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Income From House PropertyChargebility (Section 22)The annual
value of the property, consisting of any buildings or lands
appurtenant thereto, of which the assessee owner, is chargeable to
tax. If, however, house property is occupied by the assessee for
the purpose of his business or profession carried on by him, the
annual value of such property shall not be chargeable to tax under
the head Income from House Property.
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Thus, the following three conditions shall be satisfied :(1) The
property should consist of any building or land appurtenant
thereto.(2) The assessee should be owner of the property.(3) The
property should not be used by the owner for the purpose of any
business or profession carried on by him, the profits of which are
chargeable to income tax.
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BuildingThe world Building is neither defined in the Act nor in
the Rules. In common sense building means box like construction
having roof and used for any wide variety of activities such as
living, entertainment or manufacturing. Thus, the word Building is
wide enough to include residential house, office premise, factory,
music hall, lecture hall and so on.
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Land Appurtenant TheretoThe meaning of word appurtenance is
something that goes with another thing. Hence, appurtenant land in
respect of residential buildings may be in the form of approach
road to and from public streets, compound, playground attached to
and forming part of such buildings.
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OwnerThe owner for the purpose of section 22 is a person who is
entitled to receive income in his own right. The annual value of
the property is assessed to tax under section 22 in the hands of
owner even if he is not in receipt of income or even if income is
received by some other person. For e.g. if a person makes a gift of
rental income to his friend without transferring ownership of the
property, the annual value of such property will be taxable in the
hands of donar even if the rental income is received by the
donee.
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Deemed Owner (Section 27)Besides legal owner, the following
persons are to be treated as Deemed Owner :(1) If a person transfer
without adequate consideration any house property owned by him to
his or her spouse, (not being a transfer in connection with an
agreement to live apart) or to a minor child ( not being a married
daughter), he shall be deemed to be owner of such transferred
property.
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Cont.(2) A person who is allowed to take or retain possession of
any building or any part thereof in performance of a contract to
buy ( referred to in section 53A of the Transfer of Property Act,
1882)(3) If a person acquires right in a building by virtue of
transaction which is referred to in section 269UA(f). Broadly
speaking section 269UA(f) covers giving of property on lease for a
term not less than twelve years.
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Cont.(4) The holder of impartial estate shall be deemed to be
the individual owner of all the properties comprised in the
estate.(5) A member of the co-operative society, company or other
association of persons to whom a building or part thereof is
allotted or leased under a house building scheme shall be deemed to
be deemed owner of that building or part thereof.
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Case LawsIf the conditions mentioned in section 22 are
satisfied, property income is chargeable to tax under the head
Income from House Property. It makes no difference even if the
assessee company has been incorporated with the object of buying or
developing landed properties S.G. Mercantile Corp. (P) Ltd. Vs CIT
(1972) 83 ITR 100 (SC).
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Case Laws Cont.It makes no difference if the property
constitutes stock in trade or business of the assessee is to let
out the house properties O.R.M.S.P.S.V. Firm Vs CIT (1960) 39 ITR
327 (Mad.)Where the prime object is to let out the property
alongwith additional right of using furniture and fixtures and
other common facilities, the income is chargeable under the head
Income from House Property Shambhu Investment (P) Ltd. Vs CIT
(2003) 129 Taxman 70 (SC).
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Case Laws Cont.If an assessee carries on business of purchasing
and selling buildings, income received from the buildings so long
as they are owned by the assessee will be taxable under the head
Income from House Property and not under the head Profits and gains
of business or profession CIT Vs Chugandas & Co. (1965) 55 ITR
17 (SC).
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Income from composite letting of building, machinery, plant or
furniture (Section 56(2)(iii))Where an assessee lets on hire
machinery, plant or furniture belonging to him and also buildings
and the letting of the buildings is inseparable from letting of the
said machinery, plant or furniture, income from such letting is
taxable as Income from other sources, if the same is not chargeable
to tax under the head Profits & gains of business or
Profession.
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Cont.Hence, the letting of machinery, plant, or furniture should
be inseparable from the letting of the building.For instance, where
a cinema building is given on lease under a lease deed which
indicates that the lease is in respect of theatre as such which
also includes furniture and other articles therein, the rental
income therefrom is taxable under the head Income from other
sources [CIT Vs D.L. Kanhare (1973) 92 ITR 535 (Mum)].
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Property Income Exempt from Tax1. Income from farm house
provided it is used for agricultural purpose [sec.2(1A)(c) r.w.s.
10(1)]2. Annual value of any one palace of an ex-ruler
[sec.10(21)]3. Property income of a local authority
[sec.10(20)]
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Cont.4. Property income of an approved scientific research
association [sec.10(21)]5. Property income of a University or other
educational institutions [sec.10 (23C)]6. Property income of a
hospital or other medical institution [sec.10(23C)] 7. Property
income of a trade union [sec.10(24)]
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Cont.8. House Property held for a charitable purpose [sec.11]9.
Property income of a political party [sec.13A]Besides the aforesaid
exemptions, income derived by a co-operative society from the
letting of godowns or warehouses for storage, processing or
facilitating the marketing of commodities is wholly deductible u/s
80P(2)(e).
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Cont.Further, as per sec.80(P)(2)(f), if the gross total income
of a co-operative society (not being a housing society or an urban
consumers society or a society carrying on transport business or
society engaged in the performance of any manufacturing operation
with the aid of power) does not exceed Rs.20,000/-, any income from
house property is fully deductible.
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Computation of Income from Let out House Property Rs. Gross
Annual Value[sec.23(1)] -- Less : Municipal Taxes actually paid --
[Proviso to sec.23(1)] _____ Net Annual Value -- Less : Deduction
u/s 24 (i) Std. deduction-30% of -- N.A.V.[sec.24(a)] (ii) Interest
on borrowed -- capital[sec.24(b)]______ Income from House Property
--
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Gross Annual ValueThe bonafide value of a property is the
starting point for computation of income. As per section 23(1)(a),
the annual value of the property shall be the sum for which
property could reasonably be expected to let from year to year.
Therefore, the inherent capacity of the property to yield income
from year to year shall be considered.
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Cont.The Gross Annual Value is to be determined as under :A]
Find out the reasonable expected rent andB] Find out the actual
rent received or receivable
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A] Reasonable Expected RentFor determining the reasonable
expected rent, several factors have to be taken in to consideration
such as as location of the property, rent of similar property in
neighbourhood, rent which the property is likely to fetch having
regard to demand and supply and so on. The main factors to be
considered for its determination are (a) Municipal Valuation and
(b) Fair rent.
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(a) Municipal ValuationIt is one of the test to be applied for
determining the bonafide value of the property. Under the Municipal
Corporation Act, the municipal authorities determine the municipal
valuation of a property with reference to sum for which property
could reasonably be expected to let from year to year.
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(b)Fair RentThe Fair Rent of the property can be determined on
the basis of a rent fetched by a similar property in the same
locality. The higher of (a) i.e.municipal valuation or (b) i.e.
fair rent can be considered as reasonable expected rent.If the
property is covered by Rent Control Act, then the amount so
computed cannot exceed the standard rent.
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ExampleABCMunicipal Value(a)404950Fair Rent (b)464852Standard
Rent (c)3546NA Reasonable Expected 354652[higher of (a) & (b)
subject maximum of (c)]
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B] Actual rent received or receivableIn respect of let out
property, the actual rent received or receivable shall be
considered.The higher of sum referred to in (A) or (B) shall be
considered for the determination of G.A.V. of the property
(provided the let out property was not vacant during the whole or
any part of previous year)
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(C) Rent of Vacant PeriodAs per sec.23(1)(c), the let out
property was vacant during whole or any part of the previous year
and owing to such vacancy, the actual rent received or receivable
is less than the sum referred to in (A) i.e. reasonable expected
rent, the sum so received or receivable shall be the annual value
of property
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Unrealised RentAs per explanation to sec.23(1), unrealised rent,
which the owner could not realised, shall be excluded from the rent
receivable/received only if the following conditions as per Rule 4
are satisfied :(i)The tenancy is bonafide.(ii)The defaulted tenant
has vacated or steps have been taken to compel him to vacate the
property.
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Cont.(iii)The defaulting tenant is not in possession of any
other property of the assessee and(iv)The assessee has taken all
reasonable steps to institute legal proceedings for the recovery of
the unpaid rent or he satisfies the Assessing Officer that the
legal proceedings would be useless.
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Municipal TaxesFrom the (gross) annual value of the property,
taxes levied by the local authority shall be deducted. The
deduction will be allowed in the previous year in which the taxes
are actually paid by the assessee. The deduction is allowable even
if the previous years taxes are paid.
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Computation of income from Self Occupied Property (S.O.P.) Gross
Annual ValueNil Less : Municipal TaxNil Net Annual ValueNil Less :
Std. DeductionNil Interest on borrowed capital deductible
[sec.24(b)] ______ Income from S.O.P. --
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Computation of income from Self Occupied Property (S.O.P.)As per
sec.23(2), the annual value of the house property shall be taken as
nil, where the house property is in the occupation of the owner for
the purpose of his own residence or (b) It could not occupied by
the owner because his employment/business/profession is situated at
other place.
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Allowable Deductions (Sec.24)(1) Standard Deduction [sec.24(a)]
: 30% of the net annual value is deductible irrespective of any
expenditure incurred by the assessee. Standard deduction is not
allowable for S.O.P.
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Allowable Deductions (Sec.24)(2) Interest on borrowed capital
[sec.24(b)] :Let out Property It is allowable as deduction if the
capital is borrowed for the purpose of purchase, construction,
repair, renewal or reconstruction of the house property.(a) It is
deductible fully without any maximum ceiling.
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Cont.(b) It is allowable on accrual basis. It can be claimed on
yearly basis even if the interest is not actually paid during the
year(c) Interest on pre-construction period Interest payable on
borrowed capital for the construction or acquisition of house
property pertaining to pre-construction or pre-acquisition period
shall be deducted in five equal instalments commencing
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Cont.from the previous year in which house property is acquired
or constructed. However, if the deduction is allowed under any
other provisions of the Act, no such deduction will be allowed.
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Interest on borrowed capital [sec.24(b)]
(B) Self Occupied Property (i) Allowable on accrual basis as
mentioned in (a) above.(ii) Interest on preconstruction or
preacquisition period same as (b) above. (iii) The deduction not
exceeding Rs.30000 shall be allowed in respect of interest payable
on capital borrowed for the purpose of acquiring, constructing,
repairing, renewing or reconstructing the self occupied
property.
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Cont.However, where such house property has been acquired or
constructed with the borrowed capital on or after 1/4/99 and such
acquisition or construction is completed within 3 years from the
end of financial year in which capital was borrowed, then interest
payable not exceeding Rs.150000/- shall be allowed [vide 2nd
proviso to sec.24(b)].
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Cont.(iv) In relation to A.Y. 2003-04 and onwards, deduction
under 2nd proviso to sec.24(b) shall be allowed only if the
assessee furnishes a certificate from the person to whom such
interest is payable on borrowed capital, specifying the amount of
interest payable by the assessee for the purpose of such
acquisition or construction of the property or conversion of the
whole or any part of the capital borrowed which remains to be
repaid as loan.
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When more than one house is occupied for own residential purpose
[sec.23(4)] :- Where the person has occupied more than one house
for his own residential purpose, only one house according to his
choice will be treated as S.O.P. and all other houses will be
deemed to be let out.
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Special provisions when unrealised rent is realised susequently
[sec.25A & 25AA] :- As per section 25, where a deduction has
been allowed u/s 24(1)(x) in the A.Y. 2001-02 or earlier years in
respect of unrealised rent & subsequently during any P.Y.
relevant to A.Y. 2002-03 and subsequent year, the assessee has
realised any amount in respect of such rent, the amount so realised
shall be chargeable to tax (without allowing any ded. U/s 23 &
24).
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Cont.Further, as per section 25AA, where assessee has not
realised the rent during the P.Y. relevant to A.Y. 2002-03 or in
any subsequent year from a property let to a tenant and
subsequently, the assessee has realised any amount in r/o such
rent, the amount so realised (to the extent it has not been
included in annual value earlier) shall be deemed to be the income
chargeable to tax. Further, it is not necessary that the assessee
must be owner of such house property in the year of realisation of
rent.
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Special Provisions for arrears of rent received (sec. 25B) :-
Arrears of rent, in respect of let out property, received by an
assessee and which has not been charged to tax for any P.Y. will be
deemed to be income from House Property in the P.Y. of receipt.
Such arrears of rent after deducting a sum equal to 30 % of such
sum will be charged to tax whether the assessee is the owner of
such property in that year or not.
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Property owned by Co-owners (sec.26) :- Where a property is
owned by two or more persons and respective shares are
determinable, such persons shall not be assessed in respect of such
property as an A.O.P. but the share of each co-owner will be
included in his total income. Where the property is occupied
throughout the year by the co-owners for their self occupation, the
annual value falling to the share of each co-owner shall be taken
at Nil.
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Interest not deductible from Income from House Property (sec.25)
:- Any interest chargeable under the Act, which is payable outside
India on which tax has been paid or deducted ( under chapter
XVII-B) and in respect of which there is no person in India who may
be treated as an agent (u/s163), shall not be deductible.
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Loss from Income from House Property :- Loss in respect of house
property (whether let out or self occupied) can be set off u/s 71
(1) and 71 (2) against any other head of income in the same
assessment year. Such loss which can not be wholly set off against
income from any other heads in the same A.Y. will be allowed to be
carried forward and set off against Income from House Property of
immediately succeeding eight assessment years (Sec 71B).