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It may be noted that Income from letting out of vacant land is, however, taxable under the head
“Income from other sources” or “Profits and gains from business or profession”, as the case
may be.
(vii) If the title of the ownership of the property is under dispute in a court of law, the
decision as to who will be the owner chargeable to income-tax under section 22 will
be of the Income-tax Department till the court gives its decision to the suit filed in
respect of such property.
However, in case of recovery of unrealized rent and arrears of rent, ownership of that property
is not relevant. (discussed later in para 5.9)
Municipal tax
Determination of paid by the
Net Annual
Gross Annual owner during
Value (NAV)
Value (GAV) the previous
year
♦ The Expected Rent (ER) is the higher of fair rent (FR) and municipal value (MV),
but restricted to standard rent (SR).
For example, let us say the higher of FR and MV is X. Then ER = SR, if X>SR.
However, if X<SR, ER = X.
♦ Expected Rent (ER) as per section 23(1)(a) cannot exceed standard rent (SR)
but it can be lower than standard rent, in a case where standard rent is more
than the higher of MV and FR.
♦ Municipal value is the value determined by the municipal authorities for levying
municipal taxes on house property.
♦ Fair rent means rent which similar property in the same locality would fetch.
♦ The standard rent (SR) is fixed by the Rent Control Act.
From the GAV computed above, municipal taxes paid by the owner during the previous year
is to be deducted to arrive at the NAV.
ILLUSTRATION 1
Jayashree owns five houses in Chennai, all of which are let-out. Compute the GAV of each
house from the information given below –
Particulars House I House II House III House IV House V
(`) (`) (`) (`) (`)
Municipal Value 80,000 55,000 65,000 24,000 80,000
Fair Rent 90,000 60,000 65,000 25,000 75,000
SOLUTION
As per section 23(1), Gross Annual Value (GAV) is the higher of Expected rent and actual
rent received. Expected rent is higher of municipal value and fair rent but restricted to
standard rent.
Computation of GAV of each house owned by Jayashree
Particulars House I House II House III House IV House V
(`) (`) (`) (`) (`)
(i) Municipal value 80,000 55,000 65,000 24,000 80,000
(ii) Fair rent 90,000 60,000 65,000 25,000 75,000
(iii) Higher of (i) & (ii) 90,000 60,000 65,000 25,000 80,000
(iv) Standard rent N.A. 75,000 58,000 N.A. 78,000
(v) Expected rent 90,000 60,000 58,000 25,000 78,000
[Lower of (iii) & (iv)
(vi) Actual rent 72,000 72,000 60,000 30,000 72,000
received/ receivable
GAV [Higher of (v) 90,000 72,000 60,000 30,000 78,000
& (vi)]
(ii) Where let out property is vacant for part of the year [Section 23(1)(c)]
Where let out property is vacant for part of the year and owing to vacancy, the actual rent is
lower than the ER, then the actual rent received or receivable will be the GAV of the property.
(iii) In case of self-occupied property or unoccupied property [Section 23(2)]
(a) Where the property is self-occupied for own residence or unoccupied throughout the
previous year, its Annual Value will be Nil, provided no other benefit is derived by the
owner from such property.
The expression “Unoccupied property” refers to a property which cannot be
occupied by the owner by reason of his employment, business or profession at a
different place and he resides at such other place in a building not belonging to
him.
(b) The benefit of “Nil” Annual Value is available only for upto two self-occupied or
unoccupied house properties i.e. for either one house property or two house
properties owned by the assessee.
(c) The benefit of “Nil” Annual Value in respect of upto two self-occupied house properties
is available only to an individual/ HUF.
(d) No deduction for municipal taxes is allowed in respect of such property.
(iv) Where a house property is let-out for part of the year and self-occupied for part of the
year [Section 23(3)]
(a) If a single unit of a property is self-occupied for part of the year and let-out for the
remaining part of the year, then the ER for the whole year shall be taken into account
for determining the GAV.
(b) The ER for the whole year shall be compared with the actual rent for the let out
period and whichever is higher shall be adopted as the GAV.
(c) However, municipal tax for the whole year is allowed as deduction provided it is paid
by the owner during the previous year.
(v) In case of deemed to be let out property [Section 23(4)]
(a) Where the assessee owns more than two properties for self-occupation, then, the
income from any two such properties, at the option of the assessee, shall be computed
under the self-occupied property category and their annual value will be nil.
(b) The other self-occupied/ unoccupied property/properties shall be treated as “deemed
let out property/properties”.
(c) This option can be changed year after year in a manner beneficial to the assessee.
(d) In case of deemed let-out property, the ER shall be taken as the GAV.
(e) The question of considering actual rent received/ receivable does not arise.
Consequently, no adjustment is necessary on account of property remaining vacant or
unrealized rent.
(f) Municipal taxes actually paid by the owner during the previous year, in respect of the
deemed let out properties, can be claimed as deduction.
(vi) In case of a house property held as stock-in-trade [Section 23(5)]
(a) In some cases, property consisting of any building or land appurtenant thereto may be
held as stock-in-trade, and the whole or any part of the property may not be let out
during the whole or any part of the previous year.
(b) In such cases, the annual value of such property or part of the property shall be NIL.
(c) This benefit would be available for the period upto two years from the end of the
financial year in which certificate of completion of construction of the property is
obtained from the competent authority.
(vii) In case of a house property, a portion let out and a portion self-occupied
(a) Income from any portion or part of a property which is let out shall be computed
separately under the “let out property” category and the other portion or part which is
self-occupied shall be computed under the “self-occupied property” category.
(b) There is no need to treat the whole property as a single unit for computation of income
from house property.
(c) Municipal valuation/ fair rent/ standard rent, if not given separately, shall be
apportioned between the let-out portion and self-occupied portion either on plinth area
or built-up floor space or on such other reasonable basis.
(d) Property taxes, if given on a consolidated basis can be bifurcated as attributable to
each portion or floor or on a reasonable basis.
(d) the assessee has taken all reasonable steps to institute legal proceedings for the
recovery of the unpaid rent or satisfies the Assessing Officer that legal proceedings
would be useless.
(3) Property taxes (Municipal taxes)
(i) Property taxes are allowable as deduction from the GAV subject to the following two
conditions:
(a) It should be borne by the assessee (owner); and
(b) It should be actually paid during the previous year.
(ii) If property taxes levied by a local authority for a particular previous year is not paid during
that year, no deduction shall be allowed in the computation of income from house property
for that year.
(iii) However, if in any subsequent year, the arrears are paid, then, the amount so paid is allowed
as deduction in computation of income from house property for that year.
(iv) Thus, we find that irrespective of the previous year in which the liability to pay such taxes
arise according to the method of accounting regularly employed by the owner, the deduction
in respect of such taxes will be allowed only in the year of actual payment.
(v) In case of property situated outside India, taxes levied by local authority of the country in
which the property is situated is deductible [CIT v. R. Venugopala Reddiar (1965) 58 ITR 439
(Mad)].
(vi) In respect of self-occupied/unoccupied house property/properties for which “Nil” Annual Value
is claimed, deduction of municipal taxes paid is not allowable.
ILLUSTRATION 2
Rajesh, a British national, is a resident and ordinarily resident in India during the P.Y. 2019-20. He
owns a house in London, which he has let out at £ 10,000 p.m. The municipal taxes paid to the
Municipal Corporation of London is £ 8,000 during the P.Y. 2019-20. The value of one £ in Indian rupee
to be taken at ` 92.50. Compute Rajesh’s Net Annual Value of the property for the A.Y. 2020-21.
SOLUTION
For the P.Y.2019-20, Mr. Rajesh, a British national, is resident and ordinarily resident in India.
Therefore, income received by him by way of rent of the house property located in London is to be
included in the total income in India. Municipal taxes paid in London is be to allowed as deduction
from the gross annual value.
Computation of Net Annual Value of the property of Mr. Rajesh for A.Y.2020-21
Particulars `
Gross Annual Value (£ 10,000 × 12 × ` 92.50) 1,11,00,000
ILLUSTRATION 3
Arvind had taken a loan of ` 5,00,000 for construction of property on 1.10.2018. Interest was
payable @10% p.a. The construction was completed on 30.6.2019. No principal repayment
has been made up to 31.3.2020. Compute the interest allowable as deduction under section
24 for the A.Y.2020-21.
SOLUTION
Interest for the year (1.4.2019 to 31.3.2020) = 10% of ` 5,00,000 = ` 50,000
Pre-construction interest =10% of ` 5,00,000 for 6 months (from 1.10.2018 to 31.3.2019) =
` 25,000
Pre-construction interest to be allowed in 5 equal annual installments of ` 5,000 from the
year of completion of construction i.e. in this case, P.Y. 2019-20.
Therefore, total interest deduction under section 24 = ` 50,000 + ` 5000 = ` 55,000.
(2) Deduction in respect of self-occupied property where annual value is nil
(i) In this case, the assessee will be allowed a deduction on account of interest (including 1/5th
of the accumulated interest of pre-construction period) as under –
ILLUSTRATION 4
Mr. Manas owns two house properties one at Bombay, wherein his family resides and the
other at Delhi, which is unoccupied. He lives in Chandigarh for his employment purposes in
a rented house. For acquisition of house property at Bombay, he has taken a loan of ` 30
lakh@10% p.a. on 1.4.2018. He has not repaid any amount so far. In respect of house
property at Delhi, he has taken a loan of ` 5 lakh@11% p.a. on 1.10.2018 towards repairs.
Compute the deduction which would be available to him under section 24(b) for A.Y.2020-21
in respect of interest payable on such loan.
SOLUTION
Mr. Manas can claim benefit of Nil Annual Value in respect of his house property at Bombay
and Delhi, since no benefit is derived by him from such properties, and he cannot occupy
such properties due to reason of his employment at Chandigarh, where he lives in a rented
house.
Computation of deduction u/s 24(b) for A.Y.2020-21
Particulars `
I Interest on loan taken for acquisition of residential house property
at Bombay
30,00,000 x 10% = ` 3,00,000
Restricted to ` 2,00,000 2,00,000
II Interest on loan taken for repair of residential house property at
Delhi
` 5,00,000 x 11% = ` 55,000
Restricted to ` 30,000 30,000
Total interest 2,30,000
Deduction under section 24(b) in respect of (I) and (II) above to be 2,00,000
restricted to
(ii) Certificate to be furnished: For the purpose of claiming deduction of ` 2,00,000 as per (b)(i)
in the table given above, the assessee should furnish a certificate from the person to whom
any interest is payable on the capital borrowed, 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 a new loan.
Important points:
(a) The ceiling limit would not apply to let-out/ deemed let-out property: The ceiling
prescribed for self-occupied property as above in respect of interest on loan borrowed does
not apply to a let out/deemed let-out property.
(b) Interest allowable on accrual basis: Deduction under section 24(b) for interest is available
on accrual basis. Therefore, interest accrued but not paid during the year can also be claimed
as deduction.
(c) Unpaid purchase price would be considered as capital borrowed: Where a buyer enters
into an arrangement with a seller to pay the sale price in installments along with interest due
thereon, the seller becomes the lender in relation to the unpaid purchase price and the buyer
becomes the borrower. In such a case, unpaid purchase price can be treated as capital
borrowed for acquiring property and interest paid thereon can be allowed as deduction under
section 24.
(d) Interest on unpaid interest is not deductible.
Deductions from Net Annual Value: At a Glance
Deductions allowed from NAV
Standard Interest on
deduction u/s borrowed capital where loan is taken for where loan is taken for
24(a) u/s 24(b) repair, renewal or acquisition or construction of
reconstruction of house house property
property
No Yes
Maximum
Maximum
` 2,00,000 in
` 30,000 in toto for
toto for one or
one or two self
two self
occupied properties
occupied
properties
ILLUSTRATION 5
P, an individual, borrowed ` 20,00,000 for repair of his self-occupied house property and paid
interest of ` 1,60,000 thereon during the financial year 2019-20. What is the amount of interest
allowable as deduction under section 24 for the assessment year 2020-21?
SOLUTION
Section 24(b) provides that where the self-occupied house property has been acquired, constructed,
repaired, renewed or reconstructed with borrowed capital, deduction towards interest payable
thereon shall not exceed ` 30,000. Therefore, only ` 30,000 would be allowed as deduction on
account of interest on loan borrowed for repair and reconstruction of self-occupied house property.
The higher limit of ` 2,00,000 in respect of interest on loan borrowed on or after 1.4.1999 would be
available only where such loan is borrowed for acquisition or construction of self-occupied property
and not for repair of such property.
ILLUSTRATION 6
Anirudh has a property whose municipal valuation is ` 1,30,000 p.a. The fair rent is ` 1,10,000 p.a.
and the standard rent fixed by the Rent Control Act is ` 1,20,000 p.a. The property was let out for a
rent of ` 11,000 p.m. throughout the previous year. Unrealised rent was ` 11,000 and all conditions
prescribed by Rule 4 are satisfied. He paid municipal taxes @10% of municipal valuation. Interest
on borrowed capital was ` 40,000 for the year. Compute the income from house property of Anirudh
for A.Y. 2020-21.
SOLUTION
Computation of Income from house property of Mr. Anirudh for A.Y. 2020-21
Particulars Amount in `
Computation of GAV
Step 1 Compute ER
ER = Higher of MV of ` 1,30,000 p.a. and FR of 1,20,000
` 1,10,000 p.a., but restricted to SR of ` 1,20,000 p.a.
Step 2 Compute actual rent received/ receivable
Actual rent received/ receivable less unrealized rent as per
Rule 4 = ` 1,32,000 - ` 11,000 1,21,000
Step 3 Compare ER of ` 1,20,000 and Actual rent received/
receivable of ` 1,21,000.
Step 4 GAV is the higher of ER and Actual rent received/receivable 1,21,000
Gross Annual Value (GAV) 1,21,000
Less: Municipal taxes (paid by the owner during the previous year)
= 10% of ` 1,30,000 13,000
Net Annual Value (NAV) 1,08,000
Less: Deductions under section 24
(a) 30% of NAV 32,400
(b) Interest on borrowed capital
(actual without any ceiling limit) 40,000 72,400
Income from house property 35,600
ILLUSTRATION 7
Ganesh has a property whose municipal valuation is ` 2,50,000 p.a. The fair rent is ` 2,00,000 p.a.
and the standard rent fixed by the Rent Control Act is ` 2,10,000 p.a. The property was let out for a
rent of ` 20,000 p.m. However, the tenant vacated the property on 31.1.2020. Unrealised rent was
` 20,000 and all conditions prescribed by Rule 4 are satisfied. He paid municipal taxes @8% of
municipal valuation. Interest on borrowed capital was ` 65,000 for the year. Compute the income
from house property of Ganesh for A.Y. 2020-21.
SOLUTION
Computation of income from house property of Ganesh for A.Y. 2020-21
Particulars Amount in `
Computation of GAV
Step 1 Compute ER
ER = Higher of MV of ` 2,50,000 p.a. and FR of 2,10,000
` 2,00,000 p.a., but restricted to SR of ` 2,10,000 p.a.
Step 2 Compute Actual rent received/ receivable
Actual rent received/ receivable for let out period less
unrealized rent as per Rule 4 = ` 2,00,000 - ` 20,000 1,80,000
Step 3 Compare ER and Actual rent received/ receivable
ILLUSTRATION 8
Poorna has one house property at Indira Nagar in Bangalore. She stays with her family in the house.
The rent of similar property in the neighbourhood is ` 25,000 p.m. The municipal valuation is
` 23,000 p.m. Municipal taxes paid is ` 8,000. The house construction began in April, 2013 with a
loan of ` 20,00,000 taken from SBI Housing Finance Ltd on 1.4.2013. The construction was
ILLUSTRATION 9
Smt. Rajalakshmi owns a house property at Adyar in Chennai. The municipal value of the property
is ` 5,00,000, fair rent is ` 4,20,000 and standard rent is ` 4,80,000. The property was let-out for
` 50,000 p.m. up to December 2019. Thereafter, the tenant vacated the property and Smt.
Rajalakshmi used the house for self-occupation. Rent for the months of November and December
2019 could not be realised in spite of the owner’s efforts. All the conditions prescribed under Rule 4
are satisfied. She paid municipal taxes @12% during the year. She had paid interest of ` 25,000
during the year for amount borrowed for repairs for the house property. Compute her income from
house property for the A.Y. 2020-21.
SOLUTION
Computation of income from house property of Smt. Rajalakshmi for the A.Y.2020-21
Particulars Amount in `
Computation of GAV
Step 1 Compute ER for the whole year
ER = Higher of MV of ` 5,00,000 and FR of ` 4,20,000, but
restricted to SR of ` 4,80,000 4,80,000
Step 2 Compute Actual rent received/ receivable
Actual rent received/ receivable for the period let out less
unrealized rent as per Rule 4 = (` 50,000 × 9) - 3,50,000
(` 50,000 × 2)= ` 4,50,000 - ` 1,00,000 =
Step 3 Compare ER for the whole year with the actual rent
received/ receivable for the let-out period i.e. ` 4,80,000
and `3,50,000
Step 4 GAV is the higher of ER computed for the whole year and
Actual rent received/receivable computed for the let-out period. 4,80,000
Gross Annual Value (GAV) 4,80,000
Less: Municipal taxes (paid by the owner during the previous
year) = 12% of ` 5,00,000 60,000
Net Annual Value (NAV) 4,20,000
Less: Deductions under section 24
(a) 30% of NAV = 30% of ` 4,20,000 1,26,000
(b) Interest on borrowed capital 25,000 1,51,000
Income from house property 2,69,000
ILLUSTRATION 10
Ganesh has three houses, both of which are self-occupied. The particulars of the houses for the
P.Y.2019-20 are as under:
(3) Summary:
Section 25A
Arrears of Rent / Unrealised Rent
(i) Taxable in the year of receipt/realisation
(ii) Deduction@30% of rent received/realised
(iii) Taxable even if assessee is not the owner of the property in the financial year of
receipt/realisation.
ILLUSTRATION 12
Mr. Anand sold his residential house property in March, 2019.
In June, 2019, he recovered rent of ` 10,000 from Mr. Gaurav, to whom he had let out his house for
two years from April 2013 to March 2015. He could not realise two months rent of
` 20,000 from him and to that extent his actual rent was reduced while computing income from
house property for A.Y.2015-16.
Further, he had let out his property from April, 2015 to February, 2019 to Mr. Satish. In April, 2017, he
had increased the rent from ` 12,000 to ` 15,000 per month and the same was a subject matter of
dispute. In September, 2019, the matter was finally settled and Mr. Anand received ` 69,000 as arrears
of rent for the period April 2017 to February, 2019.
Would the recovery of unrealised rent and arrears of rent be taxable in the hands of Mr. Anand, and
if so in which year?
SOLUTION
Since the unrealised rent was recovered in the P.Y.2019-20, the same would be taxable in the
A.Y.2020-21 under section 25A, irrespective of the fact that Mr. Anand was not the owner of the house
in that year. Further, the arrears of rent was also received in the P.Y.2019-20, and hence the same
would be taxable in the A.Y.2020-21 under section 25A, even though Mr. Anand was not the owner of
the house in that year. A deduction of 30% of unrealised rent recovered and arrears of rent would be
allowed while computing income from house property of Mr. Anand for A.Y.2020-21.
Computation of income from house property of Mr. Anand for A.Y.2020-21
Particulars `
(i) Unrealised rent recovered 10,000
(ii) Arrears of rent received 69,000
79,000
Less: Deduction@30% 23,700
Income from house property 55,300
ILLUSTRATION 13
Ms. Aparna co-owns a residential house property in Calcutta along with her sister Ms. Dimple, where her
sister’s family resides. Both of them have equal share in the property and the same is used by them for
(2) Transfer to a minor child [Section 27(i)] – In case of transfer of house property by an
individual to his or her minor child otherwise than for adequate consideration, the transferor
would be deemed to be owner of the house property transferred.
Exception– In case of transfer to a minor married daughter, the transferor is not deemed to
be the owner.
Note - Where cash is transferred to spouse/minor child and the transferee acquires property
out of such cash, then the transferor shall not be treated as deemed owner of the house
property. However, clubbing provisions will be attracted.
(3) Holder of an impartible estate [Section 27(ii)] – The impartible estate is a property which
is not legally divisible. The holder of an impartible estate shall be deemed to be the individual
owner of all properties comprised in the estate.
After enactment of the Hindu Succession Act, 1956, all the properties comprised in an
impartible estate by custom is to be assessed in the status of a HUF. However, section 27(ii)
will continue to be applicable in relation to impartible estates by grant or covenant.
(4) Member of a co-operative society etc. [Section 27(iii)] – 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 of a society/ company/ association, shall be
deemed to be owner of that building or part thereof allotted to him although the co-operative
society/company/ association is the legal owner of that building.
(5) Person in possession of a property [Section 27(iiia)] – A person who is allowed to take or
retain the possession of any building or part thereof in part performance of a contract of the
nature referred to in section 53A of the Transfer of Property Act shall be the deemed owner
of that house property. This would include cases where the –
(i) possession of property has been handed over to the buyer
(ii) sale consideration has been paid or promised to be paid to the seller by the buyer
(iii) sale deed has not been executed in favour of the buyer, although certain other
documents like power of attorney/ agreement to sell/ will etc. have been executed.
In all the above cases, the buyer would be deemed to be the owner of the property although
it is not registered in his name.
(6) Person having right in a property for a period not less than 12 years [Section 27(iiib)]
– A person who acquires any rights in or with respect to any building or part thereof, by virtue
of any transaction as is referred to in section 269UA(f) i.e. transfer by way of lease for not
less than 12 years, shall be deemed to be the owner of that building or part thereof.
Exception – In case the person acquiring any rights by way of lease from month to month or
for a period not exceeding one year, such person will not be deemed to be the owner.
EXERCISE
Question 1
People Housing Ltd. is engaged in the business of constructing residential and commercial
properties. One of the building properties was included in the closing stock in the Balance Sheet.
The said building was let out for a monthly rent as suitable buyers could not be found. All other
buildings had been sold by the company. Examine with reasons whether the income by way of rent
from the unsold property is assessable as income from business or income from house property.
How would the monthly rent be taxed, if the main objective of the company was to hold properties
and earn income by letting out of these properties?
Answer
(a) Under section 22, the charging section for “Income from house property”, the only exception
provided is the income derived from property used/occupied by the assessee for his own
business. Therefore, income derived from letting out of house property will be taxable under
the head “Income from house property”, even if property is held by the assessee as stock-in-
trade of his business.
As per section 23(5), income from house property held as stock-in-trade would be exempt for
a period of two years from the end of the financial year in which certificate of completion was
obtained from the competent authority. However, for availing such exemption, the property
should not be let out during the said period. Section 23(5) provides for exemption in respect
of house property held as stock-in-trade for a certain period subject to fulfilment of the
condition stated therein. It implies that income from house property held as stock-in-trade –
(i) beyond the said period; or
(ii) not eligible for such exemption even during the said period due to non-fulfilment of the
stated condition,
would be taxable under the same head of income i.e., “Income from house property”.
In effect, where exemption provisions are provided under a particular head of income, it can be
inferred that the income, but for such exemption, would be taxable only under that head of income.
Note – In the case of New Delhi Hotels Ltd. v. ACIT (2014) 360 ITR 187, the Delhi High Court
followed its own decision in the case of CIT vs. Discovery Estates Pvt. Ltd/CIT vs. Discovery
Holding Pvt. Ltd., wherein it was held in the case of rental income derived from unsold flats
which were shown as stock-in trade in the books of the assessee should be assessed under
the head “Income from house property” and not under the head “Profits and gains from
business and profession”.
This decision is in sync with the intent of the provisions of section 22 and 23(5) discussed
above.
(b) The Supreme Court, in Chennai Properties and Investments Ltd. v. CIT (2015) 373 ITR 673,
held that where holding of properties and earning income by letting out of these properties is
the main objective of the company as laid out in its Memorandum of Association and the
entire income of the company as per its return of income accepted by the Assessing Officer
comprises of income from letting out of such properties, such income would be assessable
as “Profits and gains of business or profession.”
Further, in case of Rayala Corporation (P) Ltd. v. Asstt. CIT (2016) 386 ITR 500, the Supreme
Court held that since the business of the company is to lease out its property and earn rent
therefrom, the rental income earned by the company is chargeable to tax as its business
income and not income from house property.
Applying the rationale of above rulings if the main objective of the company is to hold the
properties and earn income by letting out of the properties, the income from letting out of
properties would be chargeable to tax as “Profits and gains of business or profession”.
Question 2
A Hindu undivided family owns a property which has been let out to a firm carrying on business. The
family is a partner of the firm through its Karta. No rent has been charged by the HUF from the firm
for use of the premises by the firm. The Assessing Officer, however, has taxed the family on the
notional income from property based on municipal valuation. Is this decision justified?
Answer
Under section 22, the annual value of a property is chargeable to tax under the head “Income from
house property” in the hands of the owner. However, this section specifically excludes property
occupied for the purposes of own business or profession of the assessee, the profits of which are
chargeable to income-tax. In CIT v. Shri. Champalal Jeevraj (1995) 215 ITR 289 (Mad), it was
observed that where the Karta of the HUF is a partner in the firm in his representative capacity and
the firm occupied a portion of the house belonging to the HUF, the benefit of exclusion under section
22 was available to the HUF. Hence, the income from the said property shall not be chargeable to
tax under the head “Income from house property”. Therefore, in this case, the action of the Assessing
Officer is not correct.
Question 3
In the following cases, examine under which head of income the receipt would be assessed-
(a) Anirudh let out his property to Abhinav. Abhinav sublets it. How is sub-letting receipt to be
assessed in the hands of Abhinav?
(b) Anish has built a house on a leasehold land. He has let-out the above property and has
considered the rent from such property under the head "Income from other sources" and
deducted expenses on repairs, security charges, insurance and collection charges in all
amounting to 50% of receipts.
Answer
(a) Sub-letting receipt is to be assessed as “Income from Other Sources” or as “Profits and gains
of business or profession” in hands of Mr. Abhinav, depending upon the facts and
circumstances of each case. It is not assessable as income from house property, since one
of the conditions for assessing an income under this head is that the assessee should be the
owner of the property i.e. owner of the building and the land appurtenant thereto. In this case,
since Abhinav is not the owner of the house property, sub-letting receipt cannot be assessed
under the head “Income from house property”.
(b) Since Anish is the owner of the property (building), in this case, the receipt would be
assessable as “Income from house property”. The ownership of land is not a pre-requisite for
assessment of income under this head. 30% of Net Annual Value would be allowed as a
deduction under section 24.
Question 4
Rajesh owns a house in Hyderabad. During the previous year 2019-20, 3/4th portion of the house
was self-occupied and 1/4th portion was let out for residential purposes at a rent of
` 12,000 p.m. The tenant vacated the property on February 29th 2020. The property was vacant
during March, 2020. Rent for the months of January 2020 and February 2020 could not be realised
in spite of the owner’s efforts. All the conditions prescribed under Rule 4 are satisfied.
Municipal value of the property is ` 4,00,000 p.a., fair rent is ` 4,40,000 p.a. and standard rent is
` 4,80,000. He paid municipal taxes @10% of municipal value during the year. A loan of
` 30,00,000 was taken by him during the year 2010 for acquiring the property. Interest on loan paid
during the previous year 2019-20 was ` 1,48,000. Compute Rajesh’s income from house property
for the A.Y. 2020-21.
Answer
There are two units of the house. Unit I with 3/4th area is used by Rajesh for self-occupation
throughout the year and no benefit is derived from that unit, hence, it will be treated as self-occupied
and its annual value will be nil. Unit 2 with 1/4th area is let-out during the previous year and its
annual value has to be determined as per section 23(1).
Computation of Income from house property of Mr. Rajesh for the A.Y. 2020-21
Particulars `
Unit I (3/4th area – self-occupied)
Annual Value Nil
Less: Deduction under section 24(b)
3/4th of ` 1,48,000 1,11,000
Income from Unit I (self-occupied) (1,11,000)
Unit II (1/4th area – let out)
Computation of GAV
Step 1 – Computation of Expected Rent (ER)
ER = Higher of municipal valuation (MV) and fair rent (FR), but restricted to
standard rent (SR). However, in this case, standard rent of ` 1,20,000 (1/4th
Question 5
During the financial year 2019-20, Mr. A received a sum of ` 1,80,000 (` 60,000 p.a.) by way of
arrears for the last three years as the Government department (tenant) enhanced the rate of rent
with retrospective effect. Will the sum of ` 1,80,000 be taxable in the assessment year 2020-21?
Can it be spread over the last three years?
Answer
As per section 25A, the arrears of rent shall be taxable in the previous year in which such arrears
are received. The assessee shall be allowed deduction @ 30% of such amount received. Further, it
is not necessary that the assessee should be owner of such house property in the previous year in
which such arrears are received.
As the arrear rent of ` 1,80,000 is received in the previous year 2019-20, the same is taxable in the
A.Y.2020-21. Thus, the net sum of ` 1,26,000 (i.e. ` 1,80,000 – ` 54,000) shall be chargeable to
tax under the head “Income from house property”.
There is no provision in the Income-tax Act, 1961, enabling the assessee to spread over the arrears
of rent over the last three years.
Supreme Court’s Decision: The Supreme Court, accordingly, held that, in this case, the
income is to be assessed as “Income from house property” and not as business income, on
account of lack of sufficient material to prove that the substantial income of the assessee was
from letting out of the property.
Note - In Chennai Properties and Investments Ltd. v. CIT (2015) 373 ITR 673, the Supreme
Court observed that holding of the properties and earning income by letting out of these
properties is the main objective of the company. Further, in the return of income filed by the
company and accepted by the Assessing Officer, the entire income of the company comprised
of income from letting out of such properties. The Supreme Court, accordingly, held that such
income was taxable as business income. Likewise, in Rayala Corporation (P) Ltd. v. Asst.
CIT (2016) 386 ITR 500, the Supreme Court noted that the assessee was engaged only in
the business of renting its properties and earning rental income therefrom and accordingly,
held that such income was taxable as business income. In this case, however, on account
of lack of sufficient material to prove that substantial income of the assessee was from letting
out of property, the Supreme Court held that the rental income has to be assessed as “Income
from house property”.
2. Would income from letting out of properties by a company, whose main object as per
its memorandum of association is to acquire and let out properties, be taxable as its
business income or income from house property, considering the fact that the entire
income of the company as per its return of income was only from letting out of
properties?
Chennai Properties and Investments Ltd. v. CIT (2015) 373 ITR 673 (SC)
Facts of the Case: The assessee-company was incorporated under the Companies Act,
1956. Its main objective, as stated in the memorandum of association, is to acquire properties
in the city of Madras and let out those properties. The company had rented out such properties
and the rental income was shown as its business income in the return filed by the assessee.
The Assessing Officer, however, assessed the rental income under the head “Income from
house property”. On appeal, the Commissioner (Appeals) concurred with the assessee’s
view that the rental income, in this case, was the company’s business income. The Appellate
Tribunal also supported the view of the Commissioner (Appeals).
High Court’s Opinion: The High Court allowed the Department’s appeal holding that income
derived from letting out of properties has to be assessed as income from house property. It
held so on the basis of the Supreme Court ruling in East India Housing and Land Development
Trust Ltd. v. CIT (1961) 42 ITR 9, wherein it was decided that income from letting out of shops
and stalls was to be assessed as income from house property, in the case of a company
whose main object of was buying and developing landed properties and promoting and
developing markets.
Supreme Court’s Observations: The Supreme Court observed that the High Court had
pronounced its ruling on the basis of the decision of the Apex Court in East India Housing
and Land Development Trust Ltd.’s case, wherein the letting out of property was not the object
of the company at all. Therefore, in that case, the Apex Court was of the opinion that the
character of the income which was from house property had not changed merely because it
was received by the company formed with the object of developing and setting up properties.
The Supreme Court further observed the law laid down authoritatively and succinctly by it in
Karanpura Development Co. Ltd. v. CIT [1962] 44 ITR 362. In that case, the assessee-
company was formed with the object of, inter alia, acquiring and disposing of the underground
coal mining rights in certain coal fields and it had restricted its activities to acquiring coal
mining leases over large areas, developing them as coal fields and then sub-leasing them to
collieries and other companies. Thus, in that case, the leasing out of the coal fields to the
collieries and other companies was the business of the assessee. The income which was
received from letting out of those mining leases was shown as business income. Department
took the position that the same was to be treated as income from the house property. Thus,
in similar circumstances, an identical issue arose before the Apex Court. The Apex Court
pointed out that the deciding factor as to the head under which the income was to be assessed
is not the ownership of land or leases but the nature of the activity of the assessee and the
nature of the operations in relation to them. It was highlighted and stressed that the objects
of the company must also be kept in view to interpret the activities. In support of the aforesaid
proposition, a number of judgments of other jurisdictions, i.e., Privy Council, House of Lords
in England and the US Courts were taken note of.
After applying the aforesaid principle to the facts, the Apex Court had arrived at the conclusion
that such income had to be treated as income from business and not as income from house
property.
Supreme Court’s Decision: The Supreme Court opined that the aforesaid judgment in
Karanpura Development Co. Ltd.'s case squarely applied to the facts of the present case,
where letting of the properties is in fact the business of the assessee. The main objective of
the company as per its memorandum of association is to acquire and hold properties in
Chennai and let out these properties. Therefore, holding of the properties and earning income
by letting out these properties is the main objective of the company. Further, in the return of
income filed by the company and accepted by the Assessing Officer, the entire income of the
company comprised of income from letting out of such properties. The Supreme Court,
accordingly, held that the assessee had rightly disclosed the income derived from letting out
of such properties under the head "Profits and gains of business or profession".
3. Would rental income from the business of leasing out properties be taxable under the head
“Income from house property” or “Profits and gains from business or profession”?
Rayala Corporation (P) Ltd. v. Asstt. CIT (2016) 386 ITR 500 (SC)
Facts of the case: The assessee company was in the business of renting its properties and
received rent which it claims as its business income chargeable under the head “Profits and
Gains from business or profession”. The Assessing Officer, however, brought to tax the rental
income under the head “Income from house property”.
Appellate Authorities’ views: The Appellate Tribunal and the High Court affirmed the view
of the Assessing Officer holding that the rental income from letting out of properties is to be
taxed under the head “Income from house property”.
Supreme Court’s Observations: The Apex Court took note of the specific finding by the
authorities that the assessee had stopped its other business activities and continued only the
business of leasing out its properties and earning rent therefrom. Thus, it noted that the
assessee was engaged only in the business of renting its properties and earning rental
income. It made reference to law laid down by it in Chennai Properties & Investments Ltd v.
CIT (2015) 373 ITR 673 (SC) that if an assessee is engaged in the business of letting out
house property on rent, then, the income from such property, even though in the nature of
rent, should be treated as business income. The Court held that the judgment in Chennai
Properties & Investment Ltd.’s case would squarely apply in this case also, since the company
is engaged in the business of letting out properties and earning rental income therefrom. It
did not concur with the contention of the Revenue that rent should be the main source of
income or that the purpose for which the company was formed/incorporated should be to earn
rental income, so as to make the income taxable under the head ‘Profits and gains of business
or profession”.
Supreme Court’s decision: The Apex Court, thus, held that since the business of the
company is to lease out its property and earn rent therefrom, the rental income earned by the
company is chargeable to tax as its business income and not income from house property.
4. Whether the rental income derived from the unsold flats which are shown as stock-in-
trade in the books of the assessee would be taxable under the head ‘Profits and gains
from business or profession’ or under the head ‘Income from house property’, in a case
where the actual rent receipts formed the basis of computation of income?
New Delhi Hotels Ltd. v. ACIT (2014) 360 ITR 0187 (Delhi]
High Court’s Observations: On this issue, in CIT v. Ansal Housing Finance and Leasing
Co. Ltd. (2013) 354 ITR 180, where the deemed rent (i.e., Expected Rent) formed the basis
of computation of income from unsold flats held as stock-in-trade, the Delhi High Court held
that such rent was taxable under the head “Income from house property”. Further, in CIT v.
Discovery Estates Pvt. Ltd. and CIT v. Discovery Holding Pvt. Ltd. (2013) 356 ITR 159, the
same issue emerged when the actual rent formed the basis of computation of income from
unsold flats held as stock-in-trade. In that case also, the Delhi High Court held that the income
was taxable under the head “Income from house property”.
High Court’s Decision: In this case, the Delhi High Court followed its own decision in the
case of CIT vs. Discovery Estates Pvt. Ltd / CIT vs. Discovery Holding Pvt. Ltd., wherein it
was held that rental income derived from unsold flats which were shown as stock-in-trade in
the books of the assessee should be assessed under the head “Income from house property”
and not under the head “Profits and gains from business or profession”.
Note – This has been further substantiated by section 23(5), according to which income from
house property held as stock-in-trade would be exempt for a period of one year from the end
of the financial year in which certificate of completion was obtained from the competent
authority. However, for availing such exemption, the property should not be let out during the
said period. Insertion of sub-section (5) in section 23 providing for exemption in respect of
house property held as stock-in-trade for a certain period subject to fulfilment of the condition
stated therein implies that income from house property held as stock-in-trade –
(i) beyond the said period; or
(ii) not eligible for such exemption even during the said period due to non-fulfilment of the
stated condition,
would be taxable under the same head of income i.e., “Income from house property”.
In effect, where exemption provisions are provided under a particular head of income, it can
be inferred that the income, but for such exemption, would be taxable only under that head
of income.
5. Under what head of income should income from letting out of godowns and provision
of warehousing services be subject to tax - “Income from house property” or “profits
and gains of business or profession”?
CIT v. NDR Warehousing P Ltd (2015) 372 ITR 690 (Mad)
Facts of the case: The assessee engaged in the business of warehousing, handling and
transport business claimed income from letting out of buildings and godowns as business
income. The Assessing Officer assessed such income as “Income from house property”.
Appellate Authorities’ Observations: The Commissioner (Appeals) observed that the
assessee’s activity was not merely letting out of warehouses but storage of goods with
provision of several auxiliary services such as pest control, rodent control and fumigation
service to prevent the goods stored from being affected by vagaries of moisture and
temperature. Further, service of security and protection was also provided to the goods
stored. There is, therefore, no dispute that the assessee carries on the activity in an organised
manner. These activities are more than mere letting out of the godown for tenancy.
The Tribunal noted that the objects clause of the memorandum of association of the company
clearly shows that the assessee-company was incorporated with the object of carrying on the
business of warehousing and letting/renting of godowns and providing facilities for storage of
articles or things and descriptions whatsoever. The profit and loss account of the assessee-
company shows that its main source of income is storage charges and maintenance or user
charges. Even substantial part of the expenses also relate to the salaries of employees
engaged in the maintenance and upkeep of the godowns and warehouses. Based on these
facts, Tribunal concurred with the findings of the Commissioner (Appeals) and held that the
income of the assessee from letting out of warehouses and godowns is chargeable under the
head "Profits and gains of business or profession" and not “Income from house property”.
High Court’s Decision: The High Court observed that the Commissioner (Appeals) as well
as the Tribunal had not only gone into the objects clause of the memorandum of the assessee
but also individual aspects of the business to come to the conclusion that it was a case of
warehousing business, and, therefore, the income would fall under the head “Profits and
gains of business or profession”.
Accordingly, the High Court held that the income earned by the assessee from letting out of
godowns and provision of warehousing services is chargeable to tax under the head “Profits
and gains of business or profession” and not under the head “Income from house property”.
High Court’s Observations & Decision: On the abovementioned issue, the Gujarat High
Court observed that a firm, which is a fictional entity, cannot physically reside in a house
property and therefore a firm cannot claim the benefit of this provision, which is available to
an individual owner who can actually occupy the house. However, the HUF is a group of
individuals related to each other i.e., a family comprising of a group of natural persons. The
said family can reside in the house, which belongs to the HUF. Since a HUF cannot consist
of artificial persons, it cannot be said to be a fictional entity. Also, it was observed that since
singular includes plural, the word "owner" would include "owners" and the words "his own"
used in section 23(2) would include "their own".
Therefore, the Court held that the HUF is entitled to claim benefit of self-occupation of house
property under section 23(2).
Facts of the case: The assessee had received interest-free deposit in respect of shops given
on rent. The Assessing Officer added to the assessee's income notional interest on the
interest free deposit at the rate of 18 per cent simple interest per annum on the ground that
by accepting the interest free deposit, a benefit had accrued to the assessee which was
chargeable to tax under section 28(iv).
High Court’s Observations & Decision: The High Court observed that section 28(iv) is
concerned with business income and brings to tax the value of any benefit or perquisite,
whether convertible into money or not, arising from business or the exercise of a profession.
Section 28(iv) can be invoked only where the benefit or amenity or perquisite is otherwise
than by way of cash. In the instant case, the Assessing Officer has determined the monetary
value of the benefit stated to have accrued to the assessee by adding a sum that constituted
18% simple interest on the deposit. Hence, section 28(iv) is not applicable.
Section 23(1) deals with the determination of the expected rent of a let out property for
computing the income from house property. It provides that the expected rent is deemed to
be the sum for which the property might reasonably be expected to be let out from year to
year. This contemplates the possible rent that the property might fetch and certainly not the
interest on fixed deposit that may be placed by the tenant with the landlord in connection with
the letting out of such property. Thus, the notional interest is neither assessable as business
income nor as income from house property.