INTRODUCTION

Section 4 of the Income Tax Act 1961 makes provision for the chargeability of income tax. It
must be noted though that the provision does not create any liability whatsoever on its own. The
Supreme Court has observed in CIT vs. K. Srinivasan (1972) 83 ITR 346-351 that even though
Section 4 of the Act provides for charge of income tax, income tax is chargeable only when the
central Act, which is usually the Finance Act, enacts that income tax shall be charged for any
assessment year at the rate or rates specified therein. It is also a noticeable point that any amount
of money that is received by an individual is not chargeable to tax; rather it is Section 14 of the
Act, which provides specifically about the five heads of income on which tax can be imposed
under the Income tax Act. Therefore, this implies that for income tax to be charged upon it, an
income has to fall under one of following heads provided under the section:(i) salaries (ii)income
from house property (iii) profits and gains of business or profession (iv) capital gains and(v)
income from other sources.

Sections 22 to 27 of the Act provide for taxation of income from house property. It is actually
Section 9 of the 1922 Act, which has been divided up and redrafted to form six sections (Ss. 22-
27) in the 1961 Act. Earlier it was just Section 9 in the 1922 Act which dealt with the taxability
of ‘income from house property.’ There has been omission in Section 22, of the term ‘bona fide’
which existed in Section 9(1) of the previous Act apparently because of being something which
was unnecessary

.This paper seeks to analyse what constitutes the property which is covered under Section 22 of
the Income Tax Act. For doing so, the researcher would essentially deal with the
various pronouncements of the Indian courts wherein they have thrown light upon what would
and under what circumstances, fall under the purview of Section 22. The paper also seeks to
bring out the difference between the concepts of property as contained in the Transfer of
Property Act, 1882and under Section 22 of Income Tax Act. It also goes on to discuss as to who
would be regarded as an “owner” under Section 22. And lastly, recent developments in the form
of case laws have been taken up the researcher to understand the current position in this regard.

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Chargeability [Section 22]

(i) The process of computation of income under the head “Income from house property”
starts with the determination of annual value of the property. The concept of annual
value and the method of determination is laid down in section 23.
(ii) The annual value of any property comprising of building or land appurtenant thereto,
of which the assessee is the owner, is chargeable to tax under the head “Income from
house property”.1

Conditions for Chargeability

(i) Property should consist of any building or land appurtenant thereto.

(a) Buildings include not only residential buildings, but also factory buildings, offices, shops, go
downs and other commercial premises.(b) Land appurtenant means land connected with the
building like garden, garage etc.(c) Income from letting out of vacant land is, however, taxable
under the head “Income from other sources”.2

(ii) Assessee must be the owner of the property

(a) Owner is the person who is entitled to receive income from the property in his own right.

(b) The requirement of registration of the sale deed is not warranted.

(c) Ownership includes both free-hold and lease-hold rights.

(d) Ownership includes deemed ownership.

(e) The person who owns the building need not also be the owner of the land upon which it
stands.

1
Jones v. Skinner,(1836) 5 LJ 67, 90 (Ch.).
2
Chittpore Golabari Co. P. Ltd. v. CIT,(1971) 82 ITR 753, 759 (Cal)

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(f) The assessee must be the owner of the house property during the previous year. It is not
material whether he is the owner in the assessment year.

(g) 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.

(iii) The property may be used for any purpose, but it should not be used by the owner for the
purpose of any business or profession carried on by him, the profit of which is chargeable to tax.

(iv) Property held as stock-in-trade etc.:

Annual value of house property will be charged under the head “Income from house property” in
the following cases also –

(a) Where it is held by the assessee as stock-in-trade of a business;

(b) Where the assessee is engaged in the business of letting out of property on rent;

Exceptions

(a) Letting out is supplementary to the main business

(i) Where the property is let out with the object of carrying on the business of the assessee in an
efficient manner, then the rental income is taxable as business income, provided letting is not the
main business but it is supplementary to the main business.

(ii) In such a case, the letting out of the property is supplementary to the main business of the
assessee and deductions/allowances have to be calculated as relating to profits/gains of business
and not relating to house property.3

(b) Letting out of building along with other facilities

3
Dr. H. C. Mehrotra & Dr. S.P. Goyal, “Income Tax Law and Accounts including Tax Planning,” (49th edn,
SahityaBhawan Publications, 2008), p. 162.

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(i) Where income is derived from letting out of building along with other facilities like furniture,
the income cannot be said to be derived from mere ownership of house property but also because
of facilities and services rendered and hence assessable as income from business.

(ii) Where a commercial property is let out along with machinery e.g. a cotton mill including the
building and the two lettings are inseparable, the income will either be assessed as business
income or as income from other sources, as the case may be.

Composite Rent

(i) Meaning of composite rent:

The owner of a property may sometimes receive rent inrespect of building as well as –
(1) other assets like say, furniture, plant and machinery.

(2) For different services provided in the building, for eg. –

(a) Lifts;

(b) Security;

(c) Power backup;

The amount so received is known as “composite rent”.4

(ii) Tax treatment of composite rent

(1) Where composite rent includes rent of building and charges for different services (lifts,
security etc.), the composite rent is has to be split up in the following manner –

(a) The sum attributable to use of property is to be assessed under section 22 as income from
house property;

(b) The sum attributable to use of services is to charged to tax under the head “Profits and gains
of business or profession” or under the head “Income from other sources”.

4
Mukherjee estate pvt. Ltd. V. CIT (2000) 244 ITR (Cal.)

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(2) Where composite rent is received from letting out of building and other assets (like furniture)
and the two lettings are not separable –

a) If the letting out of building and other assets are not separable i.e. the other party does not
accept letting out of buildings without other assets, then the rent is taxable either as business
income or income from other sources;

(b) This is applicable even if sum receivable for the two lettings is fixed separately.

(3) Where composite rent is received from letting out of buildings and other assets and the two
lettings are separable –

(a) If building is let out along with other assets, but the two lettings are separable i.e. letting out
of one is acceptable to the other party without letting out of the other, then income from letting
out of building is taxable under “Income from house property”;

(b) Income from letting out of other assets is taxable as business income or income from other
sources;

(c) This is applicable even if a composite rent is received by the assessee from his tenant for the
two lettings.

Income from House Property Situated Outside India

(i) In case of a resident in India (resident and ordinarily resident in case of individuals and HUF),
income from property situated outside India is taxable, whether such income is brought into
India or not.

(ii) In case of a non-resident or resident but not ordinarily resident in India, income from a
property situated outside India is taxable only if it is received in India.

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Determination of Annual Value [Section 23]

This involves three steps:

Step 1 - Determination of Gross Annual Value (GAV).

Step 2 – From the gross annual value computed in step 1, deduct municipal tax paid by the
owner during the previous year.

Step 3 – The balance will be the Net Annual Value (NAV), which as per the Income-tax Act is
the annual value.

(1) Determination of annual value for different types of house properties

(i) Where the property is let out throughout the previous year [Section 23(1)(a)/(b)]

Where the property is let out for the whole year, then the GAV would be the higher of –

(a) Annual Letting Value (ALV) and

(b) Actual rent received or receivable during the year
 The ALV 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 ALV = SR, if X>SR.
However, if X<SR, ALV = X.
 ALV 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 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.

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(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 ALV, 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.

(b) The benefit of exemption of one self-occupied house is available only to an individual/HUF.

(c) 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 here sides at
such other place in a building not belonging to him.

(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)]:5

(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 ALV for the whole year shall be taken into account for determining the
GAV.

(b) The ALV 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, property taxes 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 one property for self-occupation, then the income from
any one such property, at the option of the assessee, shall be computed under the self-occupied

5
Radhakrishna(S) v. CIT (1984) 145 ITR 170 (Mad)

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property category and its annual value will be nil. The other self-occupied/unoccupied properties
shall be treated as “deemed let out properties”.

(b) This option can be changed year after year in a manner beneficial to the assessee.

(c) In case of deemed let-out property, the ALV shall be taken as the GAV.

(d) 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.

(e) Municipal taxes actually paid by the owner during the previous year can be claimed as
deduction.

(vi) 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 on a reasonable basis

(2) Treatment of unrealized rent [Explanation to section 23(1)]

(1) The Actual rent received/receivable should not include any amount of rent which is not
capable of being realized.

(2) However the conditions prescribed in Rule 4 should be satisfied. They are –

(a) The tenancy is bona fide;

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(b)The defaulting tenant has vacated, or steps have been taken to compel him to vacate the
property;

(c)The defaulting tenant is not in occupation of any other property of the assessee;

(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)

(1) 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.

(2) 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.6

(3) 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.

(4) 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.

(5) 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)]

6
CWT V. Venugopalla konar, (1977) 109 ITR 52 (Mad.)

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Deductions from Annual Value [Section 24]

(i) There are two deductions from annual value. They are –

(1) 30% of NAV; and

(2) interest on borrowed capital

(1) 30% of NAV is allowed as deduction under section 24(a)

(a) This is a flat deduction and is allowed irrespective of the actual expenditure incurred.

(b) In case of self-occupied property where the annual value is nil, the assessee will not be
entitled to deduction of 30%, as the annual value itself is nil.

(2) Interest on borrowed capital is allowed as deduction under section 24(b)

(a) Interest payable on loans borrowed for the purpose of acquisition, construction, repairs,
renewal or reconstruction can be claimed as deduction.

(b) Interest payable on a fresh loan taken to repay the original loan raised earlier for the aforesaid
purposes is also admissible as a deduction.

(c) Interest relating to the year of completion of construction can be fully claimed in that year
irrespective of the date of completion.

(d) Interest payable on borrowed capital for the period prior to the previous year in which the
property has been acquired or constructed, can be claimed as deduction over a period of 5 years
in equal annual installments commencing from the year of acquisition or completion
of construction.

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Inadmissible deductions [Section 25]

Interest chargeable under this Act which is payable outside India shall not be deducted if –

(a) tax has not been paid or deducted from such interest and

(b) there is no person in India who may be treated as an agent under section 163.

Taxability of recovery of unrealized rent & arrears of rent received

(i) Unrealized rent is deducted from actual rent in determination of annual value under section
23, subject to fulfillment of conditions under Rule 4. Subsequently, when the amount is realized,
it gets taxed under section 25AA in the year of receipt.(ii) If the assessee has increased the rent
payable by the tenant and the same has been in dispute and later on the assessee receives the
increase in rent as arrears, such arrears is assessable under section 25B.

Unrealized rent [Section 25AA] Arrears of rent [Section 25B

Taxable in the hands of the assessee whether he is Taxable in the hands of the assessee whether
the owner of that property or not. he is the owner of that property or not.

(b) Taxable as income of the previous year in Taxable as income of the year in which he
which he recovers the unrealized rent. receives the arrears of rent.

(c) No deduction shall be allowed. 30% of the amount of arrears shall be

allowed as deduction.
(d) Unrealized rent means the rent which has been Arrears of rent is in respect of rent not
deducted from actual rent in any previous year for charged to income-tax for any previous year
determining annual value

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Cases where income from house property is exempt from tax

Sl. No. Sections Particulars

1 10(1) Income from any farm house forming part of agricultural income.
2 10(19A) Annual value of any one palace in the occupation of an ex-ruler.
3 10(20) Income from house property of a local authority.
4 10(21) Income from house property of an approved scientific research association.
5 10(23C) Property income of universities, educational institutions, etc.
6 10(24) Property income of any registered trade union.
7 11 Income from house property held for charitable or religious purpose.
8 13A Property income of any political party.
9 22 Property used for own business or profession.
10 23(2) One self-occupied property of an individual/HUF

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Conclusion

Section 22 of the Income Tax Act, therefore, makes provision for taxation of ‘annual value’ of
a property owned by the assessee, consisting of any buildings or lands appurtenant thereto,
under the head “Income from House Property”. The tax which is imposed under this provision is
actually a tax on the ‘annual value’ of house property and is not any tax on that property itself.
However, as discussed already, it is quite clear that the term “property” under sections 22 to 27
of the Act has not been employed in its ordinary or general sense or context. It is very much
restricted to the type delineated by the language of the provision, i.e., buildings or lands
appurtenant thereto.

‘Buildings or lands appurtenant thereto’ has not been defined in the Act which has led to great
deal of confusion and its scope has time and again been delineated by the courts. Permanency
of building is not a standard to be adopted under the section. Even Kachcha houses can be
‘building’ under Section 22 if the enable the occupier of house to use it for purposes of
habitation. Also, it is not necessary that all buildings under Section 22 have a roof. But this also
does not mean that an entire structure without roof would qualify to be a building regardless of
anything else. The erection of fence or boundary wall does not make the land a ‘building’ but it
is noticeable that if such fence or boundary wall enables the occupier of the main house to use
that area as part of his habitation then it qualifies to be a ‘building’. It is also very clear that the
use of building, whether residential or commercial, is not a criteria under the Section for
determination of whether it constitutes ‘buildings or land appurtenant thereto’ or not.

Though there exist plenty of case laws defining the scope of the phrase, but still there exists a
grey area in the matter, reason being there is absence of any defined criteria which is
determinative of the fact that a particular area is to be treated as building or land appurtenant
thereto. Time and again, the courts have reiterated that it has to be decided on a case to case basis
and therefore, despite everything being in black and white, there still prevails quite ambiguity in
the law. So, unless there is some ruling setting out clearly as to what exactly is the criteria for
determining whether or not income from a property is taxable under this head, we are left with
sort of guidelines and they, as for now, would suffice. Basically, income from letting out
bare property for use of the property as property would be primary requirement for treatment as p
roperty income.
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Bibliography

Books:-

e-Sources:-

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