HOUSE PROPERTY TAXATION ISSUES By Naveen.N B.Com.,F.C.A

INCOME FROM HOUSE PROPERTY ANNUAL VALUE OF PROPERTY CONSISTING OF BUILDING AND LAND APPURTENANT OF WHICH THE ASSESSEE IS THE OWNER IS CHARGEABLE TO TAX. THE PROPERTY SHALL NOT INCLUDE SUCH PORTION THAT MAY BE OCCUPIED FOR THE PURPOSE OF ANY BUSINESS OR PROFESSION CARRIED ON BY THE ASSESSEE.

INCOME FROM HOUSE PROPERTY BUILDING AND HOUSE PROPERTY NOT DEFINED IN THE ACT.TO BE UNDERSTOOD IN THEIR ORDINARY DICTIONARY MEANING. BUILDING TO INCLUDE BUILDING OCCUPIED FOR RESIDENCE, LET OUT FOR OFFICE, STORAGE, WAREHOUSING, FACTORY. LAND DENOTES THAT SUCH LAND ENHANCE THE UTILITY OF THE PROPERTY AND THEREFORE BECOME PART OF BUILDING OR PROPERTY.

INCOME FROM HOUSE PROPERTY ASSESSEE SHOULD BE THE OWNER OF THE HOUSE PROPERTY. IT IS IMMATERIAL WHETHER THE OWNER IS IN POSSESSION AND ENJOYMENT OF THE PROPERTY OR HAS LET IT OUT. AN ASSESSEE WHO TRANSFERS HOUSE PROPERTY OTHERWISE THAN FOR ADEQUATE CONSIDERATION TO SPOUSE OR MINOR CHILD IS DEEMED TO BE THE OWNER. (TULSIDAS KILACHAND VS CIT, 42 ITR, SC 1961)

INCOME FROM HOUSE PROPERTY ASSESSMENT OF INCOME FROM HOUSE PROPERTY IS ONLY IN REPECT OF THE INCOME OF THE PROPERTY IN THE PREVIOUS YEAR. WHERE OWNER RECEIVES COMPOSITE RENT, IT HAS TO BE SPLIT UP INTO HOUSE PROPERTY INCOME AND OTHER SOURCE.

ANNUAL VALUE STEP 1 FAIR RENT WHICHEVER IS HIGHER WHICHEVER IS LOWER 1 OR 2 WHICHEVER IS HIGHER MUNICIPAL VALUE STANDARD RENT STEP 2ACTUAL RENT STEP 3ACTUAL RENT AFTER VACANCY 1 OR 3 L O W E R

PROFORMA FOR CALULATING HOUSE PROPERTY INCOME-SELF OCCUPIED GROSS ANNUAL VALUE NIL LESS: MUNICIPAL TAX NIL NET ANNUAL VALUE NIL LESS: DEDUCTIONS STANDARD 30% NIL INTEREST ON CAPITAL XXX TAXABLE INCOME XXX

PROFORMA FOR CALULATING HOUSE PROPERTY INCOME-LET OUT PROPERTY GROSS ANNUAL VALUE XXX LESS: MUNICIPAL TAX XXX NET ANNUAL VALUE XXX LESS: DEDUCTIONS STANDARD 30% XXX INTEREST ON CAPITAL XXX TAXABLE INCOME XXX

INTEREST ON BORROWED CAPITAL CAPITAL IS BORROWED FOR THE PURPOSE OF PURCHASE, CONSTRUCTION, REPAIR, RENEWAL OR RECONSTRUCTION OF THE HOUSE PROPERTY. INTEREST IS DEDUCTIBLE ON ACCRUAL BASIS. IT CAN BE CLAIMED AS DEDUCTION EVEN IF INTEREST IS NOT ACTUALLY PAID DURING THE YEAR. INTEREST ON UNPAID INTEREST IS NOT DEDUCTIBLE. NO DEDUCTION FOR BROKERAGE OR COMMISSION FOR ARRANGING THE LOAN. INTEREST ON FRESH LOAN TAKEN TO REPAY THE ORIGINAL LOAN IS DEDUCTIBLE (CIRCULAR NO 28 DT ) INTEREST FULLY DEDUCTIBLE IN CASE OF LET OUT PROPERTY. IN CASE OF SELF OCCUPIED PROPERTY INTEREST DEDUCTIBLE UPTO RS 1,50,000 IF LOAN IS BORROWED AFTER (RS 30,000 IF BEFORE ). WHERE LOAN IS BORROWED FOR REPAIRS DEDUCTION RESTRICTED TO RS 30,000.

INTEREST ON BORROWED CAPITAL THE ACQUISITION OR CONSTRUCTION SHOULD BE COMPLETED WITHIN 3 YEARS FORM THE END OF FINANCIAL YEAR IN WHICH CAPITAL IS BORROWED. THE PERSON EXTENDING THE LOAN CERTIFIES THAT SUCH INTEREST IS PAYABLE IN RESPECT OF THE AMOUNT ADVANCED FOR ACQUISITION OR CONSTRUCTION OF THE HOUSE OR AS RE-FINANCE OF THE PRINCIPAL AMOUNT OUTSTANDING UNDER AN EARLIER LOAN TAKEN FOR SUCH ACQUISITION OR CONSTRUCTION. THERE IS NO STIPULATION REGARDING THE DATE OF COMMENCEMENT OF CONSTRUCTION.

INTEREST CAN BE CLAIMED AS A DEDUCTION FROM THE PREVIOUS YEAR IN WHICH THE CONSTRUCTION OR ACQUISITION IS COMPLETED. WHAT ABOUT INTEREST DURING PRE-CONSTRUCTION STAGE OR PRE ACQUISITION STAGE????? PRE CONSTRUCTION PERIOD INTEREST IS DEDUCTIBLE IN FIVE EQUAL ANNUAL INSTALMENTS. PRE CONSTRUCTION PERIOD STARTS ON DATE OF BORROWING THE LOAN ENDS ON DATE OF REPAYMENT OF LOAN 31 ST MARCH IMMEDIATELY PRECEEDING THE YEAR OF CONSTRUCTION WHICHEVER IS EARLIER

CASE STUDY 1 – ANNUAL VALUE House 1House 2 MUNICIPAL VALUE105 FAIR RENT107 STANDARD RENT88135 ACTUAL RENT FOR THE ENTIRE PERIOD STEP STEP GROSS ANNUAL VALUE110112

CASE STUDY 2 – ANNUAL VALUE House 1House 2 MUNICIPAL VALUE60140 FAIR RENT65150 STANDARD RENT ACTUAL RENT FOR THE ENTIRE PERIOD72144 LOSS DUE TO VACANCY6120 STEP STEP GROSS ANNUAL VALUE6624

CASE STUDY 3 – Pre-construction period interest X takes a loan of Rs 15% p.a for constructing a house on June 10, Construction of the house is completed on January 20, Date of repayment of loan 16 th January STARTS ON DATE OF BORROWING THE LOAN ENDS ON DATE OF REPAYMENT OF LOAN ST MARCH IMMEDIATELY PRECEEDING THE YEAR OF CONSTRUCTION WHICHEVER IS EARLIER Preconstruction period interest from to on Rs 15% i.e., Rs 28,500 deductible in 5 equal annual instalments from

CASE STUDY 4 X takes a loan of Rs 15% p.a for constructing a house on June 10, Construction of the house is completed on January 20, Date of repayment of loan 31 st October STARTS ON DATE OF BORROWING THE LOAN ENDS ON DATE OF REPAYMENT OF LOAN ST MARCH IMMEDIATELY PRECEEDING THE YEAR OF CONSTRUCTION WHICHEVER IS EARLIER Preconstruction period interest from to on Rs 15% i.e., Rs 20,000 deductible in 5 equal annual instalments from

CASE STUDY 5 ParticularsAmount MUNICIPAL VALUE1,20,000 FAIR RENT1.00,000 ACTUAL RENT PER MONTH11,000 MUNICIPAL TAXES ACCRUED12,000 MUNICIPAL TAX PAID6,000 INTEREST ON CAPITAL BORROWED7,500 NATURE OF OCCUPATIONLET OUT

ANSWER PARTICULARSLET OUT GROSS ANNUAL VALUE1,32,000 LESS: MUNICIPAL TAX6,000 NET ANNUAL VALUE1,26,000 LESS: STANDARD 30% INTEREST ON LOAN 37,800 7,500 TAXABLE INCOME80,700

CASE STUDY 6 ParticularsHouse 1 (SOP) House 2 LET OUT MUNICIPAL VALUE60,0003,00,000 FAIR RENT85,0003,20,000 STANDARD RENT65,0003,60,000 ACTUAL RENT3,00,000 MUNICIPAL TAX PAID6,00030,000 INTEREST ON CAPITAL BORROWED. LOAN BORROWED ON ,41,6002,75,000 NATURE OF OCCUPATIONSELFLET OUT

ANSWER PARTICULARSSELF OCCUPIED LET OUT GROSS ANNUAL VALUENIL3,20,000 LESS: MUNICIPAL TAXNIL30,000 NET ANNUAL VALUENIL2,90,000 LESS: STANDARD 30% INTEREST ON LOAN NIL 1,41,600 87,000 2,75,000 TAXABLE INCOME(1,41,600)(72,000) TOTAL TAXABLE INCOME(2,13,600)

DEEMED LET OUT PROPERTY IF THE ASSESSEE USES MORE THAN ONE HOUSE PROPERTY FOR HIS SELF OCCUPATION THEN ONE OF THE HOUSE AT THE CHOICE OF THE ASSESSEE WILL BE TAKEN AS A DEEMED LET OUT PROPERTY. BENEFIT OF SELF OCCUPATION (ZERO ANNUAL VALUE) AVAILABLE ONLY TO ONE HOUSE PROPERTY. VALUE OF DEEMED LET OUT PROPERTY BASED ON STEPS 1, 2 AND 3.

CASE STUDY X HAS OCCUPIED 2 HOUSES FOR HIS RESIDENTIAL PURPOSE, PARTICULARS OF WHICH ARE AS FOLLOWS House 1House 2 MUNICIPAL VALUE60,00030,000 FAIR RENT85,00032,000 STANDARD RENT65,00036,000 MUNICIPAL TAX10% INTEREST ON CAPITAL (BORROWED ON ) 1,45,00020,000

ANSWER House 1 SOP House 2 DLO GROSS ANNUAL VALUENil32,000 MUNICIPAL TAXNil3,000 NET ANNUAL VALUENil29,000 DEDUCTION STANDARD 30% Nil8,700 INTEREST ON CAPITAL1,45,00020,000 (1,45,000)300 (1,44,700)

ILLUSTRATION NITIN DRAWS A SALARY OF RS 10,00,000 P.A. HE RESIDES IN HIS OWN HOUSE PURCHASED ON HE HAS BORROWED A LOAN OF RS 50 LAKH FOR THE HOUSE SITUATED AT MUMBAI. HE HAS REPAID DURING THE YEAR A SUM OF RS 3,70,000 TOWARDS THE LOAN (PRINCIPAL RS 1,25,000 AND INTEREST RS 2,45,000). DETERMINE THE TOTAL INCOME. SALARY10,00,000 HOUSING INTEREST (1,50,000 ) GROSS INCOME8,50,000 DEDUCTIONS 80C – PRINCIPAL PAID – HOSUING LOAN 1,00,000 TOTAL INCOME7,50,000

Deepak Kapoor v ITO Delhi tribunal We find that neither the AO nor the learned CIT(A) recorded any findings as to which are the properties in the instant case which fall within the purview of section 23(2) of the Act. In these circumstances, we consider it fair and appropriate to vacate the findings of the learned CIT(A) and restore the matter to the file of the AO with the directions to identify the properties in the instant case which fall within the purview of section 23(2) of the Act and allow the assessee option mentioned in s.23(4) of the Act to choose any one of these as self occupied property. Thereafter, the assessment may be completed in accordance with law after determining ALV of the said property in the light of various judicial pronouncements, including those referred to above. The assessee is directed to place all the relevant facts before the AO and co-operate in expeditious completion of assessment. The AO is free to undertake any independent enquires, if found necessary. With these observations, ground nos. 1 & 2 in the appeal are disposed of. Since the issues are restored to the file of the AO, the ground no.3 relating to levy of interest under section 234B of the Act does not survive for our adjudication at this stage.

Shri Saif Ali Khan v Asst CIT Mumbai Tribunal Section 23(1) clearly provides that taxes levied by any local authority in respect of the property shall be deducted in determining the annual value of the property. Therefore, municipal taxes and society charges paid by assessee in respect of the let out property were allowable while computing the annual letting value of the property under section 23. This will be over and above the deduction under section 24.

K.S.Kamalakannan v Asst CIT Chennai Tribunal The original loan taken by the father and subsequent loan taken by assessee from EBSL was not for the purpose of construction or acquisition, etc., of the house property in question. Hence, the loan taken from HSBC for repayment of earlier loan does not fall under the category of loan for discharging the liability of the loan taken for acquisition or construction etc. of the property'. Accordingly, the interest whether paid or payable, is not allowable under the provision of Section 24(1)(vi) as it stood at the relevant time.

Kesoram Industries Ltd v CIT Chennai High court Not justified. Income from property belonging to the assessee and occupied by the employees of sister concern should be treated as an income from house property rather than business income chargeable under section 28.

Asst CIT V Rahul chaudary Delhi Tribunal Not rightly so. By paying borrowed money to R the assessee did not acquire any interest over the property but only the vacant possession and, therefore, the interest on borrowed capital could not be allowed to be accepted.

Vivej Jain v Asst CIT AP High court Justified.