.
Every money receipt by a person is not chargeable to tax. Section 14 of the Act specifies
five heads of income on which tax can be imposed under the Income tax Act. In order to be
chargeable, an income has to be brought under one of these five heads. The heads are (i)
salaries (ii) Income from House property (iii) profits and gains of business or profession (iv)
capital gains and (v) income from other sources. In the discussion to follow, the relevant
provisions of the Act relating to Income from House Property would be considered and
how the computation of income from this source is to be made, namely, how the income is
to be worked out and what are the deductions to be given for computing the taxable income
shall be explained. Sections 22 to 27 of the Act deal with the subject of taxation of income
from house property.

Property-the common view

In common parlance, property is understood in wide sense.
It is not only the thing which is the subject matter of ownership but is taken to mean 'dominon' or
right of ownership or even partial ownership. Lord Longdale in John v. Skinner (1836) 5Lg 67-90
(Ch) has described it as the most comprehensive of all the terms which can be used in as much
as it is indicative and descriptive of every possible interest which a person can have. However,
for purposes of taxation under sections 22 to 27 of the Act, such wider definition of property is not
relevant. The income to be taxable should be "Income from House Property".

1 (1972) 83 ITR 346-351

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1.1. CHARGEABILITY (Section 22 of the

IT Act 1961)
Section 22 provides for taxation of 'annual value' of a property consisting of any buildings or
lands appurtenant hereto, of which the assessee is owner, under the head "income from
House Property". Tax imposed under section 22 is a tax on 'annual value' of house property and
is not a tax
flats, etc. as long as they are not used for business or profession by owner. And the purpose for
which the building is used by the tenant is also immaterial. Thus, income from letting out godowns
will be taken as income from house property. It does not make any difference at all if the
property is owned by a limited company or a firm.

CONDITIONS NECESSARY FOR TAXING INCOME FROM

HOUSE PROPERTY
The three essential conditions are:

The property should consist of any building or land appurtenant thereto

The assessee should be the owner of the property
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 tax.

Unless all the aforesaid conditions are satisfied, the on "House Property". However, if a
house property is occupied by a taxpayer for the purpose of business or profession carried
on by him (the profits of which are chargeable to income tax), annual value of such property
is not chargeable to tax under the head 'Income from House Property'.

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I.THE PROPERTY SHOULD CONSIST OF ANY BUILDING

OR LAND APPURTENANT THERETO

Building means a structure made up of any material (wood, ,mud stones , bricks or concrete)
and which can be used a s a dwelling house , store house, office , factory music hall dance
hall, theatre, stadium, swimming pool.therefore roof is essential for structure to be regarded
as residential building and
A structure is a building even if it is for temporary purpose. Roof is not an essential for a
structure to be a building as it depends upon the use for which that structure it is to be used. If
it is to be used as a stadium or swimming pool, roof is not required where as in other cases
roof is important.

II.THE ASSESSEE SHOULD BE THE OWNER OF THE

PROPERTY
For the purpose of section 22, the concept hitherto understood even in court decisions has
been that the owner has to be a legal owner. Annual value of 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 instance, if a person makes gift of rental income to a
friend or a relative, without transferring ownership of the property, annual value of property is
taxable in the hands of the donor, even if rental income is received by the donee- S. Kartar
Singh v. CIT2. In other words, for the purpose of section 22, the owner must be that person
who can exercise the rights of the owner, not on that person who can exercise the rights of the
owner, not on behalf of the owner but in his own right-RB. Jodha Mal Kuthiala v. CIT 3
However, there has been some refinement in the concept of ownership after the decision of

2 (1969) 73 ITR 438 (Delhi)

3 [1971] 82 ITR 570 (SC).

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the Surpeme Court in the case of CIT v. Podar Cement(P) Ltd. 4In this case, the Supreme
Court has expressed the view that under common law 'owner' means a person who has gotvalid
title generally conveyed to him after complying with the requirements of law such as the
Transfer of Property Act, Registration Act etc. But in the context of Section 22 of the Income
tax Act, having regard to the ground realities and further having regard to the object of the
Income tax Act, namely, "to tax the income'', 'owner' is a person who is entitled to receive
income from the property in his own right. The requirement of registration of the sale deed in
the context of section 22 is not warranted. In view of this, where a property is handed over
to a purchaser to enjoy fruits of that property by the builder, the purchaser is to be treated as
'owner' of that property even though no registered document has been executed in his favour.
Ownership is relevant for the previous year
As tax is levied only on the income of previous year,
annual value of property, owned by a person during the previous year, is taxable in the
following assessment year, even if the assessee is not owner of the property during the
assessment year.

DEEMED OWNERSHIP

In the following situations the ownership shall be deemed for taxing income from house
property in view of section 27 of the Act:
(1) Transfer of house property to Spouse or minor child [Section 27(1)]: if an individual
transfers the house property to his spouse or minor child without adequate consideration then
that individual (transferor) is deemed owner of that house property i.e., Mr. A transfers house
property worth Rs. 50,00,000 to Mrs. A without consideration then Mr. A would be deemed
owner of the house property.
Exceptions
(a) In following cases if property is transferred to spouse then that individual(transferor) is
not deemed owner of that house property:

4 (1997) 92 Taxman 541 (SC)/226 ITR 625 (SC).

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Where property is transferred under an agreement to live apart;

Where adequate (sufficient) consideration is given by the spouse (transferee).
(b) In following cases if property is transferred to the minor child then that individual
(transferor) is not deemed owner of that house property.
Where property is transferred to a married minor daughter;
Where adequate (sufficient) consideration is givenby the minor child.
If inadequate consideration is given by the transferee then transferor will be deemed owner of
proportionate share i.e., Mr. A transfers house property worth Rs. 50 Lac to Mrs. A and she
transfers jewellery/shares worth Rs.25 Lac then Mr. A would be deemed owner of the 50%
share of the house property.
(2) A holder of impartible estate (Section 27(ii)):The Holder of impartible estate is deemed
owner of all the property in the estate. An impartible estate is a property which cannot be
divided and to which an assessee succeeds under law e.g..since a temple cannot be divided so
any family member succeed to it under law is deemed owner of that temple.
(3) A member of a company/co-operative society/A0Ps under House Building Scheme
(Section 27(iii)): A- member of a company/co-operative society/AOPs to whom a or a part
thereof is allotted or given on lease under House Building Scheme of that company/cooperative society/AOPs is deemed owner of that house property.
(4) A person acquiring property under section 53A of the Transfer of Property Act (Section
27(iv)): A person who acquires actual physical possession of an immovable property under
section 53A of the Transfer of Property Act, 1882, is deemed owner of that property even if it
is not registered in his name. However, following conditions should be fulfilled under section
53A of the Transfer of Property Act, 1882:
(i) There should be a written agreement for the transfer of an immovable property between
buyer and seller.
(ii) The buyer should have paid a part of the consideration and should be ready to pay
remaining consideration. Here important fact is that the purchaser is ready to make payment
whenever the payment becomes due.

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5

(iii) The buyer should acquire actual physical possession of the property. It is enough if

transferee has, by virtue of that transaction, a right to enter upon and exercise acts of
possession effectively. 6
(5) A Person having rights In a building under section 269UA(f) of the Income-tax Act
(Section 27(v)): If a person acquires a right in a building under section 269UA(f) of the
Income-tax Act, 1961 then he is deemed owner of that house property. Section 269UA(f)
talks about lease for 12 years where the period of 12 years may be fixed initially or after the
extension.
Exceptions: In the following exceptional cases, Lessee would not be deemed owner of the
house property:
(i)
(ii)

If original lease period is less than one year.

If original lease is from month to month.

Examples
(1) Mr. A, owner of a house property, gives that house property on lease to Mr. B for 20
years at lease rent of Rs20,000 per month. Mr. B becomes deemed owner of the house
property.
(2) Mr. A, owner of a house property, gives that house property on lease to Mr. B for a
period of 6 years at lease rent of Rs20,000 per month. Mr. B has a right to renew the lease
for further period of 6 years after the expiry of lease. As aggregate period of lease is more
than 12 years therefore, Mr. B becomes deemed owner of the house property.
(3) Mr. A, owner of a house property, gives that house property on lease to Mr. B for a
period of 11 months at lease rent of Rs20,000 per month. Mr. B has a right to renew the
lease for further period of 50 years after the expiry of 11 months. Though aggregate
period of lease is more than 12 years but original lease period is less than 12 months
therefore, Mr. B is not deemed owner of the house property.

5 [Sushma Rani Bonsai v CIT (2007) 165 Taxman 145 (Del) (Mag.)].
6 [Authority for Advance Rulings v Jasbir Singh Sarkaria, In Re (2007) 164
Taxman 108 (AAR-New Delhi)].

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(4)Mr. A, owner of a house property, gives that house property on lease to Mr.B for a
period of one month at lease rent of Rs.20,000 per month. Mr.B has a right to renew the
lease but every time it would be renewed for a period of one month for further period of
50 years. Though aggregate period of lease is more than 12 years but original lease is on
month to month therefore, Mr.B is not deemed owner of the house property.
Important points:
Income from subletting is not taxable under this Head of income as assessee
(receiver of rent) is not owner of the house property and it is taxable as either
profit or gain of business and profession or as 'income'.
If ownership is in dispute in the court of law then :
(a) Any person, who receives rent of the house property as owner, in case property
is let out, would be assessee for tax under section 22.
(b) Any person, who enjoys the possession of the house property as owner, in case
property is not let out, would be assessee for tax under section 22.
However, once matter is decided by the court then person declared by the court as owner
would be assessee for tax under section 22.

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III. IT SHOULD NOT BE USED BY THE ASSESSEE FOR

HIS OWN BUSINESS OR PROFESSION
For a house property to be taxable under this Head of income it should not be used by the
assessee for his own business or profession such as office, godown, factory, music hall, dance
hall, lecture hall, theatre, stadium or swimming pool. Therefore, if it is used by assessee for
himself then it should be used for residential purpose and if it is let out then it can be used by
the tenant for residential purpose or for business or profession i.e., commercial purpose
(office, godown, factory, music hall, dance once hall, lecture hall, theatre, stadium or
swimming pool).
Where residential quarters situated in the factory campus were given to employees by the
assessee at nominal rent of Rs.100/month, the purpose of letting of the residential quarters is
to run the business efficiently and smoothly. Therefore the residential quarters will be treated
as house property used by the assessee for his business. Hence, annual value will not be
chargeable to tax under this head of income (under Section 22) and rent of Rs.100/month
from workers is business income.7
Further, where a few rooms in the factory were let out by the company to Government at
nominal rent for locating a branch of' nationalized bank, post office, police station, central
excise office and railway station quarters for carrying on its business efficiently andsmoothly.
It was held that as letting of was incidental to business of the company therefore, annual
value will not be chargeable to tax under this head of income (under section 22) and rent is
business income of the company8
Important Points:
Income from house property is not taxable under this head of income (under
section22):Income from house property is not taxable under this head of income in
the following cases:

7 [CIT v Delhi Cloth and General Mills Ltd (1966)591TR 152 (P&H)].
8 [CIT v National Newsprint and Paper Mills (1978)114 ITR 388 (MP)].

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(a) If it is used by the assessee for his own business or profession i.e., commercial purpose
(office, godown, factory, music hall, dance hall, lecture hall. theatre, stadium or swimming
pool).
(b) If it is let out by the assessee and letting of is incidental to business so that assessee could
run its business efficiently and smoothly.
Composite rent: Sometimes owner charges rent from tenant not only for the house
property but also as service charges/hire charges for various facilities/ plants,
machinery, etc. provided with the house. Such total rent is known as composite rent. It
can be of two types:
(a) Composite rent which include rent for house property and service charges for
various facilities provided along with the house such as lift, gas, etc.: Where rent is
received by the assessee as rent for house property and also as service charges for
various facilities provided along with the house such as gas, lift, water, electricity and
ward, air conditioning, etc. then composite rent shall be split up and part of the rent
attributable to house property shall be income under this head of income and
remaining part of composite rent received for rendering services shall be assessable as
income from other sources.
(b) Composite rent which Includes rent for house property and hire charges of
plant, etc.: Where rent is received by the assessee as rent for house property and also
as hire charges for plant, furniture and machinery belonging to owner then composite
rent may or may not be separable.
(i) Where it is separable: Where letting of property is separable from letting of other
assets like plant, machinery and furniture and rent from house property is separable
from the hire charges for machinery, plant or furniture then rent for house shall be
taxable under this head and remaining composite rent (i.e. hire charges) for plant,
machinery and furniture would be taxable either under head "Profit and Gains of
Business or Profession" or "Income from Other Sources".
(ii) Where it is not separable: Where letting of property is inseparable from letting of
other assets like plant, machinery and furniture and rent from house property is not
separable from the hire charges for machinery, plant or furniture then whole
composite rent shall be taxable either under head "Profit and Gains of Business or
Profession" or "Income from Other Sources" and not under the head of "house
property".

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Income from house property in foreign country: Where assessee is resident or

resident and ordinarily resident in India and he has property in foreign country then
income from such house property from foreign country would be taxable in i the
hands of assessee. It is immaterial whether such income is brought into India or not.
However, if assessee is not resident in India or resident but not ordinarily resident in
India then income from house property situated in foreign country will be taxable in
India only where it is received in India during the previous year.
Income from house property is not taxable under this head of Income: In following
cases income from house property is not chargeable to tax:

(a) Farm House: Income from any building owned or occupied by an agriculturist or
receiver of rent or revenue of such land provided that(i)such building is situated in the agricultural land or the immediate vicinity of agriculture
land; and
(ii)is used as a dwelling house or a store house or other out-house.
(b) Property used by assessee for his own business or profession:Where house property is
used by assessee for his own business or profession then property shall be chargeable to tax
under head "Profits or Gains from Business or Profession" and not tinder this head of income.
(c) Self-occupied house property: Where house property is used by assessee for his own
residential purposes then annual value shall be nil.
(d) Property for charitable purposes: Where property is used for charitable religious
purposes then income from such property is exempted under section 11.
(e) Property of Registered Trade Union or Local authority: Where property is held by
registered trade union or local authority then income from such property is not taxable.
(f) House Property (Palace) of ex-ruler: Where house property is owned by an ex-ruler then
annual value of that house property is not taxable.

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2. DETERMINATION OF INCOME FROM

HOUSE PROPERTY
The determination of 'Annual Value' is important in the context of taxation of income from
House Property because though the tax under the head 'Income from house property' is tax on
income, yet it is not in that sense a tax on income but upon inherent capacity of such property
to yield income and for this 'annual value' is the yardstick. The inherent capacity has been
defined as the sum for which the property might reasonably be expected to be let from year
to-year. It is not necessary, that the property should be actually let. It is also not necessary
that the reasonable return from property should be equal to the actual rent realized when the
property is, in fact, let out. Where the actual rent received is more than the reasonable return,
it has been specifically provided that the actual rent will be the annual value. Where,
however, the actual rent is less than the reasonable rent (e.g. in case where the tenancy is
affected by manipulation, emergency, close relationship or such other consideration), the
latter will be annual value. The municipal value of the property, the cost of construction, the
standard rent if any under the Rent Control Act, the rent of similar properties in the same
locality are relevant factors for the determination of the annual value. However, if a property
is let and was vacant during any part or whole of the year and due to such vacancy, the rent
received is less than the notional rent, such lesser amount shall be the Annual Value. For
example, in case of a house, whose municipal valuation is Rs. 24,000/- and actual rent
received is Rs. 36,000/- the annual lettable value will be taken at Rs.36,000/-. If the actual rent
received is Rs. 18,000/- and municipal valuation is Rs.24,000/-, the annual value would be
Rs. 24,000/- for the purpose of the Income-tax Act. Here
if the property was vacant for six months and the rent received is Rs. 18,000/- for six months
the Annual Value shall be Rs. 18,000/-.
Where the property is subject to Rent Control Act, its annual value under section 23(1)
cannot exceed the standard rent (fixed or determined) under the Rent Control Act unless it is
actually let out for a higher amount. Such a view has been expressed by the Supreme Court in

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the cases of Dewan Daulat Rai Kapoor v. NDMC9; Amolak Ram Khosla v. CIT 10 (SC) &
Mrs. Shiela Kaushik v. CIT)11. Thus,
Income from house property = Gross Annual Value Deductions
----------------------------------------------------------------------------------------------------------------------2.1.

Gross Annual Value

For computing gross annual value, house property can be divided into two types:
(1) Let Out House Property [LOHP] [Section 23(1)]
(2) Self Occupied Residential House Property [SORHP] [Section 23(2)]

(1) Gross Annual Value of Let Out House Property

[LOHP][Section 23(1)]
In case of let out House Property [LOHP], gross annual value is,
(a) Reasonable expected rent or
(b) Actual rent received or receivable by the assessee,
whichever is higher provided section 23(1)(c) is not applicable.
However, section 23(1)(c) is applicable when Actual rent received or receivable by the
assessee is less than Reasonable expected rent due to vacancy.
(a) Reasonable expected rent is, whichever is higher of the following:
(1) Municipal value
(2) Fair rent
9 (1980) 122 ITR 700 (SC)
10 (1981) 131 ITR 589
11 (1981) 131 ITR 435 (SC

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(1) Municipal value: Municipal value is values as assessed by the local authority for
imposing municipal taxes.
(2) Fair rent: Fair rent is rent of same or similar property situated in same or similar locality.
However, two properties can never be similar in every aspect but if property in neighborhood
is comparable in some aspect to property in question then rent of such property in
neighborhood will be considered to decide Reasonable expected rent.
The Supreme Court of India held that Reasonable expected rent cannot exceed standard rent
if Rent Control Act is applicable in that area. It means the standard rent is the maximum
amount of Reasonable expected rent. 12 Therefore, Reasonable expected rent is:
(1) Municipal value or.
(2) Fair rent
Whichever is higher subject to the maximum of standard rent if Rent Control Act is
applicable.
(b) Actual rent received or receivable by the assessee (R): Actual rent received or receivable
by the assessee does not include unrealized rent (R2) and rent for the vacant period (R3).
Therefore,R= RI -R2-R3.
Where,
RI = Annual rent for the previous year for which property is let out
R2 = unrealized rent
R3= rent for the vacant period.

Annual rent for the previous year for which property

is let out (RI)

12 Sheila Kaushish v CIT (1981) 7 ITR I (SC)

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"Annual rent means: (a) where the property is let throughout the year ending on the
valuation date i.e., the previous year, the actual rent received or receivable by the owner in
respect of such year;
(b) where the property is let for only a part of the previous year, the amount which bears the
same proportion to the amount of actual rent received or receivable by the owner for the
period for which the property is let out as the period of twelve months bears to the number of
months (including part of a month) for which the property is let out during the previous year.
Example 1: If property is let out @ Rs 5,000 pm then annual rent is Rs 60,000.
Example 2: A house property is let out for 6 months @ Rs 1.000 p.m. and for 4 months @ Rs
1,500 p.m. It remains vacant for the balance 2 months. The annual rent would be:
6 1000+4 1500
12=Rs 14,400
10

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Unrealized rent (R2)

Rent, which could not be realized by the owner (assessee) because of some dispute with
tenant, is known as unrealized rent. It is to be reduced from annual rent if conditions laid
down under Rule 4 of Income-tax Rules, 1962 are fulfilled:
(i)
(ii)
(iii)

If tenancy is bona fide.

The tenant is not occupying any other property of the assessee.
All the reasonable steps had been taken by the assessee to get the house property

(iv)

vacated.
All the reasonable steps had been taken by the assessee to institute legal proceedings
for recovery of rent and the Assessing Officer is satisfied that legal proceedings
would be useless.

Rent for the vacant period (R3)

If the property remained vacant for some time during the current previous year the rent of the
vacant period is to be reduced from annual rent. Example 1: If the property is let out for 12
months @ Rs 5,000 pm and the tenant vacated the property after 10 months or property is let
out for 10 months only. Then,
Actual rent received or receivable by the assessee (R) = R I -R2-R3
Annual Rent (R1) = Rs 60,000 (Rs 5,000 x 12)
Unrealised Rent (R2) = Nil as there is no unrealized rent
Rent for vacant period (R3) = 2 10,000 (Rs 5,000 x 2)
Therefore, R = Rs 60,000 Rs 10,000 = Rs 50,000
Example 2: A house property is let out for 6 months @ Rs 1,000 p.m. and for 4 months @
Rs 1,500 p.m. It remains vacant for the balance 2 months.
Actual rent received or receivable by the assessee (R) = RI -R2-R3
The annual rent (R1) =

6 1000+4 1500
12=Rs 14,400
10

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Unrealized Rent (R2) = Nil

Rent for vacant period (R3) = Rs 2400/- i.e. (Rs 1200 x 2 as rent for one month is Rs 1200
i.e. 14,400/12)
Therefore, actual rent received or receivable = Rs 14,400

Rs 2,400/- = Rs 12,000

When Actual rent received or receivable by the assessee is less than Reasonable expected
rent due to vacancy [Section 23(I)(c)]: If following conditions are fulfilled then the Actual
rent received or receivable by the assessee (R) would be Annual value of the house property:
(i)

The property is let out property but whole or any part of the property remained vacant

during the whole or any part of the previous year. It is not compulsory that the property
should be actually let out during the previous year, the intention to let out is important.
Therefore, if the property is held by the assessee for letting out and reasonable efforts are
made to find the tenant and assessee could not succeed in letting out then this condition is
fulfilled.
The words 'property is let' in Section 23(1)(c) do not talk of actual letting out but talk about
intention to let out; if property is held by owner for letting out and efforts are made to let it
out, that property is covered by this clause 13
(ii)Actual rent received or receivable by the assessee is less than Reasonable expected rent.
(iii)This loss in the rent is only due to vacancy and not due to any other factor.
Where loss in rent is partly due to vacancy and partly due to other factors like letting outthe
Property at lower rent or unrealized rent then mode of computation is not provided in the Act
and it is very clear that intention of the legislature is to give relief to the assessee whose
property remained vacant. Therefore, in such situation there are following three possibilities
14

Possibilities
Gross Annual Value of Let Out House Property

13 Premsudha Export (P.)Ltd v CIT (2007) 17 SOT 293 (Mum)

14 CIT v ChandenlalMaganlal (2002) 120 Taxman 38 Guj

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1. When Actual rent received or receivable is less than Reasonable expected rent only
due to vacancy i.e.,
(b) Actual rent receivable by the assessee (R)
<
(a) Reasonable expected rent only due to vacancy
(b)Actual rent received or receivable by the assessee (R)
2. When Actual rent received or receivable is less than Reasonable expected rent partly
due to vacancy and partly due to other factors (letting out the property at lower rent or
unrealized rent) i.e.,
(b) Actual rent receivable by the assessee (R)
<
(a) Reasonable expected rent only due to vacancy and partly due to other factors
(letting out the property at lower rent or unrealized rent)

(a) Reasonable

expected
rent

Loss due to vacancy

3. When Actual rent received or receivable is less than Reasonable expected rent only
due to factors other than vacancy factors (letting out the property at lower rent or
unrealized rent) i.e.,
(b) Actual rent receivable by the assessee (R)
<
(a) Reasonable expected rent only due to factors other than vacancy (letting out the
property at lower rent or unrealized rent)
(a) Reasonable expected rent

II. Gross Annual Value of Self Occupied Residential

House Property [SORHP][Section 23(2)]:
Where
(a) Property is used by assessee throughout the previous year for his (or family member) own
residential purpose;
Or

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(b) Such property could not be occupied by the assessee throughout the previous year for
his (or family member) own residential purpose because either due to employment or
business or profession assessee is residing at some other place and no other benefit is
derived from such property
Then Gross Annual Value would be Nil.
A house for residential purpose does not require a compulsoryresidence; it only requires
that house should be available for residential purpose of the assessee all the time. Where
the assessee has retained exclusive control over possession of a house owned by him,
though he may not be actually present in the house and when he is away from it, he is still
in constructive possession of his residential house and as such he cannot be denied the
benefit under section 23(2)(a). [CIT v Deepak Seth (2005)1 SOT 35 (Del)].
Can a vacant property be treated as Self-occupied House property?
A vacant property shall be treated as Self-occupied House property with Gross Annual
Value Nil if following conditions are fulfilled:
(i)
(ii)

The assessee owns a house property.

The said property could not be occupied by the assessee throughout the previous
year for his (or family member) own residential purpose because either due to
employment or business or profession assessee is residing at some other place in a

(iii)
(iv)

house property not owned by him.

The said property is not let out for whole or part of the previous year.
No other benefit is derived from such property.

Example: Mr. A owns a house in Chandigarh. During previous year 2009-10, he was
working in Delhi and was residing in a rented accommodation there. His house in
Chandigarh remained vacant throughout the previous year 2009-10 and he did not take
any other benefit from that house. As all the conditions laid down under section 23(2)(b)
are fulfilled therefore vacant house in Chandigarh is self-occupied house property.
However, where above conditions are not fulfilled then vacant house shall not be treated
as self-occupied property.
Example: Mr. A owns a house in Chandigarh. He is also working in Chandigarh during
previous year 2012-13. He was residing with his father in Chandigarh. Here condition (ii)

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as mentioned under section 23(2) (b) is not fulfilled therefore the vacant house shall not
be treated as self-occupied house property.
Important points:
Only Individual or HUF can have the benefit of Section 23(2): Section 23(2) can be
applied if assessee is an individual or HUF as any other person like company,
partnership firm, AOPs/BOIs, Local Authority and any other artificial judicial person
cannot occupy the property for his (or family member) own residential purpose.
Where the house property isoccupied for residential purposes not in the capacity of
the owner:If the house property is occupied for residential purposesnot in the capacity
of the owner but as an employee then it will be let out house property and Gross
Annual Value will be determined according to Section 23(1). Where assessee lets out
his own house property to his employer-company which in turn was allotted to
assessee as rent free accommodation (perquisite). Assessee was not entitled for benefit
of Section 23(2) as he occupied the property not in the capacity of the owner but as an
employee therefore, it will be let out house property and Gross Annual Value will be
determined according to Section 23(1)15
If more than one property is occupied by the assessee during previous year: If more
than one property is occupied by the assessee during previous year for residential
purpose then depending upon assessee's discretion one house property will be treated
as self-occupied house property and Gross Annual Value will be determined according
to Section 23(2) i.e., nil. However, remaining will be "Deemed to be Let Out house
property/s" and gross Annual Value will be determined according to Section 23(1) i.e.,
(a) Reasonable expected rent; or
(b) Actual rent received or receivable by the assessee
whichever is higher. However, Section 23(1)(c) will not be applicable. As in such
situation actual rent received/receivable is nil. Therefore,
Gross Annual Value = Reasonable expected rent.
Where property is partly Self Occupied and partly let out [Section 23(3)]: If
the house property consist of two or more independent residential units and
one or more units are occupied by the assessee for own residential purposes
and remaining units are let out then Gross Annual Value of:
(a) the Let out units will be determined according to Section 23(1); and
15 [D. R. Sunder Raj v CIT(1979) 2 Taxman 458 (AP) ].

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(b)

the self-occupied units will be determined according to Section 23(2)

i.e., nil.
Where property is Self-Occupied for the part of the previous year and let out
for remaining Previous year [Section 23(3)]: If the house property is SelfOccupied for a part of the previous year and let out for the remaining previous
year then Gross Annual Value of the property:
(a) For the let out period will be determined according to Section 23(1); and
(b) for the self-occupied period will be determined according to Section 23(2)
i.e., nil.

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4.

Deductions

1. Deductions regarding Let Out House Property [LOHP]

2. Deductions regarding Self-Occupied Residential House Property [SORHP]

1. Deductions regarding Let Out House Property

[LOHP]
From the Gross Annual Value as calculated under section 23(1) give following deductions:
(a)

Municipal taxes levied by local authority and paid

by assessee [Proviso to Section 23]

Municipal taxes levied by local authority in respect of the house property will be deducted if
following conditions are fulfilled:
(i) these taxes arc borne by the assessee; and
(ii) such taxes are actually paid by the assessee.
Important points:
Municipal taxes include service tax also.
No deduction can be claimed on payable basis but only on paid basis.
Therefore, Municipal taxes levied by local authority and not paid by assessee
during previous year are not deductible.
Municipal taxes of past previous years paid by the assessee in current previous
year are deductible.
Where house property is situated outside India and Municipal taxes levied by
local authority of that foreign country and paid by assessee during previous
year then such Municipal taxes are also deductible.

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As municipal tax must be paid by assessee (landlord) therefore, Municipal

taxes levied by local authority and paid by tenant are not deductible.
Net Annual Value (NAV) = GAV - Municipal taxes

(b)

Standard Deduction [Section 24(a)]

30% of Net Annual Value is to be deducted from Net Annual Value as Standard Deduction.
Important points:
Standard deduction is given for expenditure incurred by the assessee in letting out the
house property.
The actual expenditure incurred by the assessee is not important and amount of
standard deduction is fixed i.e. 30% of annual value.

(c) Interest on borrowed capital [Section 24(b)]

Where capital is borrowed by the assessee for the purpose of purchase, reconstruction, repair,
renovation or construction of the house property and he is paying interest on such borrowed
capital then interest paid/payable during current previous year is allowed as deduction.
Important points:
For claiming deduction there should be sufficient connection among borrowed capital,
interest and house property i.e., if borrowed capital is not spent on house property but
somewhere else then no deduction can be claimed under section 24(b).
Deduction is allowed on annual interest even if interest is not paid/payable annually
i.e. interest is paid/payable monthly, quarterly or half-yearly.
Deduction can be claimed on "accrual basis" and not on paid basis. Therefore, where
interest has become due during previousyear but has not been paid by assessee then he
can claim deduction.
Interest is deductible without maximum ceiling. i.e. whatever amount is payable as
interest is allowed as deduction.
Deduction is allowed even if neither principal nor interest is charged on property i.e.,
whether it is unsecured or secured loan and whether any right/interest in the
propertyis given as security.

(d)

Interest of Pre-construction period

[Explanation to Section 24]

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Where capital is borrowed by the assessee for the purpose of purchase or reconstruction of
house property then assessee can claim deduction relating to interest of Pre-construction
period. For this aggregate the interest of Pre-construction period and divide, it into five equal
instalments and first instalment allowed as deduction in the previous year in which house is
acquired or construct is completed. Remaining four instalments will be allowed as deduction
in the four immediately succeeding previous years.
What is Pre-construction Period?
Pre-construction Period means
period commencing on the date of borrowing capital; and
ending on:
(a) March 31 immediately preceding the date of completion of construction/ date of
acquisition
or
(b) date of repayment of loan
Whichever is earlier

Deductions regarding Self occupied House Property

[SORHP]
The Gross Annual Value as calculated under section 23(2) is always nil. From GAV give
following deductions:
Interest on borrowed capital [Sections24(b)]
Where capital is borrowed by the assessee for the purpose of purchase,reconstruction, repair,
renovation or construction of the self-occupied house property andhe is paying interest on
such borrowed capital then maximum amount of deduction regarding interest is Rs 30,000.
However, maximum amount of deduction is Rs 1,50,000 if following conditions are fulfilled:
(i) Capital is borrowed on or after April 1, 1999.
(ii) Capital is borrowed for acquisition and construction of a house property.
(iii)
The acquisition and construction is completed within three years from the end
of financial year in which capital was borrowed.

Project Report on Taxation Law

(iv) The certificate from the creditor must be attached with return of income:
that interest is payable in respect of loan given for acquisition or construction
of house property or repayment of the principal amount outstanding under
earlier loan taken for such acquisition or construction of house property.
There is no condition of date of commencement of acquisition or construction of house
property it may have started before or after April 1, 1999. But capital must be borrowed on or
after April 1, 1999. Therefore, if above conditions are fulfilled maximum deduction regarding
interest would be Rs 1,50,000.
Amendment of section 24 by the Finance (No. 2) Act, 2014 [with effect from the 1st day of
April, 2015]:In section 24 (b), for the words "one lakh fifty thousand rupees". the words "two
lakh rupees" shall be substituted. Therefore, maximum deduction for house loan interest in
case of SOHP will be two lakh rupees instead of one lakh fifty thousand rupees from the said
date.
Interest of Pre-construction period [Explanation to Section 24]
Where capital is borrowed by the assessee for the purpose of purchase or reconstruction of
house property then assessee can claim deduction relating to interest of Pre-construction
period. For this aggregate the interest of Pre-construction period and divide, it into five equal
instalments and first instalment is allowed as deduction in the previous year in which house is
acquired or construction is completed. Remaining four instalments will be allowed as
deduction in the four immediately succeeding assessment years. [same as in case of LOHP].
Example: Mr. A takes loan of Rs 4,00,000 @15% p.a. for construction of house on June 10,
2004 and construction of the house is completed on January 15, 2010. Find the deduction
regarding interest if date of repayment is:
(i) January 16,2015 or
(ii) June 30, 2011 or
(iii)
October 31, 2007.
Solution:
(i) Date of repayment is January 16, 2015.
Therefore, Pre construction period is from June 10, 2004 March 31, 2009.
The interest from June 10, 2004 March 31, 2009 is Rs 2,88,490 the single
annual instalment is Rs 57.700 ( Rs 2,88,490/5)

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Deduction
regarding
Current
years
interest
Preconstruction
Period
interest
Total
deduction

2009-2010

2010-211

2011-2012

2012-2013

2013-2014

2014-2015

Rs 60,000

Rs 60,000

Rs 60,000

Rs 60,000

Rs 60,000

Rs 47,670

Rs 57,700

Rs 57,700

Rs 57,700

Rs 57,700

Rs 57,700

Nil

Rs
1,17,710

Rs
1,17,710

Rs
1,17,710

Rs
1,17,710

Rs
1,17,710

Rs 47,760

Difference in Deductions for LOHP and SOHP

Let Out House Property [LOHP]
(i) Municipal taxes levied by
local authority and paid by
assessee [Proviso to Section
23]
(ii) Standard Deduction Section
24 (a)
(iii)
Interest on borrowed
capital [Sections 24(b)] No
maximum limit
(iv)Interest of Pre-construction
period [Explanation to
Section 24]

5.

Self-Occupied Residential House Property

[SOHP]
(i)
Not allowed

(ii)

Not allowed

(iii)

Interest on borrowed capital

[Sections 24(b)] Maximum limit
is Rs 30,000 or Rs 1,50,000 in
exceptional cases.
Interest of Pre-construction
period [Explanation to Section
24] same as case in LOHP

(iv)

Unrealized realized subsequently

Where unrealized rent is realized subsequently [Sections 25A and 25AA]:

(i)

Where unrealized rent was of the previous year 2000-2001 or of earlier previous
year and was realized in assessment year 2001-2002 or earlier assessment year or

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where unrealized rent was allowed as deduction in assessment year 2001-2002 or

in earlier assessment year [Section 25A]: Where under the earlier law assessee has
claimed deduction regarding unrealised rent in the assessment year 2001-2002 or in
earlier assessment year and assessee has realized any amount in respect of such rent
during any assessment year i.e., 2001-2002 or earlier assessment year i.e. 2000-01
and so on then amount so realized would be "income from house property" of the
previous year in which it is realised.
Important points:
Section 25A is applicable where unrealized rent is of the previous year 20002001 or of earlier previous year.
Assessee will not be eligible for any deduction under section 23 or 24.
The amount recovered would be taxable even if house is not owned by the
(ii)

assessee in the year of recovery.

Where unrealized rent was of the previous year 2001-2002 or of subsequent
previous year and was realized in assessment year 2002-2003 or subsequent
assessment year [Section 25AA]: Where assessee cannot realize the rent of the
previous year 2001-2002 or of subsequent previous year and was realized in
assessment year 2002-2003 or subsequent year then amount so realized would be
"income from house property" of the previous year in which it is realized.
Important points:
Section 25AA is applicable where unrealized rent is of the previous Year
2001-2002 or of subsequent previous year.
The amount so realized should not be included in Gross Annual Value earlier
and should be deducted from Annual rent as unrealized rent (R2).
If the amount so realized is already included in Gross Annual Value earlier
and was not deducted from Annual rent as unrealized rent (R2) because
conditions laid down in Rule 4 of Income-tax Rules, 1962 are not fulfilled
then Section 25AA will not be applicable. And assessee will not be eligible
for any deduction under section 23 or 24.
The amount recovered would be taxable even if house is not owned by the
assessee in the year of recovery.

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6.Arrear of rent received in current

previous year [Section 25B]
Where assessee is or was owner of house property consisting of buildings or lands
appurtenant thereto and receives any amount as arrears of rent in current previous year then
amount so received after giving standard deduction (30% of that amount) shall be "income
from House Property provided it was not charged to tax earlier.
Section 25B would be applicable even if assessee is not owner of the house property in the
current previous year in which rent is received.
Example: Mr. A owns a house property given on monthly rent of Rs 10,000 to a company.
Rent was increased on April 15, 2014 from Rs 10,000 to Rs 15,000 with retrospective effect
from April 1, 2013.
Solution: The arrears of rent of Rs 60,000 (Rs 5,000 12), of the previous year 2013-2014)
received in the previous year 2014-15 would be "income from House Property" after giving
Standard deduction of 30%.
Arrears of rent received in the previous year 2014-15 = Rs 60,000
Standard deduction = Rs 18,000 (30/100 60,000)
Therefore, "income from House Property" during previous year 2014-15 under section 25B=
Rs 60,000 Rs 18,000 = Rs 42,000
This income is in addition to "income from house property" of current previous year (201415) as calculated according to Section 23 after giving deduction under section 24.
House property jointly owned by two or more persons [Section 26]
Where two or more persons jointly own a house property consisting of buildings or lands
appurtenant thereto then such persons are known as co-owners. Further, where respective
shares of co-owners are:

Project Report on Taxation Law

(a) definite and ascertainable then such co-owners shall not be assessed as AOPs but the
proportionate share of each co-owner in the income from house property as calculated
in accordance with sections 22-25 shall be included in his Total Income.
(b) not definite and ascertainable then each co-owner shall be deemed to have equal share
in the house property. Hence, proportionate share of each co-owner in the income
from house property as calculated in accordance with sections 22-25 shall be included
in his Total income.

Project Report on Taxation Law

7.Computation of income of Jointly

owned House property:
(a) Where such jointly owned House property is let out house property then annual
value will be first determined according to Section 23(1) as if a single person
owns such property. Thereafter, income from house property so calculated shall
be distributed amongst each co-owner as per their share (equal share in case their
respective shares are not definite and ascertainable and proportionate share In
case their respective shares are definite and ascertainable).
(b) Where such jointly owned House property is self-occupied house property then
annual value for each of such co-owner will be nil [Section 23 (2)]. But each of
such co-owner is entitled to deduction of Rs 30,000 or Rs 1,50,000 (in
exceptional cases) regarding annual interest for loan under section 24(b)
Example 1: Mr. A, Mr. B and Mr. C, are co-owners of a house property and their
shares are definite and ascertainable i.e., Mr. A 50% share , Mr. B 25% and Mr. C
25% share. The house property was constructed on December 15, 2008 and annual
interest payable for loan taken for construction is Rs 2,00,000.
The property is let-out house property with Gross Annual Value Rs 4,00,000.
Municipal taxes paid in current previous year is Rs 20,000.
Find out income under head Income from House property for Mr. A, Mr. B and
Mr. C
Solution:
Net Annual value = Gross Annual Value Municipal taxes paid
= Rs 4,00,000 Rs 20,000
= Rs 3,80,000
(i)

Standard Deduction = Rs 1,14,000

[30% of Rs 3,80,000 = 30/100 Rs 3,80,000]

Project Report on Taxation Law

(ii)

Deduction regarding interest on loan taken for construction =

Rs2,00,000
Income from house property = Rs 66,000
= [Rs 3,80,000 ( Rs 1,14,000 + Rs 2,00,000)]
Income from house property of Mr. A = 50% of Rs 66,000
= Rs 33,000
Income from house property of Mr. B = 25% of Rs 66,000
= Rs 16,500
Income from house property of Mr. C = 25% of Rs 66,00

Whether income from property be loss?

Let-out house property:In such property there can be loss under head Income from house
property, if
(i) Municipal taxes paid in current previous year are more than Gross annual value;
Or
(ii) Annual interest payable by assessee for loan taken for construction, acquisition,
repair, etc. is more than Net Annual Value.
Self-occupied house property: As in such cases annual value is always Nil.Therefore if
annual interest is payable by assessee for loan taken for construction, acquisition, repair,
etc. then income from house property is always negative.

Project Report on Taxation Law

Bibliography
Books
RATTAN, JYOTI. Taxation Laws, 6th Edition. New Delhi: Bharat Law House, 2014.
Webpages:
http://taxguru.in/income-tax/taxability-of-second-house-under-the-income-taxact1961.html
http://www.icaiknowledgegateway.org/littledms/folder1/chapter-5-income-fromhouse-property.pdf
http://www.incometaxindiapr.gov.in/incometaxindiacr/contents/tpi/Assessment-ofIncome-from-house-Pro-1.pdf
http://www.incometaxindia.gov.in/Tutorials/Income-from-House-PropertyPractical.pdf