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Taxation of Income From House Property Including ‘House Property vis-à-vis Business Income’ And ‘Taxation on Unsold Flats of Builders’ BY CA. RAMESH MALPANI
CHARGING SECTION S 22. 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”. It is beyond any dispute that several heads of income are mutually exclusive, each head covering the income arising from a particular source of income. If a particular source of income falls under a specific head, it cannot be included under any other head of income. [United Commercial Bank Ltd. vs. CIT -32 ITR 688 (SC)]
BUILDINGS OR LANDS APPUARTENANT THERETO Annual value of property consisting of any Buildings or Lands appurtenant thereto are taxable under this head Property of all kinds i. e. Residential, commercial or industrial are covered Annual value of Land appurtenant to building is also taxable under this head Term ‘Land appurtenant thereto’ has to be understood in popular non- technical sense [CIT vs. ZAIBUNNISIA BEGAM – 151 ITR 320 (AP)] Open Land not appurtenant to any building is not covered. Rent form such open Land is taxable under the head ‘Income from Other Sources’ Open Terrace is covered by term ‘Building’ [Manpreet Singh vs. ITO – 168 TTJ 502 (Del)]
‘ OWNER ’ ‘OWNER’ for the purpose of S. 22 is the person, who is legally entitled to receive the income from the property in his own right [CIT vs. PODDAR CEMENT P. LTD. - 226 ITR 625 (SC)] ‘OWNER’ Means a person who can lawfully enjoy all the benefits of the property as its owner An individual who transfers otherwise than for adequate consideration any house property to spouse or minor child shall be deemed to be the owner [S. 27(i)] Allottee member of a Co. Op. Society, Company or other association under a house building scheme [S. 27(iii)] Transferee of S. 53 A transfer under the Transfer of Property Act, 1882 [S. 27(iiia)] Person acquiring rights by virtue of lease for a term of not less than twelve years [S. 27(iiib) r. w. s. 269 UA(f)]
ANNUAL VALUE HOW DETERMINED For one Self Occupied Residential H. P. , the annual value shall be ‘nil’ In respect of all other properties, the annual value has to be determined as per S. 23 (1) as follows : - a) Sum for which property might reasonably be expected to be let form year to year (ALV) OR b) Where property is let out, the actual rent received or receivable there from (Actual Rent) Whichever is higher
VACANCY ALLOWANCE If the property is let and was vacant for whole or any part of the year and owing to such vacancy the actual rent is less than ALV, then the actual rent shall be the annual value [S. 23(1) (c)] Benefit of vacancy allowance is available only when property was actually let & was vacant. Benefit cannot be availed in cases where property not actually let but intended to be let. Period of vacancy cannot exceed period of letting. [VIVEK JAIN vs. ACIT - 337 ITR 74 (AP)] Taxes levies by any local authority shall be deducted in determining annual value of the previous year in which such taxes are actually paid by the assessee (owner)
ANNUAL LETTING VALUE (ALV) [S. 23 (1) (a)] ‘Fair Market Rates’ in the locality supported by proper evidence is the best approved method. Municipal Ratable Value, though not binding on A. O. , is an approved method. It cannot be discarded without cogent reasons. ALV cannot exceed the ‘Standard Rent’ determinable as per Rent control legislation applicable to the property. ‘Standard Rent’ is the upper limit. If fair rent is less than the standard rent, the fair rent will be the ALV. [CIT vs. TIP TOP TYPOGRAPHY-368 ITR 330 (Bom)] Notional interest on interest free security deposit cannot be added while determining ALV. It may be subject matter for inquiry of fair rent but cannot be the determinative factor. [CIT vs. MONI KUMAR. SUBA-333 ITR 38(Del-FB)] CONCLUSION : - ALV shall be the sum at which the property may reasonably let out by a willing lessor to a willing lessee uninfluenced by extraneous circumstance.
ACTUAL RENT [S. 23 (1) (b)] Actual Rent received or receivable shall be deemed to be Annual value if it is more than the ALV u/s 23(1) (a). Value of notional advantages like notional interest on interest free deposit etc. shall not form part of actual rent u/s 23(1)(b). [CIT vs. J. K. Investors (Bombay) Ltd. 248 ITR 723 (Bom)] Liabilities of owner paid by the tenant will form part of actual rent. Taxes, cesses and outgoings relating to use of the property being liabilities of the owner will be excluded from actual rent [ITO vs. GOPICHAND GODHWANI- 1 SOT 374 (Mum)]
DEDUCTIONS [S. 24] Standard deduction of 30% of Annual Value [S. 24(a)] Interest payble on ‘borrowed capital’ for acquisition , construction , repairing , renovation or reconstruction Deduction of interest on borrowed capital for S. O. residential property u/s 23 (2) restricted to Rs. 2. 00 Lakhs Interest on deposit from tenant is as such not deductible. However, if such deposits are used for acquisition / construction etc. , interest thereon is deductible [JCIT vs. B. K. Patel Family Trust 9 SOT 583 (Mum)] Interest on interest is not deductible. Interest on Partners’ Capital used for the purpose of acquisition / construction etc. is eligible for deduction u/s 24 (b) [SANE & DOSHI ENTERPRISES vs. ACIT- ITA No. 6532/MUM/2010] Interest to creditors for acquisition / construction etc. is deductible Interest on new loan taken for repayment of old loan is deductible Brokerage is not deductible – neither u/s 24 -nor u/s 23(1) (b)
MISCELLANEOUS Property occupied by partnership firm for its business in which assessee (owner) is partner is held to be occupied for own business [CIT vs. RASIKLAL BALABHAI- 119 ITR 303 (Guj)] Property owned by HUF but used by firm in which members are partners is not business user by the owner (assessee) [CIT vs. SHIV MOHANLAL- III CTR 406] Property owned by co-owners each having definite and ascertainable Share – Individual Co-owners and not AOP will be assessable [S. 26] Loss under the ‘income from house property’ can be set off against income under any other head of that year [S. 71] Unabsorbed Loss can be C/F for eight year & set off against the ‘income from house property’ [S. 71 B]
INCOME FROM HOUSE PROPERTY VIS-À-VIS BUSINESS INCOME True test is whether letting of the property is part of business of the asessee or is just exploitation of property by the owner: [CHENNAI PRPERTIES & INV. LTD. 277 CTR 185 (SC)] If Letting of properties is part of business, it is business income [CHENNAI PROPERTIES & INV. LTD. 277 CTR 185 (SC)] [ KARANPURA DEVELOPMENT CO. LTD. 44 ITR 361 (SC)] [ BHABI PROPERTIES (P) LTD. – 201 TAXMAN 59 (Cal)] If letting of Shops, stalls, counters or space Coupled with other services is part of organized commercial activity, it is business income: [KARNANI PROPERTIES LTD. 82 ITR 547 (SC)] [ NUTAN WARE HOUSING CO. (P) LTD. 326 ITR 94 (BOM)] [HARVINDER PAL MEHTA (HUF) – 122 ITD 93 (MUM)]
Rental Income form unsold flats/ units of builders /developers / real estate dealers : There are contradictory judgments on this issue: - Held to be House Property Income: [EAST INDIA HSG. & LAND DEV. TRUST LTD. 42 ITR 49 (SC)] [AZIMGANJ ESTATE (P) LTD – 352 ITR 82 (CAL)] [MANGLA HOMES (P) LTD. -182 TAXMAN 55 (BOM)] - Held to be Business Income: [NEHA BUILDERS – 296 ITR 661 (GUJ)] Ø Whether letting of unsold flats (stock in trade) takes the same out of the scope of ‘property occupied for business’ as contemplated in S. 22 !
TAXATION OF UNSOLD FLATS/ UNITS OF BUILDERS Unsold Flats/ Units (stock in trade) of builders/ developers are taxable u/s 23 (1) (a) even if there is no rental income: [CIT vs. Ansal Housing Finance & Leasing Ltd. – 354 ITR 180(Del)] Ø Whether the phrase “other than such portion of such property as he may occupy for the purposes of any business or profession carried on by him” in the charging section 22 loses site of or is not relevant Ø Whether unsold stock (Flats/Units) of a builder/ developer/ real estate dealer cannot be said to be occupied for the purposes of business as contemplated in S. 22 Ø Whether ratio of National Storage (P) Ltd. - 48 ITR 577 (SC) not applicable to such cases