What is Income from House Property?

By Kopal Chaturvedi 17 Minutes Read

In India, taxes can be measured under two heads, Direct Tax, and Indirect Tax. The Income Tax comes under the category of Direct taxes. To determine the tax liability of a person under income tax, first of all, his Gross Total Income (GTI) is to be calculated as under consisting of income from the five heads of income^[1]:

(1) Income from Salary

(2) Income from House Property

(3) Income from Business and Profession

(4) Income from Capital Gain

(5) Income from Other Sources

The Income Tax Act, 1961 mentions the taxation of several kinds of notional income, most notably the imputed income from owner-occupied houses under Section 22 of the Income Tax Act, 1961. Previously, in case of the property occupied by the owner for his residence, a notional income was brought to tax on the ground that the owner experienced a relative increase in wealth through rent savings. However, this position was changed after the Finance Act, 1986.^[2] Presently, such tax on notional income is imposed where the owner has more than one property for self-occupation.^[3] In such cases, the income from other houses is deemed to be the sum for which the property might reasonably be expected to be let from year to year.^[4] The property is assessable on notional income even when it is occupied by a tenant, free of rent.^[5]

INCOME UNDER THE HEAD INCOME FROM HOUSE PROPERTY

Income from House Property includes the rent earned from the House property which is chargeable to tax. Sometimes, the owner may have to pay tax on ‘deemed rent‘ in case the property is not let out or vacant. Following conditions must be satisfied for an income to be termed under ‘Income from House Property:

• The assessee must be the owner of that property.
• The property must consist of a house, buildings, and/or land.
• The property could be used for any purpose except used by the owner to run his business or profession.

According to Section 22, income from house property shall be taxable under this head if the following conditions are satisfied:

• The house property consists of any building or land appurtenant.
• The taxpayer is the owner of the property. The owner includes the deemed owner.
• The house property is for business or profession carried on by the taxpayer^[6]

Further, the income from the flats should be assessed as income from house property and not as income from other sources. This income from the house property can be real or notional. It was held by the Apex Court that income under the head ‘house property’ real or notional cannot escape taxation whoever may be regarded as the owner but certainly, it cannot have two owners at the same time.^[7]

 Hon’ble Supreme Court in the case of Shambhu Investment^[8] submitted that the income from letting out of the property has to be treated as “income from house property”

 In Deputy Commissioner of Income Tax vs M/s Crimson Property Pvt. Ltd^[9], was held against “business income” declared by the assessee on the ground where a major component of income was rent and the basic source of income was hiring of property and space to the members. Accordingly, it was laid that the services provided by way of lighting, furniture & fixture, etc. cannot change the nature of the income. They considered the income as “business income” on the ground that the agreement with the lessee for the property does not mention the word ‘tenant’ for the occupier in it and there is no simple ‘landlord and tenant relationship’ between the assessee company and the lessee.

While deciding as to what comes under Income from House Property, it was held in Pdf Mall and Retail Management vs Ito, that’the mere fact that the income is attached to immovable property, cannot be the sole criterion for assessment of   such income as income from house property. It is necessary to inquire further to find out what is the primary motive of the assessee while exploiting the property. If it is found that the main intention is for simply letting out of the property or any portion thereof, the resultant income must be assessed as income from house property. If, on the other hand, the main intention is found to be the exploitation of the immovable property by way of commercial activities, then the resultant income must be held as business income’^[10]

The Income Tax Act provides a special provision to political parties regarding Income from House Property, Section 13A of the Income Tax Act, 1961 makes a special provision relating to income of political parties. It provides that any income of a political party whether under the head ‘income from house property’ or ‘income from other sources’ or any income by way of voluntary contributions received by it from any person must not be included in the total income of the previous year of such party.^[11] 

THE OWNER

It is the legal owner who is chargeable to tax in respect of property income.

As laid down in Commissioner of Income-Tax vs Poddar Cement Pvt. Ltd, the owner is the person who in his own right can use the house property or derive income from it. Only such an owner has to be taxed under the head income from house property’. He alone has to be taxed under this head. If he cannot be taxed under this head, he cannot be taxed at all. In other words, he cannot be taxed under the head ‘income from other sources’ under Section 56 of the Act.^[12]

Transfer of house property by the individual without adequate consideration to his or her spouse or his minor child is considered as “deemed owner” of the house property.

Deemed owner under Section 27: Income from house property is taxable in the hands of its owner. However, in the following cases, legal owner is not considered as the real owner of the property and someone else is considered as the deemed owner of the property to pay tax on income earned from such house property:

1. An individual, who transfers otherwise than for adequate consideration any house property 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, shall be deemed to be the owner of the house property so transferred;

2. The holder of an impartible estate shall be deemed to be the individual owner of all the properties comprised in the estate;

3. A member of a 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 the owner of that building or part thereof;

4. A person who is allowed to take or retain possession of any building or part thereof in part performance of a contract of nature referred to in Section 53A of the Transfer of Property Act, 1882 shall be deemed to be the owner of that building or part thereof;

5. A person who acquires any rights (excluding any rights by way of a lease from month to month or for a period not exceeding one year) in or concerning any building or part thereof, under any such transaction as is referred to in section 269UA (f), shall be deemed to be the owner of that building or part thereof.

In  Commissioner of Income-Tax vs Modu Timblo, the controversy was regarding a property belonging to a couple in goa. Whether it was to be assessed in the hands of the communion or separately in the hands of the husband and wife. The court referred to its earlier decision in Purushotam Gangadhar Bhende’s case^[13]and observed that ‘The income from house property derived by a communion of husband and wife governed by the Portuguese Civil Code will not be assessed in the hands of the communion but given section 26 of the Act, the share of each such person in the income of the property shall be assessed in his or her hands. And thus, such a property will not come under ‘Income under House Property.’^[14]

COMPOSITE RENT

When apart from recovering rent of the building, in some cases the owner gets rent of other assets or charges for different services provided in the building (for instance, charges for lifts, security, air conditioning, etc. The amount so recovered is known as “composite rent”.

BASIS OF COMPUTING INCOME FROM A LET-OUT HOUSE PROPERTY

Income from the house property can be calculated in the following steps:

(1) Computation of Gross Annual Value

(2) Computation of Net Annual Value

(3) Computation of Deduction available under section 24

1. Gross Annual Value: This is not a tax on the rent of a property, rather a tax on the inherent capacity of a building to yield income. The standard selected as a measure of the income to be taxed is “annual value”.

This Gross Annual Value can be calculated in the following steps:

1. Find out the reasonable expected rent of the property
2. Find out rent received or receivable after excluding unrealized rent but before deducing loss due to vacancy.
3. Find out which one is higher, an amount computed in step ‘a’ or step ‘b’.
4. Find out loss because of the vacancy.
5. Step ‘c’ minus step’ is gross annual value.
6. Deduct Municipal Taxes: From the gross annual value computed above, deduct municipal taxes (including service taxes) levied by any local authority in respect of the house property. Municipal taxes are deductible only if:
7. These taxes are borne by the owner, and
8. Are paid by him during the previous year.

Municipal taxes levied by the local authority but not paid by the assessee during the previous year are not deductible. If the property is situated in a foreign country, municipal taxes levied by a foreign local authority are deductible (if such taxes are paid by the owner).

• Deduction under Section 24 of the Income Tax Act: Following two deductions are available under Section 24:
• Standard Deduction: Here, 30 percent of the net annual value is deductible irrespective of any expenditure incurred by the taxpayer.
• Interest on Borrowed Capital: interest on borrowed capital is allowable as a deduction, if capital is borrowed for purchase, construction, repair, renewal or reconstruction of the property. Also, if capital is borrowed to purchase a plot, interest liability is deductible even if construction is financed out of its funds.

The deduction is available even if neither the principal nor the interest is a charge on the property. Whereas, no deduction is allowed for any brokerage or commission for arranging the loan.

Interest on a fresh loan, taken to repay the original loan is allowable as a deduction. This rule is applicable even when the first loan is an interest-free loan. Interest on borrowed capital. Any interest chargeable under the Act, in the hands of the recipient and payable out of India, on which tax has not been paid or deducted at source, and in respect of which no person may be treated as an agent, is not deductible, under section 25, in computing income chargeable under the head “Income from House Property”.

Interest on borrowed capital is deductible fully without any maximum ceiling. Further, the transaction of allotment of a property to an assessee on installment basis does give rise to a relationship of borrower and lender between the assessee and the estate officer and as such interest paid by the assessee on installments constitutes interest on borrowed capital.

INTEREST OF PRE-CONSTRUCTED PERIOD

Interest payable by an assessee in respect of funds borrowed for the acquisition or construction of a house property pertaining and about a period before the previous year in which such property has been acquired or constructed, to the extent it is not allowed as a deduction under any other provision of the Act will be deducted in five equals annual installments, commencing from the previous year in which the house is acquired or constructed.^[15]

^[1] Source Link.
^[2] The amendment came into force on April 1, 1984. The amendment was explained by the Board in Circular No. 461, dated July 9, 1986: (1986) 161 ITR St 21.
^[3] Income Tax Act, 1961, § 23(2) read with § 23(4).
^[4] Income Tax Act, 1961, § 23(1).
^[5] CIT v. DLF Housing Construction Pvt. Ltd., (1981) 128 ITR 773 (Del); Sri Currimbhoy Ebrahim Baronetcy Trust v. CIT, (1963) 48 ITR 507 (Bom); Vakil (DM) v. CIT, (1946) 14 ITR 298 (Bom).
^[6] Source Link.
^[7] Commissioner of Income-Tax vs Poddar Cement Pvt. Ltd. Etc on 27 May, 1997.
^[8] Commissioner of Income Tax v. Shambhu Investment Private Limited: [2001] 249 ITR 47.
^[9] 2010 SCC Online ITAT 2753: [2010] ITAT 3553.
^[10] Pfh Mall and Retail Management vs Ito on 11 May, 2007, 2008 110 ITD 337 Kol, 2008 298 ITR 371 Kol, (2007) 112 TTJ Kol 523.
^[11] Subhash C. Jain, 43 JILI (2001) 500 State Funding of Elections and Political Parties in India.
^[12] Commissioner of Income-Tax vs Poddar Cement Pvt. Ltd. Etc on 27 May, 1997
^[13] [1977] 106 ITR 932.
^[14] Commissioner of Income-Tax vs Modu Timblo, 1994 206 ITR 647 Bom.
^[15] Dr. Vinod K. Singhania, Student’s Guide to Income Tax, Taxman.

Kopal Chaturvedi