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A note on Income from house property

For the purposes of charge of income-tax and computation of total income, generally all income are classified under five heads of income under the Income-tax Act, 1961 (the Act) and ‘Income from house property’ is one of them. One of the most essential ingredients to classify an income under the head ‘Income from house property’ is the existence of ownership of a house. If house and its ownership are not in existence during the previous year (PY) then generally income under this head cannot be computed. Where such house is used by the owner for the purposes of his business/profession, then it shall not be computed under the head ‘Income from house property’.

Again some ‘Income from house property’ of the assessees are exempted. They are ‘Income from house property’ arising/accruing from/of a/an :-(i) farm house as it is considered as agricultural income [section 2(1A) (c) read with section 10(1)], (ii) palace occupied by ex-ruler [10(19A)], (iii) local authority [10(20)], (iv) approved scientific research association [10(21)], (v) university/other educational institutions [10(23C)], (vi) hospital/other medical institutions [10(23C)], (vii) trade union [10(24)], (viii) house held for charitable purpose [11], (ix) political party [13A]. Further ‘Income from house property’ of a member of Scheduled Tribe if the house is situated in some specified places of North Eastern Region or Ladakh region of Jammu and Kashmir [10(26)], and of a Sikkimese if the house is situated in Sikkim [section 10(26AAA)]. Similarly there are some other exemptions of all income, including ‘Income from house property’, of a Corporation and other entities [sections 10(26AAB), 10(26B), 10(26BB), 10(26BBB), 10(27), 10(29A)].

If one looks at the definition of “income” u/s 2(24) of the Act, one will find that there are various kinds of income which are shown under various sub-clauses of section 2(24) and they fall under some heads of income or the other, but not to ‘Income from house property’. This is because the annual value of the house property is not income in real sense but “deemed to be” income u/s 23(1).

Income-tax is a charge on the annual value of the house property but not on the house property. Therefore if as a result of “principle of mutuality” there is no ‘income’ there cannot be any ‘Income from house property’. Annual value is determined through a “deeming” provision as per following clauses of section 23(1) as under:
(a) the annual value of any property is deemed to be the sum for which the property might reasonably be expected to let from year to year; or
(b) where it is a let out property (LOP) and the actual rent received/receivable is in excess of sum referred to in (a) then actual rent received/receivable; or
(c) where it is a LOP and was vacant during the whole/part of the PY and for such vacancy the actual rent received/receivable is less than the sum referred to in (a) then actual rent received/receivable:
Taxes (municipal taxes) levied by the local authority on the house property shall be deducted from the annual value of the house property in which such taxes are actually paid even if it may relate to other years [proviso to section 23(1)].
For the purposes of clause (b)/(c) above, the amount of actual rent received/receivable shall not include unrealized rent where the tenancy is bona fide; defaulting tenant has vacated or steps taken to compel him vacate; defaulting tenant is not in occupying any other house property of the assessee; the assessee has taken all reasonable steps to file legal proceedings for recovery of the unrealized rent or satisfies the Assessing Officer that legal proceedings would be useless [Explanation below section 23(1) and Rule 4 of the Income-tax Rules, 1962]

From the above provisions following inferences can be drawn:-

(i) that annual value of a house property is required to be determined as per (a) above even where the house property is actually not let out during the PY and as a result no income is earned ;
(ii) that where the actual rent received/receivable as per (b) is more than the sum referred to in (a) then the annual value is sum at (b) otherwise sum at (a);
(iii) in (c) above there are three conditions and they are cumulative. The house property shall be LOP, it should be vacant during the whole/part of the PY, and for such vacancy the actual rent received/receivable is less than the sum referred to in (a), then the annual value is the actual rent received/receivable as per (c).
Where the house property is self-occupied by the owner (SOP) or owing to his employment/ business/ profession at any other place he has to reside at that other place in a house property not owned by him then the annual value of such house property is taken at ‘nil’ only when actually it is not a LOP or no other benefit from the house property is derived by the owner. Where the owner has more than one SOP than at his option annual value of one such SOP shall be taken as ‘nil’ and the annual value of other house property/properties shall be determined u/s 23(1) ‘as if’ such house property/properties had been let (Deemed to be LOP) [sub-sections (2), (3) and (4) of section 23]
Income chargeable under the head “Income from house property” shall be computed after making two deductions namely (i) standard deduction and (ii) interest on borrowed capital [clause (a) and clause (b) of section 24]. Standard deduction @ 30% of Net Annual Value [Annual Value minus Municipal taxes paid] is deductible irrespective of any expenditure incurred or not and whether claimed or not. Interest of borrowed capital requires detailed discussion. Let us reproduce clause (b) of section 24:
“where the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital, the amount of any interest payable on such capital:”

From the highlighted words three things are clear. (i) it specifies about “property” but not “house property” hence interest on borrowed capital to acquire a plot on which house property stands is also allowable, (ii) the purpose of such borrowing shall be any one of five specified purposes, namely “acquired, constructed, repaired, renewed or reconstructed”, and (iii) interest is “payable” that is on “accrual basis”, allowable whether paid or not. However interest on unpaid interest is not deductible. [1973] 89 ITR 61 (SC).
Now let us understand the two provisos below clause (b) of section 24. Let us reproduce the two provisos.
“Provided that in respect of property referred to in sub-section (2) of section 23, the amount of deduction shall not exceed thirty thousand rupees;
Provided further that where the property referred to in the first proviso in acquired or constructed with capital borrowed on after the 1st day of April, 1999, and such acquisition or construction is completed within three years from the end of the financial year in which capital was borrowed, the amount of deduction under this clause shall not exceed two lakh rupees.”

From the highlighted words four things are clear. (i) These provisos relate to only SOP, (ii) for repair, renew or reconstruction of SOP the limit is only thirty thousand rupees even if capital borrowed on after the 1st day of April, 1999, (iii) for acquisition or construction of SOP limit is two lakh rupees where the capital borrowed on after the 1st day of April, 1999 and SOP is completed within three years from the end of the financial year in which capital was borrowed, (iv) these two provisos do not apply to LOP and DLOP.
Explanation below clause (b) of section 24 says one fifth of interest relating to period prior to acquiring/construction of property is allowable for the first five assessment years.
However where the interest is chargeable under the Act and payable outside India without making TDS and there is no agent then deduction u/s 24(b) is not allowable [section 25].

Where the amount of arrears of rent/unrealized rent received/ realized in any financial year it shall be ‘deemed to be’ “Income from house property” in the year of receipt, even if the assessee is not the ‘owner’ of the property in that year. Standard deduction @ 30% of such rent is deductible irrespective of any expenditure incurred or not and whether claimed or not. [section 25A]
Where property owned by co-owners (two or more persons) and their respective shares are definite and ascertainable then the co-owners shall not be assessed as an AOP but share of house property income shall be computed in individual hands of the co-owners in accordance with sections 22 to 25. Relief provided in section 23(2)[SOP] shall be individually entitled to each co-owners.[section 26]. Let us now understand whether the benefits of section 26 are available where the property is transferred and then what shall be status of the co-owners. Benefits of section 26 apply only with reference to sections 22 to 25 (Income from house property). But where the property is transferred then “Capital Gains” shall come into operation and benefits of section 26 shall not apply and the status of the co-owners shall be AOP.
Section 27 defines “deemed” owner of house property in five different circumstances including where house property is transferred without adequate consideration, part performance of a contract etc, for the purposes of section 22 to 26.

Jitendra Kumar Verma on July 26 2016 12:04:46


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