Lesson 3 n Computation of Income under the Head of House Property 63

Lesson 3
Computation of Income under the
Head of House Property

LESSON OUTLINE
LEARNING OBJECTIVES
– Introduction The provisions for computation of Income from
– Basis of Charge [Section 22] house property are covered under sections 22
to 27. This chapter deals with the provisions for
– Property held as stock in trade
computation of Income from house property.
– Taxation of Income prom properties situated Section 22 is the charging section that identifies
outside India the basis of charge wherein the annual value is
prescribed as the basis for computation of Income
– Disputed Ownership
from House Property. The process of computation
– Treatment of Composite Rent of “Income from House Property” starts with the
– Cases where Income from House Property determination of annual value of the property.
exempt from tax The concept of annual value and the method of
– Deemed Ownership [Section 27] determination are laid down in section 23. The
admissible deductions available from house
– How to compute income from House property are mentioned in section 24.
Property
At the end of this lesson, students will be able
– Determination of Annual Value [Section 23] to understand the conditions to be satisfied for
– Municipal Taxes income to be chargeable under this head, how
to determine the annual value of different type
– Computation of Income from House of house properties, admissible deductions and
Property for different categories of property inadmissible deductions from annual value, tax
– Deduction [Section 24] treatment of unrealized rent, who are deemed
owners, what is meant by co-ownership and what
– Taxability of Recovery of Unrealised Rent &
is its tax treatment etc.
Arrears of Rent received
– Inadmissible Deduction
– Treatment of Income from co-owned
property [Section 26]
– Treatment of Income from House Property
owned by a partnership firm
– Case Study
– LESSON ROUND UP
– SELF TEST QUESTIONS

63
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INTRODUCTION
Income from house property is one of the important heads of income under the Income Tax Act. The tax payers
have been, in particular, keen to know about the exemptions and deductions available to them on repayment
of interest and principal of the loan obtained to purchase the house property, if that house property is let out
or self-occupied. The amount of interest on borrowed capital of the current year is available under the head
house property further repayment of principal is available under section 8oC to Individuals and Hindu Undivided
Families.

BASIS OF CHARGE [SECTION 22]

1. Property should consist of any BUILDING* or land appurtenant (means land connected with the building
like garden, garage etc.) thereto.
*Building means a permanent structure made of bricks, stones, concrete etc. and which has a
foundation, walls and doors . It does not include temporary structures.
2. Assessee must be the owner of the property.
Notes:
• Assessee need not to be a Registered owner.
• Ownership includes both leasehold and freehold rights and also includes deemed ownership.
[Section 27]
• Assessee must be owner of the property during the previous year. It is not material whether he is
the owner in the Assessment Year.
• 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.
3. The property 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. The income earned by an assessee engaged in
the business of letting out of properties on rent would also be taxable as business income and not as
income from house property [Rayala Corporation (P) Ltd. v. Asstt. CIT (SC) (2016) 386 ITR 500].
If all the above three conditions are satisfied then the property income will be chargeable to tax under
the head Income from House Property.
Points to remember:
1. Income from subletting of house property will be taxable under the head “Income from other Sources”.
2. Income from vacant plot is taxable under the head “Income from other Sources”.
3. Income from display of advertisement on the roof of building will be taxable under the head income
from other sources and not under the head house property because section 22 conditions are not
satisfied.

• Income from letting out a vacant land is chargeable to tax under the
head “Income From Other Sources”
Exceptions • Income earned by an assessee who is engaged in the business of
letting out properties on rent, would be chargeable to tax under the
head “Profits / Gains from Business / Profession”
 Lesson 3 n Computation of Income under the Head of House Property 65

PROPERTY HELD AS A STOCK IN TRADE

Property constitutes stock in trade of the business, then income is to be charged only under the head “Income
from House Property”, till the time they are unsold.
Exceptions: If the letting out is supplementary to the main business, then rental income is taxable as
Business Income. Deductions or allowances from such income have to calculated as relating to PGBP and
not relating to House Property.

TAXATION OF INCOME FROM PROPERTIES SITUATED OUTSIDE INDIA

Income from properties situated outside India is liable for taxation in India if -
1. The owner of the property is resident in India; or
2. The owner of the property is non-resident or not ordinarily resident in India and the income from such
property is received in India.
The municipal taxes paid outside India shall be deductible if such taxes have been actually paid by the assessee
during the previous year.

DISPUTED OWNERSHIP
If title of ownership of a house property is under dispute in a court of law, the decision about who is owner rests
with department. Generally the person who is in receipt of income or person who enjoys possession of house
property as owner, though his claim is disputed, is assessable to tax u/s 22.

TREATMENT OF COMPOSITE RENT

1. Composite rent means the rent charged not only for the property to be let out but also for the other
facilities like furniture, Lift, Security, Power Back-up etc.
2. Composite letting separable: Where composite rent is rent of letting out of building and letting out of
other assets and two letting are separable i.e. letting out of one is acceptable to the other party without
letting out of the other, the sum which is attributable to property is to be assessed in form of annual
value u/s 22 and the sum which is attributable to other charges is assessed under PGBP or Other
sources.
3. Composite letting not separable: Where composite rent is rent of letting out of building and letting out
of other assets and two letting are not separable the income will be assessable either under PGBP or
Income from other sources.

CASES WHERE INCOME FROM HOUSE PROPERTY IS EXEMPT FROM TAX

Sl. No. Section 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(23B) Institution for development of khadi and village industries.
6 10(23BB) Khadi and Village Industries Board.
7 10(23BBA) A body or Authority for administering religious or charitable trusts or endowments
8 10(23C) Property income of universities, educational institutions, etc.
9 10(24) Property income of any registered trade union.
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10 10(26B) Statutory Corporation or an institution/ Association financed by the government for

promoting the interest of members of SC or ST
11 10(27) Co-operative Society for promoting the interest of the members of SC or ST
12 11 Income from house property held for charitable or religious purpose.
13 13A Property income of any political party.
14 22 Property used for own business or profession
15 23(2) One self-occupied property of an individual/HUF

DEEMED OWNER [SECTION 27]

In certain cases the legal ownership may vest with one person whereas the taxability is cast on another person
who is deemed to be the owner.
1. An individual who transfers otherwise than for adequate consideration any house property;
a. to his or her spouse (not being a transfer in connection with an agreement to live apart) or
b. to a minor child (not being a married daughter);
2. The holder of an impartible estate
3. A member of a Co-operative society, Company or other Association of persons to whom a building or a
part or leased under a house building scheme of the society, company or association;
4. A person who is allowed to take or retain possession of any building or part thereof in part performance
of nature referred to in section 53A of the Transfer of Property Act, 1882;
This would include cases where the –
(i) possession of property has been handed over to the buyer
(ii) sale consideration has been paid or promised to be paid to the seller by the buyer sale deed has
not been executed in favour of the buyer, although certain other documents like power of attorney/
agreement to sell/will etc. have been executed.
5. A person who acquires any rights (excluding any rights by way of lease from month to month or for a
period of one year) in or with respect to any building or part thereof by virtue of any transaction as is
referred to in section 269UA(f).

IMPORTANT ISSUES
a) House property is owned by the assessee, but it is used by the firm in which he is a partner, and he
not derived any benefit from the firm. It is deemed that the partner is using the property for his own
business, and hence not taxable under “income from House Property”.
b) When property is owned by HUF, but used by the firm in which all the members are partners, income
will be assessed in the hands of HUF as House Property.
 Lesson 3 n Computation of Income under the Head of House Property 67

Deemed Ownership (Section 27)

House property is transferred House property is transferred by

by an individual to his / her an individual to his / her minor
spouse, otherwise than for child, otherwise than for adequate
adequate consideration consideration

The transferor will be the The transferor will be the

deemed owner. deemed owner.

Exception: In case the Exception: In case the transfer

transfer is necessitated owing is to a minor married
to a separation between, daughter, then, the transferor
them, the transferee will be will not be the deemed owner.
the deemed owner

• The holder of an impartible estate, i.e., one that is not legally divisible, shall be deemed
to be the owner of all the properties in the estate.

• A member of a co-operative society, or any AOP, to whom a building is allotted, under a

house building scheme, shall be deemed to be the owner of the portion so allotted.

• A person who acquires rights with respect to a property, by virtue of transfer vide lease of
> 12 years, shall be deemed to be the owner of the property.

HOW TO COMPUTE INCOME FROM HOUSE PROPERTY

Particulars Let Out/Deemed to

be let out
Gross Annual Value (GAV) xxxx
Less: Property taxes paid to local authority (xxxx)
Net Annual Value (NAV) xxxx
Less: Deductions u/s. 24 -
a) 30% of the net annual value xxxx
b) Interest on capital borrowed (loans) paid or payable xxxx (xxxx)
Income from house property(computed) Xxxx

DETERMINATION OF ANNUAL VALUE [SECTION 23]

This involves following steps:
Step 1- Determination of Expected Rent

Fair Rent xxx

Municipal Valuation xxx
(a or b) whichever is higher xxx
Standard Rent xxx
(c or d)whichever is less is Expected Rent [ER] xxx
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Meaning of the Important terms:

Fair Rent: It can be determined on the basis of rent fetched by similar property in the same or similar locality.
Municipal Valuation: For collecting municipal taxes, local authorities make a periodical survey of all building
in their jurisdiction. Such valuation may be taken as a strong evidence representing the earning capacity of a
building.
Standard Rent under Rent Control Acts: Standard rent is the maximum rent which a person can legally
recover from his tenant under Rent Control Act.
Step 2-Determination of rent actually received or receivable: It is calculated as follows:-

Rent of the previous year (or that part of the previous year) for which the property is available for ****
letting out
Less: Unrealised rent if few conditions are satisfied** (****)
Rent Received or receivable before deducting loss due to vacancy ****
Less: Loss due to vacancy (****)
Rent received or receivable after loss due to vacancy ****

If actual rent received or receivable after LDV is higher than ERR, then GAV= ARR(-) UR(-) LDV
But if ARR after deducting UR and LDV is less than ER, then Step 3
Step 3-
1. If ARR after deducting UR and LDV is less than ER, due to loss due to vacancy only, then: GAV= ARR(-)
UR(-)LDV
2. If ARR after deducting UR and LDV is less than ER, due to vacancy and other factors, then: GAV= ER(-)
LDV
3. If ARR after deducting UR and LDV is less than ER, due to other factors, then: GAV= ER
**Treatment of unrealised rent [Explanation to section 23(1)]
The Actual rent received/receivable should not include any amount of rent which is not capable of being realised.
However the conditions prescribed in Rule 4 should be satisfied. They are
• the tenancy is bona fide;
• the defaulting tenant has vacated, or steps have been taken to compel him to vacate the property;
• the defaulting tenant is not in occupation of any other property of the assessee;
• 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.
Step 4 From the GAV as computed above deduct Municipal tax paid by the owner during the previous year. The
balance will be the Net Annual Value (NAV), which as per the Income-tax Act is the annual value.

MUNICIPAL TAXES [PROPERTY TAXES]

Municipal tax includes services related tax like Water tax and Sewerage Tax levied by any local authority in
respect of any house property to the extent to which such taxes are borne and paid by the owner, and include
enhanced municipal tax finally determined on appeal and payable by assessee - Clive Buildings Cola Ltd. v.
CIT (1989) 44 Taxman 160. Property taxes are allowable as deduction from the GAV subject to the following
two conditions:
i. It should be borne by the assessee & actually PAID during the previous year.
 Lesson 3 n Computation of Income under the Head of House Property 69

ii. It can be claimed as deduction only in respect of let-out or deemed to be let- out properties.
iii. Deduction is allowed in the year of payment only.
Where the tax on property is enchanced with retrospective effect by municipal or local authorities and the
enhanced tax relating to the prior year is demanded during the assessment year, the entire demand is deductible
in the assessment year [C.I.T. v. L. Kuppu Swamy Chettiar (1981) 132 ITR 416 (Mad.)].
Even where the property is situated outside the country taxes levied by local authority is that country are
deductible is deciding the annual value of the property. [CIT v. R Venugopala Riddiar (1965) 58 ITR 439 (Mad.)]

COMPUTATION OF “INCOME FROM HOUSE PROPERTY” FOR DIFFERENT CATEGORIES OF

PROPERTY

(I) PROPERTY LET OUT THROUGHOUT THE PREVIOUS YEAR

Particulars Amount
Computation of GAV
Step 1 Compute ER
ER = Higher of MV and FR, but restricted to SR
Step 2 Compute Actual rent received/receivable
Actual rent received/receivable less unrealized rent as per Rule 4

Step 3 Compare ER and Actual rent received/receivable

Step 4 GAV is the higher of ER and Actual rent received/ receivable

Gross Annual Value (GAV) A

Less: Municipal taxes (paid by the owner during the previous year) B

Net Annual Value (NAV) = (A-B) C

Less: Deductions u/s 24
(a) 30% of NAV D
(b) Interest on borrowed capital (actual without any ceiling limit) E
Income from house property (C-D-E) F

Illustration 1 :
Mr. X is the owner of three houses, which are all let out and not governed by the Rent Control Act. From the
following particulars find out the gross annual value in each case:

Particulars I II III
Municipal Value 30,000 20,000 35,000
Actual (De facto) Rent 32,000 28,000 30,000
Fair Rent 36,000 24,000 32,000
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Solution:
Gross Annual Value (GAV): Higher of Expected or Actual Rent Expected Rent: Higher of Municipal Valuation
or Fair Rent
House I: Rs. 36,000
House II: Rs.24,000
House III: Rs. 35,000
Actual Rent (given) GAV:
House I: Rs. 36,000 House II: Rs. 28,000 House III: Rs. 35,000

Illustration 2:
Mr. X is the owner of four houses, which are all let out and are covered by the Rent Control Act. From the
following particulars find out the gross annual value in each case, giving reasons for your answer:

Particulars I II III IV
Municipal Value 30,000 26,000 35,000 30,000
Actual (De Facto) Rent 40,000 30,000 32,000 32,000
Fair Rent 36,000 28,000 30,000 36,000
Standard Rent 30,000 35,000 36,000 40,000

Solution:
As all the houses are covered by the Rent Control Act, their gross annual value will be higher of expected Rent
or Actual Rent. Expected Rent Shall be higher of Municipal Value or Fair rent but subject to Standard Rent:

Particulars I II III IV

Expected Rent 30,000 28,000 35,000 36,000

Actual (De Facto) Rent 40,000 30,000 32,000 32,000

G.A.V. 40,000 30,000 35,000 36,000

Annual letting value of self occupied property, subject to Rent Control Act is to be fixed on basis of standard rent
and not on basis of open market Tilak Raj v. CIT (1989) 45 Taxman 279/178 ITR 327 (Punj. & Har.).
In determining annual value salary paid to caretaker cannot be taken into account
CIT v. Smt. Sreelekha Banerjee (1989) 45 Taxman 358/179 ITR 46 (Cal.).
Loss relating to self occupied house property could be set off against income from other sources CIT v. K.K.
Dhanda (HUF) (1989) 45 Taxman 346/178 ITR 602 (Punj. & Har.).

Illustration 3:
Anirudh has a property whose municipal valuation is Rs. 1,30,000 p.a. The fair rent is Rs. 1,10,000 p.a. and
the standard rent fixed by the Rent Control Act is Rs. 1,20,000 p.a. The property was let out for a rent of Rs.
11,000 p.m. throughout the previous year. Unrealised rent was Rs. 11,000 and all conditions prescribed by
Rule 4 are satisfied. He paid municipal taxes @10% of municipal valuation. Interest on borrowed capital was
Rs. 40,000 for the year. Compute the income from house property of Anirudh for A.Y. 2020-21.
 Lesson 3 n Computation of Income under the Head of House Property 71

Solution:
Computation of Income from house property of Mr. Anirudh for A.Y. 2020-21

Particulars Amount in Rs.

Computation of GAV
Step 1 Compute ER
ER = Higher of MV of Rs. 1,30,000 p.a. and FR of 1,20,000
Rs. 1,10,000 p.a., but restricted to SR of Rs. 1,20,000 p.a.
Step 2 Compute actual rent received/receivable
Actual rent received/receivable less unrealized rent as per Rule 4 = 1,21,000
Rs. 1,32,000 – Rs. 11,000
Step 3 Compare ER of Rs. 1,20,000 and Actual rent received/
receivable of Rs. 1,21,000.
Step 4 GAV is the higher of ER and Actual rent received/receivable 1,21,000

Gross Annual Value (GAV) 1,21,000

Less: Municipal taxes (paid by the owner during the previous year) = 13,000
10% of Rs.1,30,000
Net Annual Value (NAV) 1,08,000
Less: Deductions under section 24
(a) 30% of NAV 32,400
(b) Interest on borrowed capital (actual without any ceiling limit) 40,000 72,400
Income from house property 35,600

(II) LET OUT PROPERTY VACANT FOR PART OF THE YEAR

Particulars Amount
Computation of GAV
Step 1 Compute ER
ER = Higher of MV and FR, but restricted to SR
Step 2 Compute Actual rent received/receivable
Actual rent received/receivable for let out period less unrealized rent as per Rule 4

Step 3 Compare ER and Actual rent received/receivable computed for the let-out
period
Step 4 If Actual rent is lower than ER owing to vacancy, then Actual rent is the GAV.

If Actual rent is lower than ER due to other reasons, then ER is the GAV.
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However, in spite of vacancy, if the actual rent is higher than the ER, then
Actual rent is the GAV.

Gross Annual Value (GAV) A

Less: Municipal taxes (paid by the owner during the previous year) B
Net Annual Value (NAV) = (A-B) C
Less: Deductions under section 24
(a) 30% of NAV D
(b) Interest on borrowed capital (actual without any ceiling E
limit)

Income from house property (C-D-E)

Illustration 4:
Ganesh has a property whose municipal valuation is Rs. 2,50,000 p.a. The fair rent is Rs. 2,00,000 p.a. and
the standard rent fixed by the Rent Control Act is Rs. 2,10,000 p.a. The property was let out for a rent of Rs.
20,000 p.m. However, the tenant vacated the property on 31.1.2020. Unrealised rent was Rs. 20,000 and all
conditions prescribed by Rule 4 are satisfied. He paid municipal taxes @8% of municipal valuation. Interest
on borrowed capital was Rs. 65,000 for the year. Compute the income from house property of Ganesh for
A.Y. 2020-21.

Solution:
Computation of Income from house property of Ganesh for A.Y. 2020-21

Particulars Amount in Rs.

Computation of GAV
Step 1 Compute ER
ER = Higher of MV of Rs. 2,50,000 p.a. and FR of Rs. 2,00,000 p.a., but 2,10,000
restricted to SR of Rs. 2,10,000 p.a.
Step 2 Compute Actual rent received/receivable
Actual rent received/receivable for let out period
Less unrealized rent as per Rule 4 = Rs. 2,00,000 – Rs. 20,000 1,80,000
Step 3 Compare ER and Actual rent received/receivable
Step 4 In this case the actual rent of Rs. 1,80,000 is lower than ER of Rs.
2,10,000 owing to vacancy, since, had the property not been vacant the
1,80,000
actual rent would have been Rs. 2,20,000 (Rs. 1,80,000 + Rs. 40,000).
Therefore, actual rent is the GAV.

Gross Annual Value (GAV) 1,80,000

Less: Municipal taxes (paid by the owner during the previous year) = 8% of (20,000)
Rs. 2,50,000
 Lesson 3 n Computation of Income under the Head of House Property 73

Net Annual Value (NAV) 1,60,000

Less: Deductions under section 24
(a) 30% of NAV = 30% of Rs. 1,60,000 48,000
(b) Interest on borrowed capital (actual without any ceiling limit) 65,000 (1,13,000)

Income from house property 47,000

(III) SELF-OCCUPIED PROPERTY

Particulars Amount
Annual value under section 23(2) Nil
Less: Deduction under section 24
Interest on borrowed capital E
(i) Interest on loan taken for acquisition or construction of house on or after
1.4.99 and same was completed within 5 years from the end of the financial
year in which capital was borrowed, interest or aggregate interest paid or
payable subject to a maximum of Rs. 2,00,000 (including apportioned pre-
construction interest).
(ii) In case of loan for acquisition or construction taken prior to 1.4.99 or loan
taken for repair, renovation or reconstruction at any point of time, interest or
aggregate interest paid or payable subject to a maximum of Rs. 30,000.
Aggregate of the amounts of deduction under (i) & (ii) shall not exceed Rs. 2,00,000
[Inserted by Finance (No. 1) Act, 2019]
Income from house property -E

IV HOUSE PROPERTY LET-OUT FOR PART OF THE YEAR AND SELF-OCCUPIED FOR PART
OF THE YEAR

Particulars Amount
Computation of GAV
Step 1 Compute ER for the whole year
ER = Higher of MV and FR, but restricted to SR
Step 2 Compute Actual rent received/receivable
Actual rent received/receivable for the period let out less unrealized rent as per
Rule 4
Step 3 Compare ER for the whole year with the actual rent received/receivable for the let
out period
Step 4 GAV is the higher of ER computed for the whole year and Actual rent received/
receivable computed for the let-out period

Gross Annual Value (GAV) A

Less: Municipal taxes (paid by the owner during the previous year) B

Net Annual Value (NAV) = (A-B) C

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Less: Deductions under section 24

(a) 30% of NAV D
(b) Interest on borrowed capital (actual without E
any ceiling limit)
Income from house property (C-D-E) F

Illustration 5:
M is the owner of a house. The municipal value of the house is Rs. 40,000. He paid Rs. 8,000 as local taxes
during the year. He was using this house for his residential purposes but let out w.e.f. 1.1.2020 @ Rs. 4,000 p.m.
Compute the net annual value of the house.

Solution:

PARTICULARS AMOUNT Rs.

Annual rent or municipal valuation (whichever is higher) 48,000
Less : Local taxes 8,000
Net annual value of the house (No benefit shall be given for self occupied period as the 40,000
house did not remain vacant during the previous year)

Note: If fair rent is not given, then assume actual rent as fair rent.

Illustration 6:
(i.e. No vacancy but there is unrealized rent)
Mr. A owns two houses. The expected rent of the house one is Rs. 65,000. This house was let out for Rs. 7,500
But the rent for the months of February and March, 2020 could not be realized.
The expected rent of another house is Rs. 1,50,000. This house was let out for Rs.12,000 p.m. But the rent for
the last three months could not be realized.
In the both cases, Mr. A fulfills the conditions of Rule 4. You are required to compute the Gross Annual Value of
both the houses.

Solution:

Particulars House I House II

Expected Rent 65,000 1,50,000
Annual Rent 90,000 144000
Unrealized Rent 15,000 36,000
Computation of Gross Annual Value

Step 1: Expected Rent 65,000 1,50,000

Step 2: Actual Rent (After deducting unrealized rent) if higher than 75,000 1,08,000
Expected Rent then Actual rent otherwise Expected rent
Step 3: Applicable only in case of vacancy N.A. N.A.
Gross Annual Value 75,000 1,50,000
 Lesson 3 n Computation of Income under the Head of House Property 75

Illustration 7:
(There is vacancy but no unrealized rent)
Find out the gross annual value in the case of the following properties for the Assessment Year 2020-21
Rs. in thousands

Particulars P Q R S
Expected Rent 70 55 85 125
Rent Per Month (if let out) 7 5 8 8
Let out period (in months) 11 0 9 10
Vacancy (in months) 1 12 3 2
Further all the rent were realized for the year by the assessee.

Solution:
Calculation of Gross Annual Value of Mr. X for A.Y. 2020-21

P Q R S
Annual Rent (If let out for 12 months) 84 60 96 96
Loss due to vacancy 7 60 24 16
Unrealized rent Nil Nil Nil Nil
Actual Rent (for let out period) 77 Nil 72 88
Calculation of Gross Annual Value
Step 1: Expected Rent 70 55 85 125
Step 2: If actual rent is more than Expected
Rent than Actual rent otherwise expected Rent 77 N.A. N.A. N.A.
Step 3: If property remain vacant then decline due to 77 0 72 109
vacancy shall be considered
Gross annual value 77 0 72 109

Illustration 8:
(Vacancy and unrealized rent both exist)
Mr. X is the owner of a house property. He lets this property during the previous year 2019-20 for Rs. 7,000 p.m.
The house was occupied from 1.4.2017 to 31.1.2020. From 1.2.2020, it remained vacant. Mr. X fails to realize
Rs.. 10,000 from the tenant. The Expected rent of the house is Rs. 82,000 p.a. Calculate the Gross Annual
Value of the house.

Solution:
Particulars Amount Rs.
Expected Rent 82,000

Annual Rent (Actual for the whole year - 7000 x 12) 84,000

Actual Rent (7,000 x 10) 70,000

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Unrealized rent 10,000

Realized rent (Rs. 70,000 - 10,000) 60,000

Loss Due to vacancy (7,000 x 2) 14,000

Decline due to vacancy (82,000 - 14,000) but not less than actual rent received 68,000

Calculation of Gross Annual Value

Step 1: Expected Rent 82,000

Step 2: If actual rent is more than expected rent than actual rent otherwise expected rent N.A.

Step 3: Decline due to vacancy in Expected Rent (i.e. Expected Rent minus Loss due to 68,000
vacancy but not less than actual rent received)

Gross Annual Value 68,000

V. More than Two Self Occupied Property [Section 23(4)]

1. If the assessee owns more than two house property as self-occupied property (SOP); then any two of
the property at the option of the assessee shall be treated as “Self- occupied property, and the other
property shall be deemed to be let out.
2. Assessee can choose an option which will yield lower taxable income.
3. In the case of a deemed let-out property, the nature of which is self-occupied property or unoccupied
property, the income shall be similar to that of let-out property but subject to certain modifications i.e.
Fair rent has to be adopted as gross annual value. The question of considering actual rent received or
receivable does not arise.
4. No adjustment arises on account of property remaining vacant or on account of unrealizable rent.
Special Point:
• If a house property has two or more independent residential units, one of which is self occupied for own
residential purposes and other units are let out or used for own business then, valuation of each unit
will be determined separately.
• Loss from one House Property will be set off first against income from another house property in the
current year. If any loss remains after set off then, during that year it will be set off from any other heads
of income subject to maximum Rs.2,00,000/-. If still any loss remains then it will be carry forward to next
year and in the next year it will be available for set off only from income from house property and not
from any other heads of income. Loss can be carry forward for a total period of 8 Years.

Illustration 9:
Ganesh has two houses, both of which are self-occupied. The particulars of the houses for the P.Y.2019-20 are
as under:

Particulars House I House II House III

Municipal valuation p.a. 1,00,000 1,50,000 2,00,000
Fair rent p.a. 75,000 1,75,000 1,90,000
Standard rent p.a. 90,000 1,60,000 1,80,000
 Lesson 3 n Computation of Income under the Head of House Property 77

Date of completion 31.3.1999 31.3.2001 1.4.2010

Municipal taxes paid during the year 12% 8% 10%
Interest on money borrowed for repair of property - 55,000 40,000
during the current year

Compute Ganesh’s income from house property for A.Y. 2020-21 and suggest which house should be opted by
Ganesh to be assessed as self-occupied so that his tax liability is minimum.

Solution:
Let us first calculate the income from each house property assuming that they are deemed to be let
out

Particulars Amount in Rs.

House I House II House III

Gross Annual Value (GAV) 1,60,000 1,80,000

90,000
ER is the GAV of house property
ER = Higher of MV and FR, but restricted to SR
Less: Municipal taxes (paid by the owner during the 12,000 12,000 20,000
previous year)
Net Annual Value (NAV) 78,000 1,48,000 1,60,000
Less: Deductions under section 24
(a) 30% of NAV 23,400 44,400 48,000
(b) Interest on borrowed capital NIL 55,000 40,000
Income from house property 54,600 48,600 72,000

OPTION 1 (House I & II – self-occupied and House III – deemed to be let out)

Particulars Amount in Rs.

House I & II (Self-occupied) (30,000)
(interest deduction restricted to Rs. 30,000)
House III (Deemed to be let out) 72,000
Income from house property 42,000

If House I & II is opted to be self-occupied, the income from house property shall be Rs.42,000
OPTION 2 (House I & III – self-occupied & House II –deemed to be let out)

Particulars Amount in Rs.

House I & III (Self-occupied) (interest deduction restricted to Rs. 30,000) (30,000)
House II ( Deemed to be let out) 48,600
Income from house property 18,600
78 PP-DTL&P

If House I & III is opted to be self-occupied, the income from house property shall be Rs.18,600
OPTION 3 (House II & III– self-occupied & House I –deemed to be let out)

Particulars Amount in Rs.

House I (Deemed to be let-out) 54,600
House II & III (Self-occupied) 30,000
(interest deduction restricted to Rs. 30,000)
Income from house property 24,600

Since Option 2 is more beneficial, Ganesh should opt to treat House 1 & III as self-occupied and House II as
deemed to be let out. His income from house property would be Rs. 18,600 for the A.Y. 2020-21.

VI. Annual value building as Stock In Trade [Section 23(5)]

• Where property consisting of any building or land appurtenant thereto
• is held as stock-in-trade and
• property or any part of the property
• is not let during whole or any part of the p/y,
• Annual value of such property or part of the property,
• for period up to 2 year [Substituted by Finance (No.1) Act, 2019 from the end of F/Y
• in which certificate of completion of construction of the property
• is obtained from the competent authority,
• Shall be taken to be NIL

DEDUCTIONS [SECTION 24]

LET -OUT PROPERTY SELF-OCCUPIED PROPERTY
STANDARD DEDUCTION U/S 24(a) STANDARD DEDUCTION U/S 24(a)
• Deduction @30% flat deduction on the Net Annual • This deduction is not available for
Value; self-occupied property
• This deduction is allowed even if no expenditure is
incurred by the assessee.
INTEREST ON BORROWED CAPITAL [Section 24 (b)] INTEREST ON BORROWED CAPITAL
[Section 24 (b)]
a) Interest Payable on loans borrowed for the purpose
of acquisition, construction, renovation, repairing or a) Deduction shall be allowed upto
reconstruction can be claimed as deduction. Rs.2,00,000:
b) Interest relating to the year of completion of construction CONDITIONS:
can be fully claimed in that year irrespective of the
date of completion. 1. Loan borrowed on or after 01-
04-99.
c) Pre-Construction Interest: Interest accrued during the
construction period preceding the year of completion 2. Loan taken only for acquisition/
of construction can be accumulated and claimed construction of house property
as deduction over a period of 5 years in equal
installments commencing from the year of completion
of construction.
 Lesson 3 n Computation of Income under the Head of House Property 79

d) Any subsequent loan borrowed to repay the original 3. If property is constructed then
loan shall also be entitled to the same treatment as it should be complete before
the original loan. Where a person acquires a property 5 year from the end of the
and pays only part of the sale consideration, interest financial year in which loan is
payable on the unpaid purchase price qualifies for borrowed then.
deduction in the computation of income from such
OR
Property.
b) Deduction shall be allowed upto
e) Deduction under section 24(b) for interest is available
Rs.30,000 in the following cases:
on accrual basis. Therefore interest accrued but not
paid during the year can also be claimed as deduction. 1. If the conditions specified in
(a) above are not satisfied
f) Interest on unpaid interest is not deductible.
2. Loan borrowed for repair,
g) Brokerage or commission paid for acquiring the loan
renovation etc.
will not be allowed as deduction
3. Capital borrowed before
1.04.1999 for any purpose or
4. Construction of house not
completed within 5 years from
the end of the financial year in
which loan is borrowed.

Illustration 10:
P, an individual, borrowed Rs. 20,00,000 for repair of his self-occupied house property and paid interest of
Rs. 1,60,000 thereon during the financial year 2019-20. What is the amount of interest allowable as deduction
under section 24 for the assessment year 2020-21?

Solution:
Section 24(b) provides that where the self-occupied house property has been acquired, constructed,
repaired, renewed or reconstructed with borrowed capital, deduction towards interest payable thereon shall
not exceed Rs. 30,000. Therefore, only Rs. 30,000 would be allowed as deduction on account of interest on
loan borrowed for repair and reconstruction of self-occupied house property.
The higher limit of Rs. 2,00,000 in respect of interest on loan borrowed on or after 1.4.1999 would be available
only where such loan is borrowed for acquisition or construction of self-occupied property and not for repair
of such property.

TAXABILITY OF RECOVERY OF UNREALISED RENT & ARREARS OF RENT RECEIVED

(i) Unrealised 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 realised it gets taxed under
section 25A 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
25A.
80 PP-DTL&P

Unrealised rent [Section 25A] Arrears of rent

[Section 25A]
(a) Taxable in the hands of the assessee whether he is the Taxable in the hands of the assessee
owner of that property or not. whether he is the owner of that property
(b)
or not.
Taxable as income of the previous year in which he recovers
(c)
the unrealized rent. Taxable as income of the year in which
he receives the arrears of rent.
30% deduction shall be allowed.
30% of the amount of arrears shall be
allowed as deduction.

Illustration 11:
Nikhil has a property whose Municipal Valuation is INR 500,000 pa. The Fair Rent of the property is INR
400,000 pa and the Standard Rent fixed by Rent Control Act is 450,000 pa. The property was let out for a
Rent of INR 35000 pm and the tenant vacated the same on 31st January 2020. Unrealised Rent was INR
35000 and the conditions are fulfilled with respect to the same. He paid municipal taxes worth INR 15000
during the PY and the Interest on Loan was INR 60000. Please exhibit the computation and advise the
income from house property.

Solution:

Computation of GAV INR INR

ER 4,50,000
Higher of:
1) Fair Rent 4,00,000
2) Muncipal Value 5,00,000
Limited to Standard Rent 4,50,000
Actual rent received/receivable 3,50,000
Less: Unrealised Rent (35,000)
3,15,000
GAV 4,50,000
Less: Municipal Taxes paid by the owner during the PY 15,000
NAV 4,35,000
Less: Deductions u/s 24
30% NAV (1,30,500)
Interest on borrowed capital (60,000)
(1,90,500)
Income from House Property 2,44,500
 Lesson 3 n Computation of Income under the Head of House Property 81

Illustration 12:
Smt. Shanti Devi has a house property in Kolkata. The Municipal Valuation for the same is INR 10,00,000. The
Fair Rental for the property is INR 750,000. The Standard Rent per the Rent Control Act is INR 800,000. She let
out the property until 30th Nov’19 for a monthly rent of Rs. 75,000 per month. Thereafter, the tenant vacated the
property and she used the house for self-occupation. Rent for the months of Oct & Nov 19 couldn’t be realised
despite all efforts, and all the conditions for unrealised rent were satisfied. She paid Municipal Taxes @ 12%
during the year. She also paid Interest of INR 25,000 during the year for amount borrowed for repairs. Compute
the Income from House Property for AY 2020-21.

Solution:

Computation of GAV INR INR

ER
Higher of:
1) Fair Rent 7,50,000

2) Municipal Value 10,00,000

Limited to Standard Rent 8,00,000
Annual Rent 6,00,000
Less: Unrealised Rent 1,50,000
4,50,000

GAV (partly let out and partly self occupied) 8,00,000

Less: Municipal Taxes paid by the owner during the PY 1,20,000

Net Annual Value (NAV) 6,80,000

Less: Deductions u/s 24

30% NAV 2,04,000

Interest on borrowed capital 25,000 2,29,000

Income from House Property 4,51,000

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 section163.

TREATMENT OF INCOME FROM CO-OWNED PROPERTY [SECTION 26]

(i) Where property is owned by two or more persons, whose shares are definite and ascertainable,
• then share of each owner in the income of property will be taxed in his individual assessment according
to nature of occupancy
• if the property is self-occupied, then the part of self-occupancy is applicable to each co-owner individually,
and they are entitled for deduction u/s 24 independently.
82 PP-DTL&P

(ii) Where property is owned by two or more persons, whose shares are not definite:
• income from house property will be determined and charged to tax in the capacity of an AOP.

TREATMENT OF INCOME FROM PROPERTY OWNED BY A PARTNERSHIP FIRM

(i) Where an immovable property or properties is included in the assets of a firm, the income from such property
should be assessed in the hands of the firm only.
(ii) Hence, the property income cannot be assessed as income of the individual partner in respect of his share
in the firm.

Illustration 13:
Two sisters, Seema and Rashmi, are co-owners of a house property, with 50% share each in the property.
The property was constructed prior to 1st April 1999. The property has 7 equal units and is situated in
Bangalore. During the FY 2019-20, each co-owner occupied one unit each and the balance were let out
@ a rental of INR 20000 per unit per month. The Municipal Valuation (MV) was INR 7,00,000 and the
Municipal Taxes were @ 10% of the MV. Interest payable on loan taken for construction was INR 400,000.
One of the let-out units was vacant for 6 months in the year. Compute the Income from House Property for
each of the sisters.

Solutions:

Computation of GAV INR INR

Estimated Rent Higher of:

1) Fair Rent -
2) Municipal Value (700000 x 5/7) 5,00,000
Annual Rent 12,00,000
Less: Unrealised Rent (1,20,000)
10,80,000
GAV (partly let out and partly self occupied) 10,80,000
Less: Municipal Taxes paid by the owner during the PY (50,000)
NAV 10,30,000
Less: Deductions u/s 24
30% NAV (3,09,000)
Interest on borrowed capital (Rs.400000 x 5/7) (2,85,714)
(5,94,714)
Income from House Property 4,35,286
Share of each Co-owner 2,17,643
Loss from House Property (self occupied portions) -30,000
Income from House Property (each co-owner) 1,87,643
 Lesson 3 n Computation of Income under the Head of House Property 83

Notes:
1) Observe that the computation has been done for the 5 let out and 2 self-occupied portions separately
and commensurately
2) Note that the Interest on Borrowed Capital for let out proportions is fully allowable as deduction without
any cap
3) Note that the AV for the Self Occupied Portion is NIL and the Interest on Borrowed Capital is restricted
to INR 30,000 for each co-owner

Illustration 14:
Mr. X is the owner of four houses. The following particulars are available:

House 1 House 2 House 3 House 4

Municipal valuation 16,000 20,000 24,000 5,600
Rent (Actual) — 14,000 20,000 6,800
Municipal taxes 400 1,000 1,200 300
Repairs and collection charges 200 2,500 1,040 460
Interest on mortgage — — — 1,000
Ground rent — 100 — 60
Fire premium 140 — 200 —
Annual charges — — 360 —

House No. 1 is self-occupied.

House No. 2 is let out for business, construction was completed on 1.3.91 and consists of two residential units.
House No. 3 is 3/4 used for own business 1/4 let out to the manager of the business.
House No. 4 is let out for residential purposes.
His other income is Rs. 30,000. Find out the income of X from house property for the assessment year 2020-21.

Solution:
House No. 1
Rs.
Municipal valuation 16,000
Annual value deemed to be NIL
House No. 2

Gross Annual Value 20,000

Less: Municipal taxes 1,000
Net annual value 19,000
Less: 30% of Net Annual Value 5,700
Income from house property 13,300
84 PP-DTL&P

House No. 3
Since the house is used for own business, the income from this house is not taxable under the head ‘Income
from house property’ but will be assessed under ‘Profit and gains of business or profession’. 1/4 of the house
occupied by the Manager is presumed to be incidental to the business and hence not assessable under the
head ‘Income from house property’.
House No. 4

Gross Annual Value 6,800

Less: Municipal taxes 300
Net annual Value 6,500
Less: 30% of Net Annual Value 1,950
Income from house property 4,550

Income from House Property: Rs. NIL + Rs. 13,300 + Rs. 4,550 = Rs. 17,850. It is presumed that House No. 4
has not been mortgaged for purposes of acquiring or repairs on the house property.

Illustration 15:
Mr. Lal is the owner of a house property. Its municipal valuation is Rs. 80,000. It has been let out for Rs.
1,20,000 p.a. The local taxes payable by the owner amount to Rs. 16,000 but as per agreement between the
tenant and the landlord, the tenant has paid the amount direct to the municipality. The landlord, however, bears
the following expenses on tenant’s amenities:

Extension of water connection 3,000

Water charges 1,500
Lift maintenance 1,500
Salary of gardener 1,800
Lighting of stairs 1,200
Maintenance of swimming pool 750
The landlord claims the following deductions:
Repairs and Collection charges 7,500
Land revenue paid 1,500
Compute the taxable income from the house property for the assessment year 2020-21.

Solution:
Computation of income from house property for the assessment year 2020-21
Gross annual value: to be higher of the following:
(a) Municipal valuation Rs. 80,000 or
(b) De facto rent (1,20,000 less value of amenities)
(c) Rent Received: 1,20,000
Less: Value of the amenities provided by the assessee:
 Lesson 3 n Computation of Income under the Head of House Property 85

(i) Extension of water connection not deductible as it is capital expenditure

(ii) Water Charges Nil
(iii) Lift maintenance 1500
(iv) Salary of gardener 1,800
(v) Lighting of stairs 1,200
(vi) Maintenance of swimming pool 750
Total (6,750)

Gross Annual Value 1,13,250

Less: Local tax (Nil)
No deduction is permissible as the taxes have been paid by the tenant
Net Annual Value 1,13,250
Less: Standard deduction from net annual value:
30% of Net Annual Value (33,975)
Income from house property 79,275

Illustration 16:
For the assessment year 2020-21 Sonu submits the following information:

Income from business (speculative) Rs. 40,000

Property Income House I (Rs.) House II (Rs.)

Municipal valuation 35,000 80,000
Rent received 38,000 68,000
Municipal taxes paid by tenant 3,000 4,000
Repairs paid by tenant 500 18,000
Land revenue paid 2,000 16,000
Insurance premium paid 500 2,000
Interest on borrowed capital for payment of municipal tax of house property 200 400
Nature of occupation Let out for Let out for
residence business
Date of completion of construction 1.4.1996 1.7.1994

Determine the taxable income of Sonu for the assessment year 2020-21.
86 PP-DTL&P

Solution:
Computation of Taxable Income of Sonu for Assessment Year 2020-21

House I Amount (Rs.)

Gross Annual Value 38000

Less: Municipal Taxes - not deductible since paid by tenant NIL

Net Annual Value 38000

Less: 30% of Net Annual Value (11,400)

Taxable Income Total 26,600

House II

Gross Annual Value 80000

Less: Taxes - not deductible, paid by tenant NIL

Net Annual Value 80,000

Less: 30% of Net Annual Value (24,000)

Taxable Income Total 56,000

Total Income = Rs. 26,600 + Rs. 56,000 + Rs. 40,000 = Rs. 1,22,600.
Note: Interest on borrowed capital for payment of municipal tax is not allowed as deduction under Section 24
of the Act.

CASE STUDY
1. Under what head of income should income from letting out of godowns and provision of warehousing
services be subject to tax - “Income from house property” or “profits and gains of business or
profession”?

CIT v. NDR Warehousing P Ltd (2015) 372 ITR 690 (Mad)

Facts of the case: The assessee engaged in the business of warehousing, handling and transport business
claimed income from letting out of buildings and godowns as business income. The Assessing Officer assessed
such income as “Income from house property”.

Appellate Authorities’ Observations: The Commissioner (Appeals) observed that the assessee’s activity
was not merely letting out of warehouses but storage of goods with provision of several auxiliary services
such as pest control, rodent control and fumigation service to prevent the goods stored from being affected
by vagaries of moisture and temperature. Further, service of security and protection was also provided to
the goods stored. There is, therefore, no dispute that the assessee carries on the activity in an organised
manner. These activities are more than mere letting out of the godown for tenancy.

The Tribunal noted that the objects clause of the memorandum of association of the company clearly shows
that the assessee-company was incorporated with the object of carrying on the business of warehousing
and letting/renting of godowns and providing facilities for storage of articles or things and descriptions
whatsoever. The profit and loss account of the assessee- company shows that its main source of income is
storage charges and maintenance or user charges. Even substantial part of the expenses also relate to the
 Lesson 3 n Computation of Income under the Head of House Property 87

salaries of employees engaged in the maintenance and upkeep of the godowns and warehouses. Based on
these facts, Tribunal concurred with the findings of the Commissioner (Appeals) and held that the income of
the assessee from letting out of warehouses and godowns is chargeable under the head “Profits and gains
of business or profession” and not “Income from house property”.

High Court’s Decision: The High Court observed that the Commissioner (Appeals) as well as the Tribunal
had not only gone into the objects clause of the memorandum of the assessee but also individual aspects of
the business to come to the conclusion that it was a case of warehousing business, and, therefore, the income
would fall under the head “Profits and gains of business or profession”.

Accordingly, the High Court held that the income earned by the assessee from letting out of godowns and
provision of warehousing services is chargeable to tax under the head “Profits and gains of business or
profession” and not under the head “Income from house property”.

2. Would income from letting out of properties by a company, whose main object as per its memorandum
of association is to acquire and let out properties, be taxable as its business income or income from
house property, considering the fact that the entire income of the company as per its return of income
was only from letting out of properties?

Chennai Properties and Investments Ltd. v. CIT (2015) 373 ITR 673 (SC)

Facts of the Case: The assessee-company was incorporated under the Companies Act, 1956. Its main
objective, as stated in the memorandum of association, is to acquire properties in the city of Madras and let
out those properties. The company had rented out such properties and the rental income was shown as its
business income in the return filed by the assessee.

The Assessing Officer, however, assessed the rental income under the head “Income from house property”. On
appeal, the Commissioner (Appeals) concurred with the assessee’s view that the rental income, in this case,
was the company’s business income. The Appellate Tribunal also supported the view of the Commissioner
(Appeals).

High Court’s Opinion: The High Court allowed the Department’s appeal holding that income derived from
letting out of properties has to be assessed as income from house property. It held so on the basis of the
Supreme Court ruling in East India Housing and Land Development Trust Ltd. v. CIT (1961) 42 ITR 9, wherein
it was decided that income from letting out of shops and stalls was to be assessed as income from house
property, in the case of a company whose main object of was buying and developing landed properties and
promoting and developing markets.

Supreme Court’s Observations: The Supreme Court observed that the High Court had pronounced its
ruling on the basis of the decision of the Apex Court in East India Housing and Land Development Trust Ltd.’s
case, wherein the letting out of property was not the object of the company at all. Therefore, in that case,
the Apex Court was of the opinion that the character of the income which was from house property had not
changed merely because it was received by the company formed with the object of developing and setting
up properties.

The Supreme Court further observed the law laid down authoritatively and succinctly by it in Karanpura
Development Co. Ltd. v. CIT [1962] 44 ITR 362. In that case, the assessee- company was formed with the
object of, inter alia, acquiring and disposing of the underground coal mining rights in certain coal fields and
it had restricted its activities to acquiring coal mining leases over large areas, developing them as coal fields
and then sub-leasing them to collieries and other companies. Thus, in that case, the leasing out of the
coal fields to the collieries and other companies was the business of the assessee. The income which
was received from letting out of those mining leases was shown as business income. Department took the
88 PP-DTL&P

position that the same was to be treated as income from the house property. Thus, in similar circumstances,
an identical issue arose before the Apex Court. The Apex Court pointed out that the deciding factor as to the
head under which the income was to be assessed is not the ownership of land or leases but the nature of the
activity of the assessee and the nature of the operations in relation to them. It was highlighted and stressed
that the objects of the company must also be kept in view to interpret the activities. In support of the aforesaid
proposition, a number of judgments of other jurisdictions, i.e., Privy Council, House of Lords in England and
the US Courts were taken note of.

After applying the aforesaid principle to the facts, the Apex Court had arrived at the conclusion that such
income had to be treated as income from business and not as income from house property.

Supreme Court’s Decision: The Supreme Court opined that the aforesaid judgment in Karanpura
Development Co. Ltd.’s case squarely applied to the facts of the present case, where letting of the properties
is in fact the business of the assessee. The main objective of the company as per its memorandum of
association is to acquire and hold properties in Chennai and let out these properties. Therefore, holding
of the properties and earning income by letting out these properties is the main objective of the company.
Further, in the return of income filed by the company and accepted by the Assessing Officer, the entire income
of the company comprised of income from letting out of such properties. The Supreme Court, accordingly,
held that the assessee had rightly disclosed the income derived from letting out of such properties under the
head “Profits and gains of business or profession”.

3. Can benefit of self-occupation of house property under section 23(2) be denied to a HUF on the
ground that it, being a fictional entity, cannot occupy a house property?

CIT v. Hariprasad Bhojnagarwala (2012) (Guj.)

The Gujarat High Court observed that a firm, which is a fictional entity, cannot physically reside in a house
property and therefore a firm cannot claim the benefit of this provision, which is available to an individual owner
who can actually occupy the house. However, the HUF is a group of individuals related to each other i.e., a
family comprising of a group of natural persons. The said family can reside in the house, which belongs to the
HUF. Since a HUF cannot consist of artificial persons, it cannot be said to be a fictional entity.

4. Can notional interest on interest-free deposit received by an assessee in respect of a shop let out
on rent be brought to tax as business income or income from house property?

CIT v. Asian Hotels Ltd. (2010) 323 ITR 490 (Del.)

Facts of the case: The assessee had received interest-free deposit in respect of shops given on rent. The
Assessing Officer added to the assessee’s income notional interest on the interest free deposit at the rate of
18 per cent simple interest per annum on the ground that by accepting the interest free deposit, a benefit had
accrued to the assessee which was chargeable to tax under section 28(iv).

High Court’s Observations & Decision: The High Court observed that section 28(iv) is concerned with
business income and brings to tax the value of any benefit or perquisite, whether convertible into money
or not, arising from business or the exercise of a profession. Section 28(iv) can be invoked only where the
benefit or amenity or perquisite is otherwise than by way of cash. In the instant case, the Assessing Officer
has determined the monetary value of the benefit stated to have accrued to the assessee by adding a sum
that constituted 18% simple interest on the deposit. Hence, section 28(iv) is not applicable.

Section 23(1) deals with the determination of the expected rent of a let out property for computing the income
from house property. It provides that the expected rent is deemed to be the sum for which the property might
reasonably be expected to be let out from year to year. This contemplates the possible rent that the property
might fetch and certainly not the interest on fixed deposit that may be placed by the tenant with the landlord in
 Lesson 3 n Computation of Income under the Head of House Property 89

connection with the letting out of such property. Thus, the notional interest is neither assessable as business
income nor as income from house property.

5. Whether the rental income derived from the unsold flats which are shown as stock-in- trade in
the books of the assessee would be taxable under the head ‘Profits and gains from business or
profession’ or under the head ‘Income from house property’, in a case where the actual rent receipts
formed the basis of computation of income?

New Delhi Hotels Ltd. v. ACIT (2014) 360 ITR 0187 (Delhi]

High Court’s Observations: On this issue, in CIT v. Ansal Housing Finance and Leasing Co. Ltd. (2013) 354
ITR 180, where the deemed rent (i.e., Expected Rent) formed the basis of computation of income from unsold
flats held as stock-in-trade, the Delhi High Court held that such rent was taxable under the head “Income from
house property”. Further, in CIT v. Discovery Estates Pvt. Ltd. and CIT v. Discovery Holding Pvt. Ltd. (2013)
356 ITR 159, the same issue emerged when the actual rent formed the basis of computation of income from
unsold flats held as stock-in-trade. In that case also, the Delhi High Court held that the income was taxable
under the head “Income from house property”.

High Court’s Decision: In this case, the Delhi High Court followed its own decision in the case of CIT vs.
Discovery Estates Pvt. Ltd / CIT vs. Discovery Holding Pvt. Ltd., wherein it was held that rental income derived
from unsold flats which were shown as stock-in-trade in the books of the assessee should be assessed
under the head “Income from house property” and not under the head “Profits and gains from business or
profession”.

Note – This has been further substantiated by insertion of new sub-section (5) of section 23, according to
which income from house property held as stock-in-trade would be exempt for a period of one year from
the end of the financial year in which certificate of completion was obtained from the competent authority.
However, for availing such exemption, the property should not be let out during the said period. Insertion of
sub-section (5) in section 23 providing for exemption in respect of house property held as stock-in-trade for a
certain period subject to fulfilment of the condition stated therein implies that income from house property held
as stock-in-trade –

(i) beyond the said period; or

(ii) not eligible for such exemption even during the said period due to non-fulfilment of the stated condition,
would be taxable under the same head of income i.e., “Income from house property”.

In effect, where exemption provisions are provided under a particular head of income, it can be inferred that the
income, but for such exemption, would be taxable only under that head of income.

LESSON ROUND UP
– Charging Section: Section 22 of the Act provides that 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”.
– Deemed Owner: As per section 27, the following persons though not the legal owners of a property
are deemed to be the owners for the purposes of sections 22 to 26:
(a) Transfer to a spouse or minor child
90 PP-DTL&P

(b) Holder of an impartible estate

(c) Member of a co-operative society
(d) Person in possession of a property
(e) Person having right in a property for a period not less than 12 years
– The measure of charging income-tax under this head is the annual value of the property, i.e., the
inherent capacity of a building to yield income. The expression ‘annual value’ has been defined in
Section 23(1) of the Income-tax Act as, the annual value of any property shall be deemed to be:
o the sum for which the property might reasonably be expected to let from year to year; or
o where the property or any part of the property is let and the actual rent received or receivable
by the owner in respect thereof is in excess of the sum referred to in clause (a), the amount so
received or receivable; or
o where the property or any part of the property is let and was vacant during the whole or any part
of the previous year and owing to such vacancy the actual rent received or receivable by the
owner in respect thereof is less than the sum referred to in clause (a), the amount so received or
receivable.
– Gross annual value shall be higher of
(a) Expected Rent
(b) Actual rent received or receivable.
The higher of Municipal value and fair rental value shall be Expected rent. However, expected rent
shall not exceed the Standard rent.
– Net annual value shall be computed in the following manner:
Determine the Gross Annual Value
Deduct municipal tax actually paid by the owner during the previous year from the Gross Annual
Value.
– Deduction from Annual Value (Section 24): W.e.f. Assessment Year 2002-03, income chargeable under
the head “Income from house property” shall be computed after making the following deductions,
namely:
o Standard deduction: a sum equal to 30% of the annual value;
o Interest on borrowed capital: where the property has been acquired, constructed, repaired,
renewed or reconstructed with borrowed capital, the amount of any interest payable on such
capital. The interest on borrowed money pertaining to pre-construction period is available in 5
equal installments commencing from the previous year in which house is acquired or constructed.
For this purpose the pre-construction period means the period commencing on the date of
borrowing and ending on 31st March immediately prior to the date of completion of construction/
date of acquisition or date of repayment of loan, whichever is earlier. Interest for current year is
deductible upto Rs. 30,000/ Rs. 2,00,000 as the case may be.

SELF-TEST QUESTIONS
These are meant for re-capitulation only. Answers to these questions are not to be submitted for evaluation

ELABORATIVE QUESTIONS
1. What is the meaning of ‘Owner of House Property’ under Section 27 of the Income-tax Act, 1961?