Income From House Property

Chargebility (Section 22)

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

 Thus, the following three conditions shall

be satisfied :
(1) The property should consist of any
building or land appurtenant thereto.
(2) The assessee should be owner of the
property.
(3) The property should not be used by the
owner for the purpose of any business or
profession carried on by him, the profits of
which are chargeable to income tax.

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

Land Appurtenant Thereto

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

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

Deemed Owner (Section 27)

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

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

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

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

Case Laws Cont.

It makes no difference if the property constitutes

stock in trade or business of the assessee is to let out
the house properties O.R.M.S.P.S.V. Firm Vs CIT
(1960) 39 ITR 327 (Mad.)
Where the prime object is to let out the property
alongwith additional right of using furniture and
fixtures and other common facilities, the income is
chargeable under the head Income from House
Property Shambhu Investment (P) Ltd. Vs CIT
(2003) 129 Taxman 70 (SC).

Case Laws Cont.

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

Income from composite letting of

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

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

Property Income Exempt from

Tax

1. Income from farm house provided it is

used for agricultural purpose [sec.2(1A)(c)
r.w.s. 10(1)]
2. Annual value of any one palace of an exruler [sec.10(21)]
3. Property income of a local authority
[sec.10(20)]

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

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

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

Computation of Income from Let out

House Property

Rs.

Gross Annual Value[sec.23(1)]

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

Gross Annual Value

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

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

A] Reasonable Expected Rent

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

(a) Municipal Valuation

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

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

 Example
Municipal Value(a)
Fair Rent (b)
Standard Rent (c)
Reasonable Expected
[higher of (a) & (b)
subject maximum of (c)]

A
40
46
35
35

B
49
48
46
46

C
50
52
NA
52

B] Actual rent received or

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

(C) Rent of Vacant Period

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

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

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

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

Computation of income from Self

Occupied Property (S.O.P.)

Gross Annual Value

Less : Municipal Tax
Net Annual Value
Less : Std. Deduction
Interest on borrowed capital
[sec.24(b)]
Income from S.O.P.

Nil
Nil
Nil
Nil
deductible
______
--

Computation of income from Self

Occupied Property (S.O.P.)

As per sec.23(2), the annual value of the

house property shall be taken as nil, where
the house property
(a) is in the occupation of the owner for the
purpose of his own residence or
(b) It could not occupied by the owner
because his
employment/business/profession is
situated at other place.

Allowable Deductions (Sec.24)

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

Allowable Deductions (Sec.24)

(2) Interest on borrowed capital

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

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

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

Interest on borrowed capital

[sec.24(b)]
(B) Self Occupied Property (i) Allowable
on accrual basis as mentioned in (a) above.
(ii) Interest on preconstruction or preacquisition
period same as (b) above.
(iii) The deduction not exceeding Rs.30000 shall
be allowed in respect of interest payable on
capital borrowed for the purpose of acquiring,
constructing, repairing, renewing or
reconstructing the self occupied property.

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

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

 When more than one house is occupied for

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

 Special provisions when unrealised rent is

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

Cont.

Further, as per section 25AA, where assessee has not

realised the rent during the P.Y. relevant to A.Y. 200203 or in any subsequent year from a property let to a
tenant and subsequently, the assessee has realised any
amount in r/o such rent, the amount so realised (to the
extent it has not been included in annual value
earlier) shall be deemed to be the income chargeable
to tax. Further, it is not necessary that the assessee
must be owner of such house property in the year of
realisation of rent.

 Special Provisions for arrears of rent

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

 Property owned by Co-owners (sec.26) :Where a property is owned by two or more

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

 Interest not deductible from Income from

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

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