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PROJECT ON TAXATION LAW

TOPIC: INCOME FROM HOUSE PROPERTY

SUBMITTED TO:

MS. SUPREET GILL

SUBJECT: TAXATIONLAW

SUBMITTED BY:

HARRY PUNYNAI

B.COM. LL.B. 9

ROLL NO. 250/15, SEMESTER, IX


ACKNOWLEDGEMENT

I would like to express my earnest ad deepest gratitude to, Mr. Mukesh Ghosh sir, Faculty for Taxation
Law for giving me this opportunity to do a project on such valuable topic of “Income from House
Property”. I am grateful for the assistance, guidance and support that were excluded during the course of
excellent research. I am also thankful to the college administration for providing the resources necessary
for research work and project preparation. Above all I think the God almighty for blessing me with the
health and vitality to complete this project.

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TABLE OF CONTENTS

1. INTRODUCTION

2. MEANING AND DEFINITION

3. DETERMINATION OF ANNUAL VALUE OF HOUSE PROPERTY. SECTION 23

4. DEDUCTIONS FROM INCOME FROM HOUSE PROPERTY. SECTION 24

5. AMOUNTS NOT DEDUCTIBLE FROM INCOME FROM HOUSE PROPERTY.SECTION 25

6. SPECIAL PROVISIONS DOR CASES WHERE UNREALISED RENT ALLOWED AS

DEDUCTION IS REALISED SUBSEQUENTLY.SECTION 25-A

7. UNREALISED RENT RECEIVED SUBSEQUENTLY TO BE CHARGED TO INCOME TAX.

SECTION 25-AA

8. SPECIAL PROVISIONS FOR ARREARS OF RENT RECEIVED.SECTION 25-B

9. PROPERTY OWNED BY CO-OWNERS

10. CONCLUSION.

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INTRODUCTION

This project deals with income, which falls under the head ‘Income from house

property’. The scope of income charged under this head is defined by section 22
of the Income Tax Act and the computation of income falling under this head is
governed by sections 23 to 27. All the provisions relating to tax treatment of
income from house property are explained in this project.

Income from House Property is one of the most important heads of income under the Income Tax Act. It is
one such subject on which the tax payers in particular have a lot of queries relating to exemptions,
deductions and overall computation of Income from House Property.

Every money receipt by a person is not chargeable to tax. Section 14 of the Act specifies five heads of
income on which tax can be imposed under the Income tax Act. In order to be chargeable, an income has to
be brought under one of these five heads. The heads are :

(i) salaries

(ii) Income from House propertya

(iii) Profits and gains of business or profession

(iv) capital gains ,and

(v) income from other sources.

In the discussion to follow, the relevant provisions of the Act relating to Income from House Property
of
would be considered and how the computation income from this source is to be made, namely, how the
income is to be worked out and what are the deductions to be given for computing the taxable income shall
be explained. Sections 22 to 27 of the Act deal with the subject of taxation of income from house property.

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DEFINITION & MEANING

Meaning of House Property : House property consists of any building or land appurtenant thereto of
which the assessee is the owner. The appurtenant lands may be in the form of a courtyard or compound
forming part of the building. But such land is to be distinguished from an open plot of land, which is not
charged under this head but under the head „Income from Other sources‟ or „Business Income‟, as the
case may be. Besides, „house property‟ includes flats, shops, office space, factory sheds, agricultural land
and farm houses. Further, house property includes all type of house properties, i.e., residential houses,
godowns, cinema building, workshop building, hotel building, etc.

Example:- Mr. X has one big house. It includes vast open area within its boundaries. The house has been
let out at a rent of Rs. 1,00,000 p.m., out of which rent of Rs. 25,000 p.m. is attributable to the open land.
In this case, entire rental income is taxable under the head house property.

Definition of Income under Income Tax Act : As per Section 2(24), ‘Income’ includes:-
(1) Profits and gains
(2) Dividend
(3) Voluntary contributions received by a trust created wholly or partly for charitable or religious purposes
or by an institution established wholly or partly for such purposes or by a scientific research association or
games association referred under section 10(21) or by any other notified fund or institution established for
charitable or religious purposes referred under section 10(23C), other than those wholly or substantially
financed by the Government, or, by an electoral trust approved by the Board (CBDT) in this behalf.
(4) The value of any perquisite or profit in lieu of salary taxable under section 17.
(5) Any special allowance or benefit, other than the perquisite included under above clause, specifically
granted to the assessee to meet expenses wholly, necessarily and exclusively for the performance of duties
of an office or employment of profit.
(6) Any allowance granted to the assessee either to meet his personal expenses at the place where the duties
of his office or employment of profit are ordinarily performed by him or at a place where he ordinarily
resides or to compensate him for the increased cost of living.

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(7) The value of any benefit or perquisite, whether convertible into money or not, obtained from a company
either by a director or by a person who has a substantial interest in the company or by a relative of the
director or such person and any sum paid by any such company in respect of any obligation which, but for
such payment, would have been payable by the director or other person aforesaid.
(8) The value of any benefit or perquisite, whether convertible into money or not, obtained by any
representative assessee or by any person on whose behalf or for whose benefit any income is receivable by
the representative assessee (referred as ‘beneficiary’) and any sum paid by the representative assessee in
respect of any obligation which, but for such payment, would have been payable by the beneficiary.
(9) Compensation for termination or modification of terms or conditions of agency or management.
(10) Income of trade, professional or similar association from specific services to its members.
(11) Deemed profits under Section 41 or under Section 59.
(12) Profit on sale of an import license as referred under section 28(iiia).
(13) Cash assistance received or receivable by any person against exports under any scheme of the
Government of India, as referred under Section 28(iiib).
(14) Any duty of customs or excise repaid or repayable as drawback, as referred under section 28(iiic).
(15) Value of any benefit or perquisite, whether convertible into money or not, arising from business or
exercise of profession, as referred under section 28(iv).
(16) Any interest, salary, bonus, commission or remuneration, by whatever name called, due to, or received
by a partner or a firm from such firm.
(17) Any capital gains chargeable under section 45.
(18) Profits and gains of any business of insurance carried on by a mutual insurance company or by a co-
operative society, computed in accordance with Section 44 or any surplus taken to be such profits and gains
by virtue of provisions contained in the First Schedule.
(19) The profits and gains of any business of banking (including providing credit facilities) carried on by a
co-operative society with its members.
(20) Any winnings from lotteries, crossword puzzles, races including horse races, card games and other
games of any sort or from gambling or betting of any form or nature whatsoever.
Explanation: “Lottery” includes winnings from prizes awarded to any person by draw of lots or by chance
or in any other manner whatsoever, under any scheme or arrangement by whatever name called.
“Card game and other game of any sort” includes any game show, an entertainment programme on
television or electronic mode, in which people compensate to win prizes or any other similar game.

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(21) Any sum received by any assessee from his employees as contributions to any provident fund or
superannuation fund or any fund set up under the Employees State Insurance Act, 1948 or any other fund
for the welfare of such employees.
(22) Any sum received under a Keyman insurance policy including the sum allocated by way of bonus on
such policy.
(23) Any sum received on account of non-competing fees and exclusivity rights as covered under section
28(va).
(24) Any sum of money / immovable property / any property other than immovable property received by an
individual / HUF, the value of which exceeds fifty thousand rupees as referred under section 56(2)(vii).
(25) Shares of a company (not being a company in which the public is substantially interested) received by
a private company or a firm either without or at less consideration, as referred under section 56(2)(viia).
(26) Any consideration for issue of shares as exceeds the fair market value of the shares received by a
company (not being a company in which the public is substantially interested) as referred to in Section
56(2)(viib).
(27) Any sum of money referred to in Section 56(2)(ix).
(28) Assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver or
concession or reimbursement (by whatever name called) by the Central Government or a State Government
or any authority or body or agency in cash or kind to the assessee other than the subsidy or grant or
reimbursement which is taken into account for determination of the actual cost of the asset in accordance
with the provisions of Explanation 10 to Section 43(1).

CONDITIONS NECESSARY

Income from house property is taxable in the hands of its legal owner in whose name the property stands.
„Owner‟ for this purpose means a person who can exercise the rights of the owner not on behalf of the
owner but in his own right. A person entitled to receive income from a property in his own right is to be
treated as its owner, even if no registered document is executed in his name.

Section 22 to 27 deal with the income from house property. The provisions of section 22 indicate that
income will be chargeable to income tax under the head “Income from House Property” if the following
conditions exist :

a) There must be a house property (the property must consist of buildings and lands appurtenant
thereto)

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b) The assessee must be the owner of such house property

c) 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. If the
property is used for own business or profession, it shall not be chargeable to tax.

Ownership includes both free-hold and lease-hold rights and also includes deemed ownership.

Concept of Ownership : For the purpose of section 22, the concept hitherto understood even in court
decisions has been that the owner has to be a legal owner. Annual value of 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 instance, if a person makes gift of rental income to a friend or a
relative, without transferring ownership of the property, annual value of property is taxable in the
hands of the donor, even if rental income is received by the donee. In other words, for the purpose of
section 22, the owner must be that person who can exercise the rights of the owner, not on behalf of the
owner but in his own rights.

Tax Chargeability [Sec. 22] The annual value of property consisting of any building or lands
appurtenant thereto of which the assessee is the owner shall be subject to Income-tax under the head
„Income from House Property‟ after claiming deduction under Sec. 24, provided such property or any
portion of such property is not used by the assessee for the purpose of any business or profession,
carried on by him, the profits of which are chargeable to Income-tax.

DETERMINATION OF ANNUAL VALUE OF HOUSE PROPERTY

SECTION 23

Annual value how determined(section23)

What is Annual Value?

➢ Income from house property is taxable on the basis of annual value. Even if the property is not let
out, notional rent receivable is taxable as its annual value. As per Sec. 23(1)(a) the annual value
of any property shall be the sum for which the property might reasonably be expected to be let out
from year-to-year. In determining the annual value there are four factors which are normally taken

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into consideration. These are: i) Actual rent received or receivable, ii) Municipal value, iii) Fair
rent of the property, iv) Standard rent.

The determination of ‘Annual Value ’is important in the context of taxation of income from House

Property because though the tax under the head ‘Income from house property ’is tax on income, yet it
is not in that sense a tax on income but upon inherent capacity of such property to yield income and for
this ‘annual value ’is the yardstick. The inherent capacity has been defined as the sum for which the
property might reasonably be expected to be let from year to-year. It is not necessary, that the property
should be actually let. It is also not necessary that the reasonable return from property should be equal
to the actual rent realized when the property is, in fact, let out. Where the actual rent received is more
than the reasonable return, it has been specifically provided that the actual rent will be the annual
value. Where, however, the actual rent is less than the reasonable rent (e.g. in case where the tenancy
is affected by manipulation, emergency, close relationship or such other consideration), the latter will
be annual value. The municipal value of the property, the cost of construction, the standard rent if any
under the Rent Control Act, the rent of similar properties in the same locality are relevant factors for
the determination of the annual value. However, if a property is let and was vacant during any part or
whole of the year and due to such vacancy, the rent received is less than the notional rent, such lesser
amount shall be the Annual Value.

For example, in case of a house, whose municipal valuation is Rs. 24,000/- and actual rent received is
Rs. 36,000/- the annual lettable value will be taken at Rs.36,000/-. If the actual rent received is Rs.
18,000/- and municipal valuation is Rs.24,000/-, the annual value would be Rs. 24,000/- for the
purpose of the Income-tax Act. Here, if the property was vacant for six months and the rent received is
Rs. 18,000/- for six months the Annual Value shall be Rs. 18,000/-.

Determination of Annual Value of Self-occupied property: In case of one self-occupied house


property which has not been actually let out at any time, the annual value is taken as ‘nil’. If, one is
having more than one house property using all of them for self-occupation, he is entitled to exercise an
option in terms of which, the value of one house property as specified by him will be taken at nil. The
annual value of the other self occupied house properties will be determined on notional basis as if
these had been let out.

Annual Value of one house away from work place: A person may own a house property, say in
Bangalore, which he normally uses for his residence. He is transferred to Chennai where he does not
own any house property and stays in a rental accommodation. In such case, the house property in

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Bangalore cannot be used for self-occupation and notional income therefor would normally have been
chargeable although he derives no benefit from the property. To save the taxpayer from hardship in
such situations, it has been specifically provided that the annual value of such a property would be
taken to be nil subject to the following conditions:

• The assessee must be owner of only one house property.

• He is not able to occupy the house property because of his employment, business etc. being away
from place where the property is situated.

• The property should not have been actually let.

• He has to reside at the place of employment in a building not belonging to him [Section 23(2)(b)].

• He does not derive any other benefit from the property not occupied.

Determination of Annual Value of Let out house properties: In respect of a let out house property,
the rent received is usually taken as the annual lettable value. When, however, the rent is not indicative
of the actual earning capacity of the house, the notional annual value will have to be found and
adopted. The standard rent would be the Annual Value in the case of properties, subject to Rent
Control Legislation, as mentioned earlier. However, when the actual rent received or receivable is
higher than the notional value as calculated above, the higher figure will be taken for the purpose of
Income-tax. From the annual value as determined above, municipal taxes are to be deducted if the
following conditions are fulfilled:

• The property is let out during the whole or any part of the previous year (There is no such deduction
in respect of a self-occupied house property).

• The Municipal taxes must be borne by the landlord. (If the municipal taxes or any part thereof are
borne by the tenant, the same will not be deductible).

• The municipal taxes must be paid during the year. (Where the municipal taxes have become due but
have not been actually paid, these will not be allowed. The municipal taxes may be claimed on

payment basis i.e., only in the year they were paid even if the taxes belonged to a different year).
Amount left after deduction of municipal taxes is net annual value.

DEDUCTION FROM INCOME FROM HOUSE PROPERTY (SECTION 24)

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Income chargeable under this head “income from house property” shall be computed after making the
following deductions :

(i) deduction equal to 30% of the annual value, irrespective of any expenditure incurred by the
taxpayer (S.24(a)). No other allowance for repairs, maintenance etc. would be allowable.

(ii) interest on borrowed capital (S. 24(b))

Interest on borrowed capital is allowable as deduction on accrual basis (even if account books are kept on
cash basis) if capital is borrowed for the purpose of purchase, construction, repair, renewal or
reconstruction of the house property.

Income chargeable under the head “Income from house property” shall be computed after making the
following deductions, namely:- (a) a sum equal to thirty per cent of the annual value; (b) where the property
has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital, the amount of
any interest payable on such capital.

The main point which is stated is that residential property which is let out the deduction is 30% and
for the self occupies property it is that the standard deduction is nil.

While for the interest on the borrowed capital it is stated that in the let out house property interest
one the loan is deducted in full while in the self occupied as NAV is nil but interest on loan taken for
the purchase or the construction of the houses still allowed as the deduction and it is given to the
individual and HUF as it will result into the losss which can not be set off against other incomes of
current previous year or the future

Provided that in respect of property referred to in sub-section (2) of section 23; the amount of deduction
shall not exceed thirty thousand rupees before 1-4-1999 and the condition is that of certificate from lender.

Provided further that where the property referred to in the first proviso is acquired or constructed with
capital borrowed on or after the 1st day of April, 1999 and such acquisition or construction is completed
within three years from the end of the financial year in which capital was borrowed, the amount of
deduction under this clause shall not exceed two lakh rupees for the purchase and construction and repair is
the Rs 30000 and the condition is

Where the property has been acquired or constructed with borrowed capital, the interest, if any, payable on
such capital borrowed for the period prior to the previous year in which the property has been acquired or
constructed, as reduced by any part thereof allowed as deduction under any other provision of this Act,

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shall be deducted under this clause in equal instalments for the said previous year and for each of the four
immediately succeeding previous years.

Provided also that no deduction shall be made under the second proviso unless the assessee furnishes 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.
Explanation.-For the purposes of this proviso, the expression “new loan” means the whole or any part of a
loan taken by the assessee subsequent to capital borrowed, for the purpose of repayment of such capital.

EXAMPLE That Mr A taken s loan on 1-4-13 for the construction of a house and completed on 30-6-15
and the annual interest is 50000 and the current previous year is 2016-17 calculate the pre accusation period
and post acquisition period interest for the year 2016-17.

SOLUTION In the example it is stated

That 2103-14 and 2014-15 is the pre acquisition period and pre construction interest is 50000 of both the
years and 2015-16 is the year in which the construction was completed and deduction of interest is (current
year interest and 1/5 the Pre construction period that is 50000+1/5of 100000 =70000)

AMOUNTS NOT DEDUCTIBLE FROM INCOME OF HOUSE PROPERTY


(SECTION 25)

Notwithstanding anything contained in section 24, any interest chargeable under this Act which is payable
outside India (not being interest on a loan issued for public subscription before the 1st day of April, 1938),
on which tax has not 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 under section 163 shall not be deducted in computing the
income chargeable under the head “Income from house property”.

Interest when not deductible from “Income from House Property” - Interest on borrowed money which is
payable outside India shall not be allowed as deduction u/s 24(b), unless the tax on the same has been paid
or deducted at source and in respect of which there is no person in India, who may be treated as an agent of
the recipient for such purpose.

SPECIAL PROVISION FOR CASES WHERE UNREALISED RENT


ALLOWED AS DEDUCTION IS REALISED SUBSEQUENTLY

(SECTION 25-A)
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Where a deduction has been made under clause (x) of subsection (1) of section 24 as it stood immediately
before its substitution by the Finance Act, 2001 in the assessment for any year in respect of rent from
property let to a tenant which the assessee cannot realise and subsequently during any previous year the
assessee has realised any amount in respect of such rent, the amount so realised shall be deemed to be
income chargeable under the head “ Income from house property” and accordingly charged to income tax
(without making any deduction under section 23 or section 24 as it stood immediately before its
substitution by the Finance Act, 2001) as the income of that previous year, whether the assessee is the
owner of that property in that year or not.

UNREALISED RENT RECEIVED SUBSEQUENTLY TO BE CHARGED TO


INCOME TAX (SECTION 25AA)

Where the assessee could not realise rent from a property let to a tenant and the same was allowed as
deduction and, subsequently, the assessee has realised any amount in respect of such rent, the amount so
realised shall be deemed to be the income chargeable under the head “Income from house property” and,
accordingly, charged to income-tax as the income of that previous year in which such rent is realized,
whether or not the assessee is the owner of that property in the previous year.

SPECIAL PROVISIONS FOR ARREARS OF RENT RECEIVED (SECTION


25-B)

Where the assessee- (a) is the owner of any property consisting of any buildings or lands appurtenant
thereto which has been let to a tenant; and

(b) has received any amount, by way of arrears of rent from such property, not charged to income-
tax for any previous year,

The amount so received, after deducting a sum equal to thirty per cent of such amount, shall be deemed to
be the income chargeable under the head “Income from house property” and accordingly charged to
income-tax as the income of that previous year in which such rent is received, whether the assessee is the
owner of that property in that year or not.

PROPERTY OWNED BY CO-OWNERS (SECTION 26)

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Where property consisting of building or buildings and lands apprutenant thereto is owned by two or more
persons and their respective shares are definite and ascertainable, such persons shall not in respect of such
property be assessed as an association of persons, but the share of each such person in the income from the
property as computed in accordance with sections 22 to 25 shall be included in his total income.

Explanation.-For the purposes of this section, in applying the provisions of sub-section (2) of section 23 for
computing the share of each such person as is referred to in this section, such share shall be computed, as if
each such person is individually entitled to the relief provided in that sub-section.

DEFINITIONS OF SOME IMPORTANT TERMS (SECTION 27)

(i) 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;

(ii) The holder of an impartible estate shall be deemed to be the individual owner of all the
properties comprised in the estate;

(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 the society,
company or association, as the case may be, shall be deemed to be the owner of that building
or part thereof;

(iiia) a person who is allowed to take or retain 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, 1882 (4 of 1882), shall be deemed to be the owner of that building or part
thereof;

(iiib) 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 with respect to any building or part
thereof, by virtue of any such transaction as is referred to in clause (f) of section 269UA, shall
be deemed to be the owner of that building or part thereof;

(iv) taxes levied by a local authority in respect of any property shall be deemed to include service
taxes levied by the local authority .

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SOLVED QUESTION- A,B,C are the cowers of a house property and their are not definite. The house
property was constructed in Dec 2018 and annual interest payable for the loan is 200000. The property is
let out with GAV 400000 and MC taxes is Rs 20000. Find out the income under income from house
property for Mr A,B,C

SOLUTION- NAV = GAV- MC Taxes

= 400000-20000

=380000

Standard deduction is 30% OF 380000=114000

Deduction for the interest on the loan is 200000

Income from house property is =380000-114000-200000

Income from house property is 66000

As the shares are not determined so the amount of rs 66000 is divided equally between them that is 22000
each of the co owners.

CONCLUSION

From, this project we can conclude that Sections of the I.T. Act 1961 concerning computation of Income
from House Property (Sections 22 to 27 of the I.T. Act, 1961)

The annual value of property consisting of any buildings or lands appurtenant thereto of which the assessee
is the owner, other than such portions of such property as he may occupy for the purposes of any business
or profession carried on by him the profits of which are chargeable to income-tax, shall be chargeable to
income-tax under the head “Income from house property”.

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