CHAPTER 3 COMPLICATIONS RELATING TO INCOME FROM HOUSE PROPERTY AND SUGGESTIONS TO OVERCOME THEM

Transcription

1 CHAPTER 3 COMPLICATIONS RELATING TO INCOME FROM HOUSE PROPERTY AND SUGGESTIONS TO OVERCOME THEM 3.1 INTRODUCTION : Of the five heads of incomes 'income from house property', is the second head of income. As per section 22 of the Act, the tax is levied on income from house property and not on house property itself. The Supreme Court held in the case of Chelmsford Club, V. CIT [2000] 109 Taxman 215 that it is not only the surplus from the activities of the business of the club that is excluded from the levy of income tax, even the annual value of the club house as contemplated in section 22 of the Act will be outside the purview of the levy of incometax. The club owned a house property and it provided recreational and refreshment facilities exclusively to its members and their guests. Its facilities were not available to nonmembers. The club was run on 'no profit no loss' basis; the members paid for all their expenses and were not entitled to any share in the profit and surplus, if any, was used for maintenance and development of the club. Tax under the head 'income from house property' is not a tax upon rent of a property; it is, rather, taxed on inherent capacity of a building to yield income. The standard selected as a measure of the income to be taxed is "annual value". 3.2 INCIDENCE OF TAX Income from house property can accrue to an assessee when he is the owner of any building or land appurtenant thereto which is not used by him for the purpose of any business or profession carried out by him, the profits of which are chargeable to income tax. When these conditions are satisfied, income from property will be chargeable under section 22 of

2 the Act under the head 'income from house property' even in the case of a company which has been incorporated with the object of buying and developing landed properties. It has been so held by the Supreme Court in the case of S.G. Mercantile Corporation (P) Ltd. V. CIT (1972) 83 ITR 700. Likewise, income from property will be chargeable under this head of income when property constitutes stock-in-trade of a business or when the business of the assessee is to let out house properties Incidence is attracted in respect of 'buildings or land appurtenant thereto' The subject of chargeability to tax under this head is the existence of building with or without the appurtenant land. Therefore, income by way of rent of a vacant plot of land cannot be charged under the head 'income from house property' because there is no building in existence. If it is the business activity of an assessee let out on rent vacant plot/plots, such rental income will be chargeable under the head 'profits, and gains of business or profession', otherwise such rental income would be chargeable under the head 'income from other sources'. The income-tax Act, 1961 does not define the word 'building'. Under the Act, the world 'building' is treated to be wide enough to include residential house whether let out or self-occupied, building let out for office use or for storage or for use as factory, music halls, dance halls and other public auditorium used for cinema and stage shows. The webster's New International Dictionary defines the word building as "that which is built; specifically, as now generally used, a fabric, or edifice, framed or constructed, designed to stand more or less permanently, and covering a space of land, for use as a dwelling, store house, factory, shelter for beasts or some other useful purpose building in this sense does not include a mere wall, fence, monument, hoarding or similar structure though designed for permanent use where it stands; not a steam boat, ship or other vessel of navigation." From this definition, it is clear that the existence of a roof is not always necessary for a structure to be regarded as a building. A large stadium or an open air swimming pool constructed at a considerable expense would be a building as being a permanent structure and as being designed for a

3 useful purpose. The Supreme Court has, in this connection, held in the case of Ghanshiam Das V. Debi Prasad AIR 1966 SC 1998 that the question as to what is "building" must always be a question of degree which depends upon facts and circumstances of each case. Thus, there may be a building constructed of wood as well as of bricks or stone, and it is not necessary that there should be a roof to cover it in order to construct a building. An incomplete house or a house which is in rains without a roof and without doors cannot be called a building. The "appurtenant land" in respect of a building forms an essential part in respect of both types of buildings residential and non-residential. In respect of a residential building, the appurtenant land may be in the form of approach roads to and from public streets, compounds, courtyards, backyards, playgrounds, kitchen garden, motor garage, stable or a coach home, cattle-shed, etc., attached to and forming part of building. In respect of a nonresidential building, the appurtenant land may be in the form of car-parking spaces, and roads connecting one department with another department, playgrounds for the benefit of employees, etc. Thus, where an assessee has a well in the compound of her dwelling house from which he supplied water to certain companies on payment basis, the claim of the assessee that the well is 'land appurtenant to building' is not tenable and so income therefore cannot be taxable under the head 'income from house property'. This has been so decided in the case of M. Ramalakshmi Raddi V. C IT (1998) 100 Taxman 509 by the Madras High Court Land and Building should be owned by the assessee Income is chargeable to tax under the head 'income from house property' only when the assessee is the owner of house property. Therefore, income from property sub-let by a tenant will not be chargeable to tax under the head 'income from house property' because the tenant is not the owner of property; such income is taxable under the residuary head of income viz., income from other sources. The word "owner" means a legal owner. The supreme court has held in the case of R.B.

4 Jodha Mal Kuthiala V. CIT (1971) 82 ITR 570 that the owner must be the person who can exercise the rights of the owner, not on behalf of the owner but in his own right. Further, the Supreme Court has in this connection held in the case of CIT V. Podar Cement (P.) Ltd. (1997) 92 Taxman 541 that where a property is handed over to a purchaser to enjoy fruits of that property by the builder, the purchaser is treated as "owner" of that property even though no registered document has been executed in his favour. If a person makes gifts of rental income from some property to a friend or a relative, without transferring ownership of the property, annual value of the property is taxable in the hands of the person making the gift, even if rental income is received by the person to whom the gift is made. Ownership of site and/or superstructure In the case of a plot of land held by an assessee under leasehold agreement if a superstructure is built by the assessee, he will be the owner of the house property and accordingly, annual value of the superstructure would be taxable in his hands under the head "income from house property" during the period of the lease of the site. So, it is not necessary that the assessee should be the owner of the site as well for being charged to tax under the head "income from house property". Amount of ground rent charged by the lessor of land is chargeable under the head "Profits and gains of business or profession" if he is engaged in the business of letting of plot of lands on lease or under the head "Income from other sources" if he is not so engaged. In case of mortgage of property, mortgagor of property charged to tax under this head and not the mortgagee of the property. Where a property is owned by partnership, it is the firm which is assessable to tax in respect of income from such house property; individual partners cannot, therefore, be charged as co-owners. The same applies in the case of property owned by an association of persons. Where under a will, life interest in the property of the deceased person is given to specific legatees, annual value is assessable in the hands of the legatee and not in the hands of the executor. Under the law of insolvency, property of the insolvent vests in the Official Assignee. Therefore, Official Assignee can be treated as "owner" for the purpose of computing income from house property. If, however, a Receiver is appointed by the Court, the property of the insolvent does not vest in the Receiver.

5 Receiver, therefore, cannot be charged to tax as owner of house property "Deemed Owner" is assessable to tax on annual value. It is true that it is the owner of house property who is chargeable to tax in respect of income from house property. However in certain specified cases a person is deemed to be the owner of house property and is, thus, made liable to pay tax in respect of such property. The following are the cases which have been specified in this regard as per section 27 of the Act : 1. The transfer of house property to spouse or minor child without adequate consideration when an individual transfers his house property to his or her spouse not being a transfer in connection with an arrangement to live apart or to his/her minor child not being married daughter without adequate monetary consideration, he is deemed to be the owner of such property for the purpose of charging tax on annual value of such property. For example, suppose Mr. X transfers a house property owned by him on April 1,2008 without any consideration to his wife. Mrs. X receives the rental income of the house for the previous year Rental income of the house, will be charged to tax in the hands of Mr. X and not Mrs. X because Mr. X will be deemed to be the owner of the house. Which he has transferred to Mrs. X without any consideration. However, the case would be different when Mr. X gifts some money to Mrs. X who purchases a house property out of the gifted money. In this case Mr. X will not be deemed to be the owner of house property purchased by Mrs. X 1. In this case, income of the house property would be computed in the hands of Mrs. X because she is the owner of the property. Of course, the income so calculated will be included in the income of Mr. X due to the provision of section 64(1) (iv) of the Act. Similarly, if a person transfers house property to his son's wife without adequate consideration, he will not be deemed to be owner of the property under section 27(i), but income earned from the property by the transferee will be included in the income of the transferrer under section 64 of the Act Holder of impartible estate A house property held by one of the joint owners, the person holding it will be deemed to be its owner for the purpose of charging tax in

6 respect of income from house property. If the holder of the impartible property does not agree to paying tax on entire income from such property, he will have to divide it among all its joint owners who shall, then, be liable to pay tax in respect of their share of such property. Till such property is so divided the holder will be liable in respect of entire income from such property as its deemed owner though he is the owner of only a part of it. Till the property is divided among all it joint owners, the holder of it holds it as a trustee on behalf of other joint owners. 3. Property held by a member of co-operative society, company or AOB/BO1 When a house property is allotted by a co-operative society, company or AOP/BO1 to its members, the members are legally not the owners of the property allotted to them but for taxation purposes the members are deemed to be the owners. The co-operative society or the company or the AOP/BOI/which allots house property to its members cannot be assessed to tax under section 22 in respect of the rental income from property. 4. Lessee of a house property for a period of 12 years or more when a person acquires a right in a house property under lease for a period of not less than 12 years, the lessee is deemed to be the owner of the property for the purpose of assessment in respect of income from house property. The period of 12 years of the lease may be fixed originally or it may have been extended to 12 years or more due to the provision for the extension of term of the lease. Such rights in a house property are acquired by a person by virtue of a transaction which is referred to in section. 269 UA(f) of the Act. This provision of deemed ownership does not cover any right by way of a lease from month to month or for a period not exceeding one year. For example, suppose Mr. X gives on lease a property owned by him to Mr. Y for 6 years at a monthly rental of Rs. 5000/-. According to a provision in the lease deed, Mr. Y has a right to get renewal of lease for a further period of 6 years after the expiry of the lease. The aggregate period of the lease is 12 years in this case. Therefore, Mr. Y is deemed as "Owner" of the property.

7 5. Acquisition of property by a person under "power of attorney" If a person has acquired a property under power of attorney by satisfying the condition of section 53A of the Transfer of Property Act, he is deemed as owner of the property even if he is not the "registered owner" of it. Property under section 53A of the Transfer of Property Act is transferred to the purchaser when there is an agreement in writing between the purchaser and seller; the purchaser has either paid the consideration or has agreed to pay the consideration and that the purchaser has taken the possession of the property. It is sufficient if the purchaser has a right to enter upon and exercise acts of possession effectively by virtue of the transaction of acquisition of property. For example, Mr. X agrees to purchase a property from Mr. Y for Rs. 10 lac under a written agreement. He pays the amount and takes possession of the property though sale deed is yet no registered in his name. Mr. X becomes the deemed owner of the property for the purpose of paying tax on the rental income from the property The owner should not occupy the property for his own business or profession Annual value of a house property will be chargeable to tax under this head if its owner does not use it for the purpose of carrying on his business or profession, the income of which not exempt from tax. If a person carries on business or profession in a rented property, the amount of rent payable to the landlord is admissible to be deduced in full in computing income from business or profession. When business or profession is carried on by a person in a house property which is owned by him, no deduction for rent is available to him since he does not pay rent to any body for use of the house property. Where letting out is subservient and incidental to the main business Where an assessee constructs residential quarters and lets them out to his employees and letting out of residential quarters is subservient and incidential to the main business, the residential quarters will be treated as house property used by the assessee for the purpose of his business and, therefore, annual value of the quarters will not be chargeable to tax under the head 'income from house property'. The amount of rent charged by the assessee, if any, will be chargeable as 'Profits and gains of business or profession". The idea behind this treatment is

8 that the living of employees near the place of work is in the interest of the employer because the employees would be reaching the place of work in time; this will enable the workers to devote more time on production. Also, the employees will reach their residences well in time; this will help them to work more efficiently and again they could produce and manufacture more for their employers. Since the living of workers near the place of their work is in the interest of business of their employers, the rental income of quarters allotted to them is chargeable as income from business. Likewise, if the assessee makes its accommodation available to the Govt. for locating a branch of nationalised bank, post office, police station, central excise office, or railway staff quarters with the objective of carrying on its business efficiently and smoothly, rent collected in this regard is not chargeable as income from house property; rather, it is chargeable as income from business. Similarly, when a house property is occupied as residence by employees or directors of a company who are related to the promotion of business of the company whether on payment of rent or otherwise, to enable them to discharge their functions efficiently and letting of property is subservient and incidental to the main business of the assessee, such use of the property amounts to its use by the company itself for the purposes of its business even though no business is actually run in such premises and, therefore, income from such property is not assessable as income from house property. This has been so held in the case of C.I.T. V. Modi Industries Ltd. (1994) 210 ITR 1 by the Delhi High Court. Depreciation, repairs and collection charges in respect of such property One important fact as regards deduction in respect of depreciation, repairs and rent collection charges in respect of property which is used in the business or profession of the assessee is that depreciation is allowable as deduction under section 32 of the Act and actual repair expenses and collection charges are deductible u/s 31 and 37 of the Act; no deduction for depreciation, repair expenses and collection charges is available u/s 22 of the act while computing "income from house property", if such property is not used for the purpose of business or profession carried on by the assessee. There are two exceptions to the rule that income from ownership of house property is taxable as income from house property

9 (a) (b) Letting is incidental and sub servient to the main business of the assessee As is clear from the above discussion, where letting of property is only incidental and subservient to the main business of the assessee, rental income is not taxable under the head 'income from house property' but is chargeable as business income under the head 'Profits and gains of business or profession'. Hiring of property alongwith incidental services or facilities where the subject hired is a complex one and it is not only the letting out of property, income in such cases may be assessed as income from business and not as income from house property. In the case of letting out of furnished paying-guest accommodation, a well equipped theatre, a safe deposit vault, etc. Where property is let out alongwith incidental services or facilities, the subject hired is a complex one. The income is derived not only from ownership of property but it is also derived due to the facilities and services associated with the hiring of the complex. Income in such cases may be charged to tax as income from business. 3.3 PERSONS CHARGEABLE TO TAX IN RESPECT OF INCOME FROM HOUSE PROPERTY TWO assesses an individual and an HUF, are chargeable to tax in respect of income from house property in the following two situations : (1) When they use more than one house owned by them for their self-residence, one such house according to their own choice is exempt from tax u/s 23(2)(a) of the Act and all other such house/houses will be "deemed to be let out" and annual value of such house/houses will be charged to tax accordingly. The option of choosing one such house as self occupied should be exercised in such a way that net income of the taxpayer is reduced to the minimum possible amount. It is important to note in this regard that the option of choosing one house as self-occupied may be changed every year by an assessee in order to reduce the amount of tax to the minimum. (2) When they have let on hire a house, part of a house or more than one house, all such house/houses are chargeable to tax under the head "income from house property".

10 All other assesses (other than an individual and an HUF), viz., a company, a firm, an AOP/BO1, local authority and an artificial juridical person are chargeable to tax in respect of income from house property when they let out some house property on hire to other person which is owned by them. The person to whom the house property is let out on hire may use it for residential purposes or may use it for commercial purposes; it does not affect the incidence of tax in the hands of the person who owns such property and who lets it on hire to others. It is important to note in this regard that since a specific head of income is provided for income from house property, annual value of house property cannot be brought to tax under any other head of income even if (i) the property is held by the assessee as stock-in-trade of a business; or (ii) the assess is engaged in the business of letting out of property or rent. The Bombay High Court held in this connection that house owing, however profitable, is neither trade nor business for the purpose of the Act 1. Where income is derived from house property by the exercise of property rights, income falls under the head "Income from house property". Property owned by Co-owners As per section 26 of the Act when a house property consisting of building or building and land appurtenant thereto is owned or deemed to be owned by two or more persons and the respective shares of the co-owners are definite and ascertainable, then the share of each co-owner in the income of the property as computed under the head "Income from house property" shall be included in the total income of each such person. The co-owners in such a case shall not be assessed as an association of persons. The concessional tax treatment in respect of self-occupied property is applicable as if each such person is individually entitled to such relief. Disputed ownership If title of ownership of a house property is under dispute in a court of law, the decision as to who is the owner of the property rests with the Income Tax Department. In such a case the recipient of income is taxable though there may be a rival

11 claim as to the title of source of income. The Department can charge the recipient of income as owner without waiting for judicial judgement of any suit field in respect of the property under dispute. House property in a foreign country An assessee who is resident in India during the previous year is chargeable to tax in respect of income from house property situated in a foreign country as well whether income is received in India or not. A not ordinarily resident and a non-resident assessee is chargeable to tax in respect of house property situated in a foreign country only when income from such property is received in India. The Madras High Court observed CIT V. R.Venugopala Reddiar (1965) 58 ITR 439 in this connection that while computing taxable income, no distinction should be made between a house property situated in India and a house property situated abroad. Thus, if tax incidence is attracted in respect of house property situated abroad under the head "Income from house property", its annual value is to be computed as if the property is situated in India. 3.4 PROPERTY INCOME EXEMPT FROM TAX : In the following 11 cases, income from house property is exempt from tax : (1) Income from farm house being agricultural income under section 10(1) of the Act. (2) Annual value of any one palace of an ex-ruler under section 10(19A) of the Act. (3) Property income of a local authority under section 10(20) of the Act. (4) Property income of an approved scientific research association under section 10(21) of the Act. (5) Property income of a hospital or other medical institution under section 10(23C) of the Act. (6) Property income of a university or other educational institution. (7) Property income of a trade union. (8) House property held for charitable purposes under section 11 of the Act.

12 (9) Property income of a political party under section 13A of the Act. (10) Property used by an assessee for its/his own business or profession under section 22 of the Act. (11) One self-occupied property according to the option of an assessee in the case of an individual and an HUF under section 23(2) of the Act. 3.5 PROCEDURE OF COMPUTATION OF INCOME FROM LETOUT PROPERTY There are three steps in the computation of income from let out house property which have been stated in the performa given below : Particulars Amount (Rs.) Step. 1 : Computation of Gross annual value X X X Step. 2 : Less : Municipal taxes paid X X X Net Annual Value X X X Step. 3 : Less Deduction u/s 24 : (i) Standard Deduction XXX (ii) Interest on loan XXX X X X Income from let out property X X X Step 1 : Computation of Gross Annual Value : Gross annual value (GAV) as per section 23(1) of the Act and as required to be computed under step 1 as stated above is the inherent capacity of a building to yield income. Tax levied under section 22 of the Act is not a tax on house property but is a tax on income or rent from house property. GAV is the amount which is higher of (a) the amount of reasonable expected rent, and (b) the amount of rent actually received or receivable. Amount of reasonably expected rent is deemed to be the sum for which the property might reasonably be expected to be let out from year to year. In determining reasonable rent, several factors

13 have to be taken into consideration, such as, location of the property, annual rateable value of the property fixed by municipalities, rents of similar properties in neighbourhood, rent which the property is likely to fetch having regard to demand and supply, cost of construction of the property and nature and history of the property. These factors play an important role in determining amount of reasonable expected rent of a house property. In case of a house property which is not covered by a Rent Control Act, the amount which is higher of (a) municipal valuation of the property; and (b) fair rent of the property, will be the value of reasonable expected rent, If, however, a property is covered by a Rent Control Act, then amount of reasonable expected rent will be the amount which is lower of the following two amounts (a) (b) higher of municipal value and fair rent of the property; and the amount of standard rent determinable under the Rent Control Act. areas. Rent Control Act is applicable in the case of properties which are situated in urban Municipal valuation is the value which is determined by the municipal authorities representing the earning capacity of a building; it is determined on the basis of the periodical survey of all buildings in their jurisdiction which is used as the basis for levying municipal taxes. Fair rent is the amount of rent being fetched by similar property in the same or similar locality. Standard rent is the amount of maximum rent which a person can legally recover from his tenant under the Rent Control Act. As per the decision of the Supreme Court 1, a landlord cannot reasonably expect to recieve from a hypothetical tenant anything more than the standard rent under the Rent Control Act. This rule is applicable even if a tenant has lost his right to apply for fixation of the amount of standard rent. This rule is also applicable to the owner himself while computing income from deemed to be letout property. Further, the Supreme Court has held that reasonable expected rent can be lower than the amount of standard rent. 2 Thus, amount of standard rent is the maximum amount of reasonable expected

14 rent. The application of step 1 as regards computation of amount of reasonable expected rent can be seen in the following example. Example No. 3.1 On the basis of values of municipal value, fair rent and standard rent given below, what will be the amount of reasonable expected rent : (Rs. in thousand) S i t u a t i o n s M V F R S R N.A Solution : The value of reasonable expected rent is equal to MV or FR, which ever is higher, subject to the maximum of SR. On this basis the answers of reasonable expected rent in the given situations will be as follows : (1) Rs. 36,000 being the higher of MV and FR [property is situated in a rural area and therefore SR is not applicable] (2) Rs. 28,000 being the higher of MV and FR which can not exceed SR and which can be less than SR. (3) Rs. 35,000 being the higher of MV and FR which can not be higher than SR but which can be less than SR. (4) Rs. 36,000 which is not more than SR and MV and FR are equal. (5) Rs. 28,000 being the higher of MV and FR which is not more than SR but which is

15 equal to SR. (6) Rs. 30,000 being equal to SR which is less than MV and FR Both. (7) Rs. 63,000 being the higher of MV and FR which is not greater than SR but is only equal to SR. (8) Rs. 45,000 being the value of MV or FR or SR because all the three values are equal. (9) Rs. 35,000 being equal to SR which is less than the higher of MV and FR. (10) Rs. 45,000 being the higher of MV and FR which is less than SR. Amount of rent actually received or receivable For computing GAV, amount of reasonable expected rent is compared with the amount of actual rent received or receivable by the owner of property before deducting loss due to vacancy, if any, during the previous year and the higher of the two is treated as the GAV. Amount of rent received/receivable is arrived at by deducting the amount of unrealised rent from the amount of rent of the previous year or part of the previous year for which the property is available for letting out. However, as per the explanation to section 23(i), deduction in respect of unrealised rent for computing the amount of rent received/receivable will be available to an asessee if the following 4 conditions are satisfied : (a) (b) (c) (d) The tenancy is bonafide. The defaulting tenant has vacated the property in question or steps have been taken to compel him to vacate the property. The defaulting tenant is not in occupation of any other residential property of the assessee. The assessee has taken all reasonable steps to institute legal proceedings for the recovery of the unpaid amount of rent or, else, satisfies the assessing officer that undertaking of legal proceedings against the tenant would be useless.

16 Splitting up of composite rent Sometimes, the owner gets a composite amount by way of rent i.e., rent in respect of house property and rent in respect of different services provided in the house property like lift, security, air conditioning, electricity supply, supply of water, arrangement for scavenging etc. In such cases, composite rent is to be split up and the sum which is attributable to the use of the building is to be assessed in the form of annual value under the head "Income from house property". The amount of composite rent which relates to the above services is charged to tax under the head "Profits and gains of business or profession" or under the head "Income from other sources", as the case may be. This rule is applicable even if it is difficult to split up the amount of composite rent and it is not legally correct to charge the amount of composite rent as business income or as income from other sources. Where composite rent is rent of letting out of building and letting out of other assets and the two letting are separable, then income from letting out of building is taxable under the head "Income from house property" and income from letting out of other assets is taxable either as business income or income from other sources. As regards determination of amount of rent received/receivable, a non-refundable deposit received by the owner or deemed owner of property from the tenant will be included in rent received/receivable on prorata basis. A refundable deposit can only be included in amount of rent received/receivable when it is taken from the tenant for the purpose of compensating the owner for short payment or non-payment of rent by the tenant; in such case it is paid in lieu of rent. When a refundable deposit is taken from the tenant for any of the following purposes, it cannot be included in the amount of rent received/receivable : (i) (ii) (iii) (iv) to ensure that the tenant will vacate the property after the expiry of the lease period; to ensure proper payment of rent on due dates in this regard; to check that the tenant will not damage the property, or will not make any unauthorised alteration; and to check that the tenant will not misuse the property.

17 The payment in respect of municipal taxes is the duty of the occupier of property i.e., the tenant, the share of municipal taxes realised from the tenant cannot be added to the amount of actual rent 1. Likewise, the amount spent by the tenant on repairs of the tenanted property cannot be added to amount of rent received/receivable 2. The following payments made by an assessee who is the owner of a house property cannot be deducted from the amount of rent received/receivable : (i) (ii) (iii) Commission to a broker who arranges for a tenant; Development Charges to a municipal corporation for regularising unauthorised construction; and Cost of stamp duty for drawing up lease deed and registration thereof. The applicability of the above provisions relating to computation of gross annual value can be understood with the help of the following examples. Example No. 3.2 : House does not remain vacant but there is unrealized rent. The following are the particulars of five house properties owned by Mr. X for the previous year What shall be the gross annual value of the properties for the assessment year assuming that none of the properties remained vacant during any part of the previous year. (Rs. in thousand) Particulars Properties Municipal Value (MV) Fair Rent (FR) Standard Rent (SR) N.A Actual Rent Unrealized Rent

18 (Conditions Satisfied) Loss due to Vacancy Nil Nil Nil Nil Nil Solution : Computation of Gross Annual Value in respect of Properties of Mr. X for the A.Y ( Rs. in thousand) Particulars Properties Reasonable expected rent (MV or FR Subject to maximum of SR) Rent received/receivable after deducting unrealized rent Reasonable expected rent or rent received/receivable, whichever is higher Less : Loss due to vacancy Nil Nil Nil Nil Nil Gross Annual Value Example No. 3.3 : House remains vacant but there is not unrealized rent The following are the particulars as relating to five properties of Mr. X for the assessment year What shall be the amount of gross annual value of the properties assuming that there is no case of unrealized rent. (Rs. in thousand) Particulars Properties Municipal Value (MV)

19 Fair Rent (FR) Standard Rent (SR) Actual Rent Vacancy in Months Loss due to Vacancy Unrealised rent Nil Nil Nil Nil Nil Solution : Computation of Gross Annual Value of Properties of Mr. X for the A.Y (Rs. in thousand) Particulars Properties Reasonable expected rent (MV or FR Subject to maximum of SR) Rent received/receivable Reasonable expected rent or rent received/receivable, whichever is higher Less Loss due to vacancy Gross Annual Value Example No. 3.4 : House which neither remains vacant nor there is any unrealised rent. Mr. X is the owner of 5 house properties which have been let out during the previous year The particulars of the properties are given below : (Rs. in thousand) Particulars Properties Municipal Value (MV)

20 Fair Rent (FR) Standard Rent (SR) Actual Rent What shall be the amount of gross annual value for the A.Y Solution : Computation of Amount of Gross Annual Value of Properties of Mr. X for the A.Y (Rs. in thousand) Particulars Properties Reasonable expected rent (MV or FR which ever is higher subject to maximum of SR) Rent received/receivable Gross Annual value (Reasonable expected rent or rent received/receivable whichever is higher) Example No. 3.5 : House remains vacant and there is unreaised rent also. The following are the particulars in respect of five properties of Mr. X which were let out throughout the previous year What shall be the gross annual value of these properties for the assessment year (Rs. in thousand) Particulars Properties Municipal Value (MV) Fair Rent (FR) Standard Rent (SR)

21 Actual Rent Unrealised rent (Conditions satisfied) Loss due to vacancy Solution : Computation of Gross Annual Value of Properties of Mr. X for the A.Y (Rs. in thousand) Particulars Properties Reasonable expected rent (MV or FR whcih ever is higher Subject to maximum of SR) Rent received/receivable after deducting unrealized rent but before adjusting loss due to vacancy Reasonable expected rent or rent received/receivable, whichever is higher Less loss due to vacancy Gross Annual value It is important to note that amount of unrealized rent relating to current previous year is deducted for computing the amount of rent received/receivable; deduction in respect of unrealized rent of years earlier than the current previous year is not so available. Step 2 : Deduction of amount of municipal taxes Deduction in respect of payment of municipal taxes is available to an owner of let out propriety only when he pays it and has actually paid it. So, if the tenant pays the amount of municipal taxes, deduction for the same is not available to the owner. Also, even if the liability to pay municipal taxes does not lie on the tenant, deduction to the owner will only be

22 available when the owner makes payment thereof during the previous year. The Calcutta High court has held in the Gillanders' case as given earlier that it is the duty of the occupier of a house property to make payment for municipal taxes. Still the owner and the tenant may agree that the owner will be liable to make payment of the municipal taxes. They may so provide for it in their rent agreement. In case the owner makes payment for municipal taxes for more than one year entire amount paid by him is deductible during the previous year during which the payment is made. The owner may make payment for municipal taxes in advance as well. Supposting the owner has to go abroad for a period of five years. He can make payment for the period of five years suceeding the previous year during the current previous year alongwith the payment for the previous year. It may so happen that the amount of municipal taxes paid during the previous year exceeds the amount of gross annual value; the amount of net annual value (NAV) thus arrived at will be negative. This means that the owner of property can recover this amount of loss from the income from rest of the heads of income during the previous year and if he is not able to adjust fully the amount of loss, he can set it off from income from house property upto a maximum period of eight succeeding assessment years. Municipal taxes levied by any local authority also include the service taxes like sewerage tax, water tax, fire tax, conservancy tax, education cess, scavenging tax, etc. House tax is an important ingredient of municipal taxes. The remaining amount left after deduction of municipal taxes from the amount of gross annual value is net annual value (NAV). The applicability of provisions stated under Step 2 as regards deduction on account of municipal taxes can be understood with the help of the following examples. Example No. 3.6 : The owner pays the amount of municipal taxes. If it is assumed that in Example No. 3.2 the owner pays 10% municipal tax, what would be the amount of net annual value for the A.Y ? Solution :

23 Particulars Computation of net annual value of Properties of Mr. X For the A.Y Properties Gross annual value (as computed in Example 3.2) Less : Municipal taxes Net Annual Value (Rs. in thousand) Note : Municipal taxes are paid in proportion to the amount of municipal value fixed by municipality. Example No. 3.7 : The tenant pays the amount of municipal taxes. If it is assumed that in Example No. 3.2 the owner pays 10% municipal tax, what would be the amount of net annual value for the A.Y ? Solution : Particulars Computation of net annual value of Properties of Mr. X for the A.Y Properties Gross annual value (as computed in Example 3.2) Less : Municipal taxes Net Annual Value deduction. (Rs. in thousand) Note : Since the tenant bears the payment of municipal taxes, Mr. X is not eligible for

24 Example No. 3.8 : The owner is liable to pay Municipal taxes but has not paid. If it is assumed that in Example No. 3.4 the owner is liable to make payment for municipal 10% but he has not made payment for the same, what would be the amount of net annual value for the A.Y ? Solution : Particulars Computation of net annual value of Properties of Mr. X for the A.Y Properties Gross annual value (as computed in Example 3.2) Less : Municipal taxes Net Annual Value deduction. (Rs. in thousand) Note : Since Mr. X has not made payment for municipal taxes, he is not eligible for Example 3.9 : The owner makes payment of specified amounts by way of municipal taxes : It is Example No. 3.5, the owner makes payment of Rs. 45,000, Rs. 12,000, nil, Rs. 81,000 and Rs. 8,000/- respectively in respect of municipal taxes of the five properties, what would be the amount of net annual value for the assessment year ? Solution : Computation of net annual value of Properties of Mr. X for the A.Y Particulars Properties (Rs. in thousand)

25 Gross annual value (as computed in Example 3.5) Less : Municipal taxes Net Annual Value (-) Nil 72 Note : The owner is eligible to get deduction equal to the entire amount of municipal taxes paid by him whether it is more than the amount of GAV, equal to the amount of GAV or it is less than the amount of GAV. Step 3 : Deductions under section 24 For computing income from let out property, following deductions have to be made from the amount of net annual value which are available under sections 24(a) and 24(b) respectively (1) Standard deduction as per section 24(a) In order to compensate an assessee in respect of certain payments he has to make in respect of the property on account of insurance, ground rent, land revenue, repairs collection charges, electricity, water supply, salary of liftman, etc., this deduction is allowed. The amount of this deduction as per section 24(a) of the Act is fixed which is equal to 30% of net annual value irrespective of the amount spent by the assssee on account of the expenses relating to the property. So, loss from a property cannot accrue as a result of this deduction. If loss from property has already accrued as a result of amount of municipal taxes being greater than the amount of GAV, it will not be increased due to the standard deduction. At the most the amount of this deduction can be zero when the amount of net annual value is nil or negative. example. The applicability of this provision can be understood with the help of the following Example No If facts and figures presented in Example No. 3.9 are taken into consideration, what

26 amount of deduction will be available under section 24(a) on account of standard deduction? Solution : Computation of amount of standard deduction of Properties of Mr. X for the A.Y (Rs. in thousand) Particulars Properties Gross annual value Less : Municipal taxes Net Annual Value (-) Nil 72 Less : Standard deduction u/s 24(a) (30% of NAV) Nil Nil 21.6 Income from letout properties (-) Nil 50.4 (2) Interest on Loan Deduction under section 24(b) is available in respect of amount of interest on loan obtained for the purpose of (i) purchase, (ii) construction, (iii) repair, and (iv) renovation or reconstruction of the property. The deduction is available on "due" basis and it can be availed without making actual payment for interest in this regard. Amount of interest on loan is fully deductible without any maximum limit. However, there is a maximum prescribed limit on account of this deduction in respect of the self-occupied house of the assessee. Deduction is available if the money borrowed is used for any of the above stated purposes even if it is obtained for any other purpose, say, marriage of a child of the assessee, medical expenses of the assessee, etc. The CBDT has clarified that in the case of Central Govt. employees, interest on house building advance taken under the House Building Advance Rules (Ministry of Works and Housing) would be deductible on the basis of accrual of interest which would start running from the date of drawal of advance. As per circular No. 363, dated June 24, 1983, the interest which accrues in terms of Rule 6 of the House Building Advance Rules is on the balances outstanding on the last day of each month. If an assessee obtains a non-refundable loan from his statutory provident fund account for the purpose of

27 using it on his house, such part of the amount of interest would be allowable under section 24(b) which is paid by the assessee on the amount of borrowing which belongs to his employer 1. He is not eligible for deduction on amount of interest relating to the amount contributed to the provident funds by the assessee because this amount is exempt from tax at the time of its withdrawal. As regards this deduction, it is important to note that the deduction is available only to the person who has acquired or constructed the property with borrowed funds. The deduction is not available to the successor to the property when the successor did not utilise the borrowed funds for acquisition, construction, repair or renovation of the property. Where a buyer of house property enters into an arrangement with the seller to make payment of sale price in instalments together with the amount of interest due thereon, the unpaid purchase price is treated as capital borrowed for acquiring property and interest paid thereon is allowed as deduction under section 24(b); by such arrangement the seller becomes the lender as regards the unpaid purchase price and the purchaser becomes the borrower. 1 Deduction on account of interest is also available if funds are borrowed for acquisition of plot and not house property since the word used in section 24(b) is "property" and not "house property" 2. However, amount of interest payable on unpaid interest is not deductible under section 24(b) of the Act. This has been so held by the Supreme Court in the case of Shew Kissen Bhatter V. CIT (1973) 89 ITR 61. Likewise, no deduction is available in respect of any brokerage or commission payable for arranging the loan. But, as per circular no. 28, dated August 20, 1969, interest on a fresh loan taken to repay the original loan is allowable as deduction; this rule is applicable even if the original loan was interest free. One important point regarding this deduction as provided under section 25 of the Act is that when money is borrowed from abroad, deduction on account of interest payable is available when either tax is deducted at source before making payment outside India and the amount so deducted is deposited in the Government Treasury or there is some person who may be treated as an agent in India in this respect. The object of his provision is to counteract

28 evasion of tax by the recipient of such interest. Interest deductible under section 24(b) of the Act is computed separately for (i) pre-construction period, and (ii) the previous year or the current year. Interest payable by an assessee in regard to funds borrowed for the acquisition or construction of a house property which relates to the period prior to the previous year in which such property has been acquired or constructed is treated as interest for the preconstruction period. Such interest is deductible if five equal annual instalments beginning with the previous year in which the house is acquired or constructed. For this purpose "preconstruction period" means the period which commences on the date of borrowing and which ends on either (i) March 31 immediately prior to the date of completion of construction/date of acquisition or (ii) date of repayment of loan, whichever is earlier. The interest for the entire financial year in which the construction is completed or property is acquired is treated as interest for the current year. The first instalment of interest relating to the pre-construction period is deductible in the year in which construction of property is completed or in which property is acquired. Deduction in respect of interest for the current previous year will continue till the date of repayment of loan but interest for the pre-construction period will be deducted only over a period of 5 years. The applicability of the above provisions relating to deduction for interest on loan in respect of computing income from let out properties can be understood with the help of he following example. Example No Mr. X borrows Rs. 2 lac for construction of a 9% p.a. on August 1, Construction of the house commences on August 31, 2004 and is completed on Dec. 31, He let out the house to a tenant from Jan. 1, What will be the amount of deduction for interest under section 24(b) if the date of repayment of loan is (i) June 30, 2007 or (ii) June 30, 2009 or (iii) June 30, 2012.