The income of a taxpayer is assessed under 5 different heads of income. The rental income is taxed under the head ‘Income from house property’ which is computed after allowing payment for municipal taxes, and other permissible deductions. As a result of amendment made by Finance Act, 2001, w.e.f. asst. year 2002-03 consolidated deduction of 30 per cent shall be allowed from annual value in place of hitherto available distinct deductions for repairs, collection charges, fire insurance premium, annual charge and ground rent. However, even now interest shall be considered separately. The Vacancy Allowance and unrealised rent will be taken into account while calculating the annual value. A property may be occupied by its owner or may be let out. For minimising the tax burden on such income, the taxpayers should know the important provisions. The vital issues relating to tax treatment of income from house property are discussed in this chapter.

Income that is taxed under the head ‘Income from house property’ -

Rent and other income from any flat, building or land appurtenant thereto is generally taxed under the head ‘Income from house property’.

As per section 22 “House Property” does not include vacant land. Income derived from a vacant land is charged either under the head “Income from Business or Profession” or under the head “Income from other sources” depending upon its nature. However if the owner occupies the house property for the purposes of his own business or profession, no tax is to be paid under this head in respect of such property.

Notional Income from the part of a House Property owned by HUF, used for business purposes by a firm, in which HUF was a partner was not assessable to tax - CIT v. H.S. Singhal & Sons [2002] 253 ITR 653 (Del.).

Rent or other income derived from the house property is taxed under this head even if the house property is kept as stock-in-trade, or it is the assessee’s business to let out properties or rooms. The tax is levied upon the legal or beneficial owner and not upon the occupant. It is levied upon the annual value as discussed in next question.

Some illustrations, where income has been held to be assessable under the head ' Income from House Property ' :

(1) Income from own building used partly for business and portions let out on rent - CIT v. Pandyan Bank Ltd. [1969] 71 ITR 707 (Mad) and Rampur Industries Ltd. v. CIT [1971] 82 ITR 23 (AII).

(2) Rent from setting up a market - East India Housing & Land Development Trust Ltd. v. CIT [1961] 42 ITR 49(SC).

(3) Rent from letting out of property by assessee having house owning as business asset - S.C. Majumdar v. CIT [1947] 15 ITR 484, 493 (Pat) and East India Prospecting Syndicate v. CIT [1951] 19 ITR 571(Cal).

(4) Income from property acquired in the course of money-lending business -O.RM. SP. SV.Firm v. CIT [1960] 39 ITR 327 (Mad), Arunachalam Chettiar v. CIT [1945] 13 ITR 183 (Mad) and Bansilal Gangaram v. CIT [1963] 48 ITR 973 (Bom)

(5) Rent from certain stalls in ' Mangala Haat' - CIT v. Kanaiyalal Mimani [1979] 120 ITR 892 (Cal).

(6) Rent from Bustee huts having a minimum life of 5 to 6 years - Tinsukia Development Corporation Ltd. v. CIT [1979] 120 ITR 176 (Cal.).

(7) Income from market consisting of shops, buildings, godowns etc.- P.V.G. Raju v. CIT [1967] 66 ITR 122 (AP).

(8) The assessee, carrying on business of colonisation, built a school premises and let it out on perpetual lease at Re.1 per year to a trust for running a school. It was held that the estimated net annual value of Rs 5000 was assessable under head House Property.- DLF United Ltd. v. CIT [1984] 149 ITR 24 (Del).

(9) The assessee took lease of land having tenants for construction of cinema theatre. On a part of the land, a residential building was constructed and let out to the pre-existing tenants and on the other part the cinema theatre was constructed. It was held that the rental income from letting out of residential building was assessable under head House Property- N.L.Mehta Cinema Enterprises (P) Ltd. v. CIT [1994] 208 ITR 975 (Bom).

(10) Rent from letting out a building with electrical fittings, water closets and Lift facility - CIT v. Indian Metal & Metallurgical Corporation [1995] 215 ITR 424, 429 (Mad).

(11) Income derived from shopping complex by letting out shops to various tenants with inseparable ancillary services is assessable partly as income from house property and partly as income from business - Attukal Shopping Complex (P) Ltd. v. CIT [2002] 178 CTR ( Ker) 469; [2002] 125 Taxman 881 ( Ker).

(12) Annual value of a property is liable to be charged to income tax even in a case where the property is mortgaged and no income is derived from it. S.Ujjannappa v. CIT [2002] 255 ITR 455 (Kar).

(13) Rent from superstructure built on leasehold land and the assessee-lessee has raised the construction over the leasehold land and he is also entitled to sell, mortgage or transfer the property during the lease period as per the terms of the lease, he is the deemed owner of the property and the rental income of the said property is assessable as income from the house property - CIT v. Estate of Omprakash Jhunjhunwala [2002] 254 ITR 152 (Cal) .

(14) Where theatre was given on hire as per court's order, rent received for such hiring was assessable as 'Income from House Property' - CIT v. M. S. Menon [2002] 254 ITR 462 (Mad).

Some illustrations , where income has been held not to be assessable under the head Income from House Property -

(1) Rent from vaults for storage of films - CIT v. National Storage (P) Ltd. [1967] 66 ITR 596 (SC).

(2) Rent from furnished accomodation - Sultan Bros v. CIT (1964) 51 ITR 353 (SC) and CIT v. Bosotto Bros Ltd (1940) 8 ITR 41 (Mad).

(3) Rent from paying guest accomodation - Manohar Singh v. CIT [1965] 58 ITR 592 (Punj).

(4) Income from letting out the surplus of the non factory buildings including godown - CIT v. Ajmera Industries Pvt. Ltd. [1976] 103 ITR 245 (Cal).

(5) Rent from residential quarters for employees - Jamshedpur Engineering Machine Mfg. Co. Ltd. v. CIT [1957] 32 ITR 41 (Pat), Rohtas Industries Ltd. v. CIT [1961] 41 ITR 524 (Pat), CIT v. Delhi Cloth & General Mills Co. Ltd. [1966] 59 ITR 152 (Punj).

(6) Rent from letting out of lodging house with amenities held to be business income - CIT v. Shanmugham [1984] 147 ITR 692 (Mad).

(7) Rent received from letting out of portion of paper mill for setting up Bank, Post office, Police Station, Central Excise office, Railway staff quarters in a way to facilitate assessee's own business income - CIT v. National Newsprint & Paper Mills Ltd. [1978] 114 ITR 388 (M.P.).

(8) Service Charges received from tenants are liable to be assessed as "income from other sources" and not "income from House property" - Tarapore & Co. v. CIT [2002] 125 Taxman 446 ( Mad.)

Cases when income from property is not charged to tax -

Income from property by way of rent is not charged to tax in the following situations :

i) Income from farm house u/s 2(1A)(c) read with section 10(1)

ii) Annual value of any one palace of an ex-ruler u/s 10(19A)

iii) Income from property of a local authority u/s 10(20)

iv) Income from property of an approved scientific research association u/s 10(21)

v) Income from property of an educational institution and hospital u/s 10(23C)

vi) Income from property of a trade union u/s 10(24)

vii) Income from property in the case of a person resident of Ladakh u/s 10(26A)

viii) Income from house property held for charitable purposes u/s 11

ix) Income from property of a political party u/s 13A

x) Any property used for own business or profession as per section 22

xi) One self-occupied house-property or a property which can’t be occupied by the owner due to the fact that owning to his employment, business or profession carried on at any other place he has to reside at that other place in a building not belonging to him - u/s 23(2)

Club house property providing recreational facilities -

In a case where the assessee is a club and owns a club house for providing recreational and refreshment facilities, the business is governed by the principle of mutuality as :

(i) the contributors are the recipients

(ii) the club provided facilities exclusively to members and their guests only.

(iii) Members are not entitled to any share in profits.

and therefore, income tax is not payable, as held by the Apex Court in the case of Chelmsford Club v. CIT [2000] 243 ITR 89(SC) which superceded the earlier decision of Allahabad High Court in the case of Wheeler Club Ltd [1963] 49 ITR 52 (All.). In such a case the club runs on 'no profit no loss' basis as the members pay for all their expenses and are not entitled to any share in the profits. The surplus, if any is used for maintenance and repairment of the club.

Rent from putting up hoardings on the top of the building -

Rent for putting up hoardings on top of the building is not income from house property. It will be taxed under the head Income from other sources. The Calcutta High Court has held in the case of Mukherjee Estate (P) Ltd v. CIT [2000] 244 ITR 1 (Cal.) that hoardings do not form part of the building, therefore income from putting up such hoarding for advertisement purpose cannot be considered as income from house property.

Annual Value and its determination -

The annual value means the amount for which the property might reasonably be expected to be let out from year to year.

However, if the actual rent received or receivable in respect of any let out property exceeds the above referred reasonable amount, the tax is charged on the actual amount of rent received or receivable. However, in a place where the rent control law is in operation, the standard rent under such law should be taken as the basis for determining the annual value. This is now established by the Supreme Court’s decisions in Dewan Daulatrai Kapoor v. New Delhi Municipal Committee and another 122 ITR 700 (SC); Sheila Kaushish v. C.I.T. 131 ITR 435(SC) and Balbir Singh v. MCD and Others 152 ITR 388(SC).

Vacancy - W.e.f. asst. year 2002-03 where the let out property remains vacant for whole or a part of the year, the rent for such period shall not be considered for computing annual value. Further the rent which the owner is unable to realise shall also be excluded.

The maintenance charges, Security charges, charges for common electricity, Lift maintenance etc. which are borne by the landlord should be deducted from the rent in computing annual value. Delhi bench of ITAT has confirmed this in the case of - Lekh Raj Channa v. ITO [1990] 37 TTJ (Delhi) 297, CIT v. Jacob K. Joseph [2002] 174 CTR (Ker) 34 ; [2002] 121 Taxman 332 (Ker).

From the annual value computed on the above basis, deduction is first made in respect of municipal taxes (including service tax) actually paid during the year. Such taxes may relate to one or more year(s). It is advisable that the taxpayers should attach proof of payment of tax to municipality or any other local authority, along with the I.T. Return. But if the municipal tax is being paid by the tenant, the owner shall be entitled to deduct only the amount of such tax actually borne and paid by him. Municipal tax include fire tax, halal khore tax, education cess and water tax.

Annual letting value in case of a property given under leave and licence agreement -

In Smt. Indumati v. Adya v. Ninth ITO [1983] 4 ITD 349 (Bom.) the assessee gave her flat under leave and licence agreement, which envisaged that she would get a licence fee or compensation for the use of premises. The ITO computed the income from house property by taking licence fee as rent received. The assessee contended that there was a distinction between the expressions "let" and "licence" and that her case did not fall u/s 23(1) (b) but u/s 23(1)(a). Hence, annual value should be computed not with reference to licence fee but with reference to standard rent computed by the Municipal Corporation.

Held, that for the purpose of determining the property income in any particular case, it may not be necessary to draw a distinction between the technical meaning of "letting" and "licence". In the instant case even though the legal relationship between parties could be gathered from the agreement to be of licence, in effect it was a manner of letting the premises for the occupation of the lessee's employee. Accordingly, section 23(1)(b) was applicable.

Corporation Tax realised by the landlord from the tenant -

As per the decision in CIT, W.B. - IV v. Gillandar Arbuthnot & Co. Ltd. [1983] 142 ITR 598(Cal.), the occupier's share of corporation tax realised by an assessee from its tenants does not form part of the sum for which the property might reasonable be expected to let from year to year within the meaning of section 23(1) and the same cannot be assessed as the income of the assessee. Similarly, the occupier's share of corporation tax collected in excess of what was paid to the corporation cannot also be assessed as the income of the assessee.

Who is treated as "Owner"

As per section 27 owner of house property means not only the legal owner, i.e. the person in whose name the property stands, but also -

i) the person who has transferred the property without adequate consideration to his/her spouse (otherwise than in connection with an agreement to live apart) or to a minor child, not being a married daughter.

ii) a member of a Co-operative Society, Company or A.O.P. to whom a building or a part of building is allotted or leased under a house building scheme.

iii) a person in possession of the property in part performance of a contract within the meaning of section 53A of the Transfer of Property Act. The persons, who have paid consideration and taken possession of flat or building as per ‘agreement for sale’ will come in this category even though the transfer is not yet registered.

iv) a person having lease right in the property under a lease for a period exceeding 12 years in the aggregate including the term for which the lease may be extended.

v) The holder of an impartible estate shall be deemed to be the individual owner of all the properties comprised in the estate. -

When “annual value” is taken as "nil"

One house or part of a house (a flat in a building) used by the owner for his own residence is exempted from tax. If such house or flat was in the occupation of the owner for a part of the year and was let out for the remaining part, the taxable income is computed on the basis of the annual value relatable to the period during which the property was let out. In case, two or more flats or houses are used by the owner for his residence, the assessee has the option to choose one of the self occupied house or flat, for which he would like to get exemption from tax.

Where the assessee owns only one house property and it cannot actually be occupied by him because it is situated at a place other than a place where he is employed or carries on business or profession, in such a case also the annual value of the property is taken as nil provided the property is not actually let out and no other benefit is derived by the assessee from such property. When the assessee let out his house to his employer and the employer allotted the house to the assessee as rent free quarter, the benefit of exemption from tax in case of self residence would not be available to the assessee - D.R. Sundar Raj v. CIT [1980]

Deductions available from Annual Value -

From the annual value the following deductions are available u/s 24 w.e.f. asst. year 2002-03 -

a) a sum equal to 30% of the annual value u/s 24(a). [ This is in substitution of earlier deductions for repairs, collection charges, ground rent, insurance etc.]

b) where the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital, the amount of any interest payable on such capital.

Provided that in respect of a self occupied property, the amount of deduction shall be allowed as under -

i) where the property is acquired or constructed with capital borrowed on or after 1.4.99 and such acquisition or construction is completed before 3 years from the end of the financial year in which capital was borrowed, (w.e.f. asst. year 2003-04, earlier the period for acquiring or construction was on or before 1.4.2003) the amount of deduction shall be limited to Rs.1,50,000 w.e.f. asst. year 2002-03. (It was Rs. 75,000 for asst. year 2000-01 and Rs.1 lac for asst year 2001-02).

The aforesaid higher deduction of Rs. 1,50,000 will not be available unless the assessee files a certificate from the lender 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 ( 3rd Proviso to section 24, w.e.f. asst. year 2003-04).

ii) In other cases where the amount was borrowed prior to 1.4.99 - Rs. 30,000.

It may be noted that interest payable by an assessee in respect of funds borrowed for the purpose of acquisition or construction of house property prior to the previous year in which such property has been acquired or constructed is deductible in 5 equal instalments commencing from the previous year in which the house is acquired or constructed. However, the benefit of such prior interest will not be permissible if the interest has been claimed under any other section.

In case of self occupied house property, for which annual value has been taken as nil, none of the above deductions except the interest on borrowed capital subject to limit mentioned above is admissible.

"Set-off" and "carried forward" of the loss under the head "Income from house property"

W.e.f. asst. year 1999-2000 loss under the head "Income from House Property" can be carried forward for eight asst. years and set off against income under the same head (section 71B). From asst. year 1995-96 to asst. year 1998-99, the loss under the head "Income from house property" could have been set off against the income from other heads, and no carry forward was allowed.

If the property is owned jointly by two or more persons -

In such cases, where the shares of joint owners are definite and ascertainable, the income of such house property will be assessed in the hands of each co-owner separately and not as A.O.P. For the purpose of computing income from house property the rent/annual value will be taken in proportion to his share in the property. However, where the share is not definite the income of the property shall be assessed as that of an Association of Persons. (section 26)

Rental income from superstructure constructed on leased land -

The Calcutta High Court in the case of CIT v. Estate of Omprakash Jhunjhunwala [2002] 254 ITR 152 held that where land is taken on lease and superstructure is constructed by assessee, rental income from superstructure would be assessable as property income in assessee's hands. It was also observed that the assessee had raised that construction and he could sell, mortgage or transfer the leasehold property during the lease period, he was the deemed owner of the property and the rental income was assessable as income from the house property.

If flat is alloted by DDA under Hire Purchase Agreement, whether any notional income will be considered u/s 22 -

As per Delhi Bench of ITAT in the case of ITO v. Amar Singh 14 TTJ 321 (Delhi) 1, in the given case the assessee is not the owner of the property. The notional income u/s 22 can be assessed only in the hands of the owner and not in the hands of the tenant. The assessee is the tenant during the currency of hire purchase agreement, therefore no notional income will arise.

Unrealised rent, if realized later -

As per section 25AA introduced by the Finance Act, 2001 where the assessee cannot realise rent from a property let to a tenant and, subsequently 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 tax as the income of that previous year in which such rent is realised whether or not the assessee is the owner of that property in that previous year.

Section 25B also provides that any arrear rent received on or after 1.4.2000 shall be chargeable to tax under the head "Income from House Property" in the year of its receipt if the same has not been charged in earlier years irrespective of the fact that the recipient of the rent continued to be the owner of the property in the year of receipt or not. However deduction from annual value to the extent of 30% w.e.f. asst. year 2002-03 shall be available from such rent.

Since the Finance Act, 2000 had introduced the new section 25B with effect from asst. year 2000-01, the arrear rent actually received on or before 31.3.2000, is not taxable in the year in which it is received - Hamilton & Co. Pvt. Ltd. v. CIT [1992] 194 ITR 391, 398 (Cal); Hope (India) Ltd. v. CIT [1999] 238 ITR 740(Cal).

If the assessee or the tenant uses the house property for own business -

The tax treatment in such situations, in the hands of the assessee will be as follows :-

a) In case the assessee uses the house property for the purpose of his own business, the annual value of such property will not be assessable u/s 22 provided profit of such business or profession is capable of being assessed. Further in such cases while computing business income of such assessee no deduction on account of notional rent of such house property will be permissible.

b) In case the property is let out to a tenant who uses it for carrying on his own business, the annual value of such property will be chargeable to income-tax under the head "Income from House Property", in the hands of the owner of the property.

Where a portion of shopping complex-cum-lodging house was leased out to a bank on monthly rent -

In the case of New Paris Complex v. ACIT [2002] 83 ITD 25A (Coch) that the assessee firm was the owner of the property let out to the bank. The bank was carrying on the business of banking. However carrying on the business of banking was not the objective of the assessee firm. Therefore, there was no reason to believe that the portion of the building let out by the assessee to bank was occupied for the purpose of the business or profession, sought to be carried on by the assessee. Therefore on plain reading of section 22, it had been seen that the rent received by the assessee firm from the bank has to be treated as income from house - property. The nature of the rent received by the assessee firm would not alter because it was received by the assessee firm formed with the object of constructing and running the shopping complexes and lodging house. Once the rent is received it is straight away bracketed under the head ‘Income from house property'; it could not be considered under the head 'Profits from the business' only for the reason that the property let out by the assessee firm had an indirect connection with the properly constructed by the assessee firm to pursue its business objective. Therefore in the facts and circumstances and in the light of various judicial pronouncements the A.O. had rightly treated the rental income as income from house property.

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