CA-Final (Income Tax)

Chapter
5
INCOME FROM HOUSE PROPERTY

5.0 INTRODUCTION
Generally, only real income is taxable under the Income Tax Act. Where the
law provides for adopting notional figure as the basis of computation, it is possible
that notional income also gets taxed in view of such specific provision. For
example, perquisite in respect of interest free loan calculated at a specified rate of
interest results in notional income being taxed as part of salary. Similarly, Section
50C provides for adoption of guideline value of an immovable property as the
consideration if the real sale consideration is lesser than such value. On account of
this provision, it is possible that a notional capital gain may get taxed. On the
same basis, there are certain situations under this head of income, which renders
notional income taxable.
An assessee may be taxed on a notional income in the case of let out property
if fair rent exceeds actual rent. Again, where an assessee owns more than one
house property for self-occupation purposes, the annual value of only one such
house shall be taken as nil and in respect of the other properties income shall be
computed on a notional basis by deeming such properties as let out and by
adopting fair rent as the gross annual value.
The computation becomes easier if the student identifies the category of the
house property for which computation is sought to be made and then proceeds to
apply the respective methodology. The Provisions relating to this head of income
can be divided into three segments as follows :
SECTIONS 22 TO 27
Chargeability Sec. 22 Computation of Income Special Provisions
Deemed Owner Sec. 27 Sec. 23 to 25 Sec. 25AA, 25B and 26
Although the nomenclature of this head of income uses the words “House
Property”, the chargeability does not confine to buildings which are residential
house properties. It extends to even other buildings such as offices, shops,
godowns and other commercial premises.

5.1 CONDITIONS TO BE SATISFIED FOR INCOME TO BE CHARGED TO TAX

UNDER THE HEAD ‘INCOME FROM HOUSE PROPERTY’ [Sec. 22]
As per Section 22, the following conditions are to be satisfied for an income to
be charged under the head “Income from House Property” –
(1) The property must consist of buildings or lands appurtenant thereto :
The appurtenant lands in respect of a residential building may be in the form
of approach roads to and from public streets, compounds, courtyards,
gardens, cattle-shed, etc.
(a) Vacant Plot : Vacant plot cannot be said to be a land appurtenant to a
building and thus, income from such vacant plot is not taxable u/s 22,
but u/s 56 as income from other sources.
(b) Income from well within the outer walls of house : A well within the walls of
a house cannot be said to be land appurtenant to house, as it is not
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necessary for enjoyment of the house. Thus, income from sale of water of
well is not chargeable u/s 22, but u/s 56 as income from other sources –
M. Ramalakshmi Reddy V. CIT [1998] 232 ITR 281 (Mad)
(c) Display of advertisement hoarding on roof of building : Rent on account of
display of advertisement hoarding of various concerns on the roof of the
building cannot be taxed as ‘Income from House Property’ but will be
taxed as ‘Income from Other Sources’ because hoarding on roof of
building cannot be treated as part of the building. – Mukherjee Estate Pvt.
Ltd. v. CIT [2000] 244 ITR 1 (Cal.)
(2) The assessee must be the owner of such house property : For the purpose
of Section 22, ‘owner’ is a person who is entitled to receive income in his own
right. Owner includes deemed owner u/s 27.
(a) Registered ownership is not necessary : Where a house property is handed
over by contractor/builder to a purchaser, the purchaser is to be treated
as ‘owner’ of that property for purpose of Section 22 even though no
registered documents as required by Transfer of Property Act, 1882 or the
Registration Act, 1908 are executed. The requirement of registration of
the sale deed in the context of Section 22 is not warranted. [CIT v. Podar
Cement (P) Ltd. [1997] 226 ITR 625 (SC)]
(b) Dispute in title of property : In case there is dispute in relation to
ownership of the property, the income therefrom shall be assessed in the
hands of the person who is in respect of such income.
(3) The property should not be used by the owner thereof for the purpose of
any business or profession carried on by him, the profit of which are
chargeable to tax : If the property is used by the owner thereof for any
business or profession carried on by him; and the profits of such business are
chargeable to tax, then income from such property shall not be chargeable to
tax under this head.
The following points are relevant to explain this point :
(a) Use for business must be by owner : E.g. if a company gives its house
property to its subsidiary for business of such subsidiary, then income
from such property shall be taxable under this head, as use for business
purposes is not by owner of house i.e. the company, but by its subsidiary.
(b) Letting out for business purposes is use for business purposes : For
example, when a house property owned by an assessee is occupied for
residence by its employees/directors, etc., whether on payment of rent or
otherwise, to enable them to discharge their functions efficiently and
letting out of the property is subservient and incidental to the main
business of the assessee, such an occupation amounts to use of the
property by the assessee itself for the purpose of its business, even
though no business is actually carried on in such premises. Income from
such property is not assessable as ‘Income from House Property’, but as
income from business or profession. – CIT v. Modi Industries Ltd. [1994]
210 ITR 1 (Delhi) (FB)
(c) Partner’s Property in which firm carries on business is to be treated as used
by the partner for his business : When a partner gives his property for use
by the partnership firm for the purpose of carrying on business of the
firm, then it will be treated as use by the partner for the purpose of his

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business and therefore, the income from such property shall not be
charged to tax under this head. – [CIT v. Rasiklal Balabhai [1979] ITR 303
(Guj); CIT v. Mustafa Khan [2005] 276 ITR 601 (All.)]
(d) Property of HUF let out to firm in which HUF is partner through the Karta :
In this case, the property will not be assessable under this head, as the
property is used by the owner (HUF) for its (firm’s) business – CIT v. Shri
Champa Lal Jeevraj [1995] 215 ITR 289 (Mad.).
However, in case premises owned by HUF is used by firm in which its
member/Karta is partner in individual capacity, then the bonafide annual
value of such property would be assessable under Section 22 in the hands
of HUF – CIT v. Shiv Mohan Lal [1993] 202 ITR 60 (All.)

Other points relating to charge of income under this head :

(A) Property held as stock-in-trade : Even if the property is held by the assessee as
a stock in trade, or is engaged in the business of letting out of property on
rent, or the assessee is a company incorporated for the purpose of owning
house property, the income falls under the head ‘Income from House Property’
because it is the specific head for charge income from house property.
(B) Sublet receipt : Income from sub-letting of property is not assessable as
income from house property as the person sub-letting the property is not the
owner thereof. Subletting receipt is taxable as income from other sources.
However, if sub-letting is carried on as a business activity, the income
therefrom will be chargeable as Profits and Gains of Business or Profession.
(C) Intention of the parties is also relevant : If the letting out of the property is for
earning rental income therefrom, then the income from such property will be
chargeable under Section 22, even if some additional facilities are also
provided and the monthly rent is inclusive of charges for such facilities and the
property, both. However, if letting out of the property is for the purposes of the
business of the assessee, the income from such property will not be taxable
under this head – Shambhu Investment P. Ltd. v CIT [2003] 263 ITR 143 (SC).
(D) Building constructed on leasehold land : The income from property being
building or land appurtenant thereto is assessable under this head. In case of
building constructed on a leasehold land, though the assessee is not the owner
of the land but he is the owner of the superstructure i.e. the building. Thus,
the income arising from building is assessable under the head ‘Income from
House Property’.
(E) Principle of mutuality: the assessee members club provided recreational and
refreshment facilities exclusively to its members and their guests. Its facilities
are not available to nonmembers. The club is run on no profit no loss basis.
Members are not entitled to any share in the profits. The assessee's business
is governed by the doctrine of mutuality and does not come within the scope of
business. In the case of such a mutual concern, It is not only the surplus from
the activities, but even the annual value of the clubhouse that shall be
excluded from the purview of the levy of income tax. Therefore, the annual
value of the building is not chargeable to tax-Chelmsford club versus CIT (SC)
(F) Exempted buildings: The following buildings are exempted subject to
satisfaction of the conditions prescribed under the relevant sections:
• farm houses outside the specified area-section 10 (1);
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• Buildings owned by an educational or charitable institution - section
10(203C) or section 11;
• Buildings owned by a trade union-section 10 (24);
• buildings owned by a political party in-section 13A;
• buildings owned by a local authority-section 10 (20); and
• buildings owned by Approved scientific research institution-section 10
(21).

(G) Treatment of Composite Rent, which is received for letting of property as well as
other services and/or assets : Treatment of Composite rent is given as under :
(a) Composite rent on account of rent for the property and service charges for
various facilities provided along with the house : Composite rent is to be
split up and the sum that is attributable to the use of the property is to be
assessed in the form of annual value under Section 22. While the income
received fro services is chargeable under Section 28 or Section 56.
(b) Composite rent on account of rent for the property and hire charges of
machinery, plant or furniture belonging to the owner : If the letting of
property is separable from letting of other assets, then rent for house
property is taxable u/s 22 and rent for other assets is taxable u/s 28 or
56, as the case may be. If letting is inseparable, then the entire income is
taxable u/s 28 or 56, as the case may be.

5.0 CHARGEABILITY OF VARIOUS TYPES OF BUILDINGS AND LANDS

APPURTENANT THERETO
Sr. Types of Buildings and Lands Chargeability
No.
1. • Tiled house with mud walls or The buildings referred here should
cement walls; be of permanent nature. Temporary
• RCC buildings, Palaces; structure shall not be considered as
• Apartments/Individual flats; buildings for the purpose of income
from house property. E.g. Circus
• Bungalows, Row House, Beach
Tents, exhibition structures, etc.
House and Pent House;
• Auditoriums;
• Godowns, Warehouses;
• Offices, Commercial shops,
theatres;
• Farm houses; College/library
Buildings
2. Buildings does not include - • The building is left incomplete as
• Incomplete units; the construction is not completed
• Buildings, which are in a due to litigation or any other
dilapidated condition reason;
• Building, which is not capable for
self-occupation or letting out for
residential or commercial
purposes. E.g. Substantial
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structure of the building is
destroyed due to earthquake.
3. Lawns, Gardens, parking places, etc. Chargeable as land appurtenant to
attached to the buildings. the buildings.
4. Buildings situated in foreign The income from such property shall
country. be computed similar to the
properties situated in India.
However, students may note that the
taxability of such buildings is based
on the residential status of the
assessee. In case the Double
Taxation Avoidance Agreement
provides for tax relief in respect of
such income, then Sec. 90 would
apply and subject to the terms of
such agreement, the income from
house property in foreign country
will be subjected to tax.

5.2 CONCEPT OF DEEMED OWNERSHIP [Section 27]

Generally, ownership itself is the criteria for assessment under the head
Income from House Property. However, there are instances in which the income
from property is assessable in the hands of an assessee, who is not the legal owner
thereof. These instances are covered under Section 27. As per Section 27, the
following persons shall be deemed to be the owners of the house property :
(1) An individual who transfers his house property otherwise than for adequate
consideration to –
(a) His or her spouse (not being a transfer in connection with an agreement
to live apart) or
R w section 64
(b) Minor child (not being married daughter)
is deemed to be the owner of such house property.
(2) The holder of impartible estate of an HUF is deemed to be individual owner of
all the properties comprised in the estate.
(3) A member of a co-operative society, company or an Association of Persons to
whom a building or part thereof is allotted or leased under a house-building
scheme of the society, company or associations, shall be deemed to be the
owner of that building or part thereof.
(4) A person who is allowed to take or retain possession of any building or part
thereof in part performance of a contract of the nature referred to in Section
53A of the Transfer of Property Act, 1882, shall be deemed to be the owner of
that building or part thereof.
(5) A person who acquires any rights in or with respect to any building or part
thereof, for a period of 12 years or more by virtue of any transaction referred to
under Section 269UA(f) shall be deemed to be the owner of that building or
part thereof.
Exceptions : The above provisions excludes any rights by way of a lease from
month to month or for a period not exceeding one year.
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Illustration 1 – Deemed Ownership : Answer the following –

(a) Mr. Ram transfers a property of market value of Rs.10,00,000 to his wife only
for Rs.4,00,000. The income from such property is Rs.1,50,000. How will the
property income be taxed?
(b) Mr. Rohan gifts a property valuing Rs.5,00,000 to his minor child being a
married daughter. The annual income from such property is Rs.25,000. How
will the property income is taxed?
(c) Mr. Sohan gifts Rs.20,00,000 to his wife and the wife purchases a house
property of Rs.20,00,000 out of such money. Will Mr. Sohan be the deemed
owner of the house property?
(d) Mr. A gives his house property on lease to Mr. B for a total period of 13 years,
but the lease is to be renewed by Mr. B annually during this period. In whose
hands will the property income be assessed?
(e) Mr. X gives his house property on lease to Mr. Y for a period of two years. Mr.
Y can get the lease renewed for another two years on payment of a specified
sum and so on for indefinite period. In whose hands will the property income
be assessed?
(f) Mr. P leases his house property to Mr. Q for 8 months, which can be renewed
every six months for indefinite period. In whose hands will the property
income be assessed?

Solution : The above issues can be answered as follows :

(a) Here, Mr. Ram has transferred his house property to his spouse otherwise
than for adequate consideration. Therefore, he will be deemed to be owner of
property to the extent of such inadequacy of consideration i.e. 60% of house
and the part of those representing the consideration i.e. 40% of the house shall
be assessed in the hands of spouse. Thus, property income will be assessed as
follows :
In the hands of Mr. Ram : Rs.1,50,000 × 6,00,000 ÷ 10,00,000 = Rs.90,000
In the hands of Mrs. Ram : Rs.1,50,000 × 4,00,000 ÷ 10,00,000 = Rs.60,000
(b) In case of property transferred by way of gift to minor child being a married
daughter, the transferor shall not be deemed to be the owner of the property
because Section 27 specifically excludes married daughter from this purview.
Hence, the property income will be assessed in the hands of the minor married
daughter by way of her representative assessee.
(c) Section 27(i) speaks of transfer of house property and not the transfer of any
other asset. In this case, Mr. Sohan doesn’t transfer house property but what
is transferred is money. It is immaterial that out of such money Mrs. Sohan
purchases a house property. The owner of the house property will be Mrs.
Sohan. Mr. Sohan cannot be deemed to be the owner of such house property.
(d) In this case, the lease is for a period exceeding 12 years, but the same is to be
renewed annually i.e. for a period not exceeding one year. Hence, the same
doesn’t fall u/s 27 and therefore, Mr. B is not the deemed owner of the
property u/s 27. The property income will be assessed in the hands of Mr. A.
(e) The lease is to be renewed after every two years but the lessee i.e. Mr. Y has a
right to get it renewed after every two years for indefinite period. Hence, the

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total period of lease can be more than 12 years and therefore, Mr. Y will be
deemed to be the owner of the house property and property income will be
assessed in his hands.
(f) Since the lease is to be renewed after six months, i.e. for a period not
exceeding one year, therefore, lease doesn’t fall under Section 27 and Mr. Q
cannot be deemed to be the owner of the house property. Thus, the property
income will be assessed in the hands of Mr. P.

5.3 TYPES OF PROPERTIES AND TREATMENT :

All the building properties are divided into the following three categories for the
purpose of knowing the principles involved in computation :
(i) let-out property – Section 23(1);
(ii) self-occupied property or unoccupied property – Section 23(2)(a) and (b); and
(iii) deemed let out property – Section 23(4)

The provisions of Section 23 deal with computation of annual value of a

building property. After computation of the annual value, deductions prescribed
u/s 24 are required to be allowed so as to arrive at the taxable income from house
property. These two sections deal with all the above mentioned categories of
properties. The provisions of Section 25 provides for disallowance of interest,
otherwise allowable u/s 24, if it is payable outside India and if the tax is not
deducted or paid.
The expression “unoccupied property” used above refers to a property which
cannot be occupied by the owner by reason of his employment, business or
profession at a different place and he resides at such other place in a building not
belonging to him. Such property is treated at par with a self-occupied property.
Once the student is familiar with the mode of computation of income in respect
of let-out property then the format needs to be suitably modified for the other
category of properties. The concepts as explained for let out property equally apply
for other types of properties except to the extent modified and accordingly stated
under the respective categories. Further, students can remember that the net
result of computation of the above mentioned three categories of properties shall be
as follows :
Nature of Property Net result of computation
1. Let out Property Any amount of income or loss
2. Self-occupied property or Either nil or loss subject to a maximum of Rs.30,000
unoccupied property or Rs.1,50,000 as the case may be, as indicated in
the note herebelow.
3. Deemed let-out property Any amount of income or loss
Note : In respect of property mentioned in 2 above deduction up to Rs.30,000 is
allowable on account of interest on loan borrowed for purchase construction,
repairing, renovation, etc. of such property. However, if such property is acquired
or constructed out of loan borrowed on or after 1.4.1999, interest shall be allowed
as deduction up to Rs.1,50,000 instead of the limit of Rs.30,000 provided such
acquisition or construction is completed within 3 years from the end of the financial
year in which loan was borrowed.

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5.4 LET-OUT PROPERTY – Section 23(1)

The format given hereunder can be used to determine the taxable income from
house property :
Rs. Rs.
Gross Annual Value (GAV) XXX
Less : Property taxes paid to local authority XXX
Net Annual Value (NAV) XXX
Less : Deductions u/s 24 –
(a) 30% of the net annual value XXX
(b) Interest on capital borrowed (loans) XXX XXX
Income from House Property XXX
Each of the above steps involved in computation of income from house
property needs to be conceptually understood. The principles involved in
quantification of each of the above mentioned items are indicated in the following
elucidation.

5.6 STEPS FOR DETERMINING ANNUAL VALUE U/S 23

Chart page 179

Unrealised Rent :
In adopting to “actual rent”, the following adjustment is called for in respect of
unrealized rent :
If any amount of rent is not capable of being realized, then such portion of rent
shall not be included in computing the actual rent received or receivable. In order
to exclude such unrealized rent, the conditions prescribed in the relevant rule
should be satisfied.
Exclusion of unrealized rent is permissible if the following conditions
prescribed under Rule 4 are satisfied :
(i) The tenancy is bonafide;
(ii) The defaulting tenant has vacated or steps have been taken to compel him to
vacate the property;
(iii) The defaulting tenant is not in occupation of any other property of the
assessee; and

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(iv) 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.

Municipal Taxes :
Deduction is permissible in respect of property taxes subject to the following
two conditions :
(i) It should be borne by the assessee; and
(ii) It should be actually paid during the previous year.
If property tax levied by a local authority for a particular previous year is not
paid during that year, no deduction shall be allowed in the computation of house
property income for that year. However, if in a later year, the entire arrears are
paid, then actual amount paid during such later year shall be fully allowed as
deduction in the computation of house property income for that later year.

5.8 DEDUCTIONS – Section 24

30% of the Net Annual Value – Section 24(a) :
Section 24(a) allows deduction, i.e. 30% flat deduction on the net annual
value. 30% of net annual value being allowed as deduction is automatic and does
not depend on the quantum of actual expenditure incurred. This deduction is
allowed even if no expenditure is incurred by the assessee. Assessee can avail this
deduction even if tenant undertakes to do the repairs. However, this deduction is
not available for self-occupied property.

Illustration :
Mr. X owns a house property which is let-out for Rs.5,000 per month. The fair
rent of the property is Rs.72,000. Municipal taxes paid during the year for each
half year is Rs.3,600. The tenant has undertaken to do the repairs. Compute the
income from house property.

Ans : Computation of income from House Property

Particulars Amount
Rs.
Gross Annual Value 72,000
Less : Municipal Taxes paid 7,200
Net Annual Value 64,800
Less : Deduction u/s 24(a)
30% of net annual value 19,440
Income from House Property 45,360

5.9 INTEREST ON LOANS – Section 24(b)

(i) Interest payable on loans borrowed for the purpose of acquisition,
construction, renovation, repairing or reconstruction can be claimed as
deduction.
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(ii) Interest relating to the year of completion of construction can be fully claimed
in that year irrespective of the date of completion.
(iii) Interest accrued during the construction period preceding the year of
completion of construction can be accumulated and claimed as deduction over
a period of 5 years in equal instalments commencing from the year of
completion of construction.
(iv) According to Explanation to Section 24, any subsequent loan borrowed to
repay the original loan shall also be entitled to the same treatment as the
original loan. Therefore, the interest payable in respect of the second loan
would also be admissible as deduction in the computation of income from
house property.
(v) Where a person acquires a property and pays only part of the sale
consideration, interest payable on the unpaid purchase price qualifies for
deduction in the computation of income from such property. – CIT vz. R.P.
Goenka and J.P. Goenka, 233 ITR 123 (Cal.)
SNAPSHOT OF INTEREST PROVISIONS
The following provisions will give a Birds Eye view, of the provisions under section
24:
No Scenario Maximum Restricted to
Amount
Deductible

PART A - SELF OCCUPIED PROPERTY

1. Property acquired before 1-04-99
• interest paid for ACQUISITION or
CONSTRUCTION 30,000
• interest paid for REPAIR or 30,000
RENEWAL 30,000
• 1/5 of PRE-CONSTRUCTION
period interest
Total deduction restricted to Rs.30,000
2. Property acquired after 1-04-99
• interest paid for ACQUISITION or
CONSTRUCTION 1,50,000
• interest paid for REPAIR or 30,000
RENEWAL 1,50,000
• 1/5 of PRE-CONSTRUCTION
period interest
Total deduction restricted to Rs.1,50,000
PART B - LET OUT PROPERTY / DEEMED LET OUT PROPERTY
There are no restrictions on the maximum amount that can be claimed as interest
in the case of let out or deemed let out property

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Illustration :
Mr. Rajan constructed a house property for which he borrowed a loan of Rs.2
lakhs at 12% per annum on 1.10.1999. The construction of the house was
completed by end of January, 2001. The house property has been let-out for
Rs.6,000 per month from September, 2001. Municipal taxes paid during the
previous year 2006-07 is Rs.7,500. Repairs incurred Rs.12,500. Insurance
premium due for the year but outstanding is Rs.1,500. Collection charges incurred
is Rs.100 per month. Current year interest on the loan is outstanding.
Compute the income from house property for the assessment year 2007-08.
Ans :
Computation of income from house property for the assessment year 2007-08
Particulars Amount Amount
Rs. Rs.
Gross Annual Value 72,000
Less : Municipal taxes paid 7,500
Net Annual Value 64,500
Less : Deduction u/s 24
(i) 30% of Net Annual Value 29,350
(ii) Interest on Loan 24,000 43,350
Income from House Property 21,150
Notes : Interest pertaining to the period from 1.10.1999 to 31.3.2000 amounts to
Rs.12,000. This amount should have been claimed in equal instalments over a
period of 5 years commencing from the year 2000-01 which is the year of
completion of construction, relevant to the assessment year 2001-2002 and ending
with assessment year 2006-07. Therefore, no deduction is claimed for the
assessment year 2007-08.

5.10 SELF-OCCUPIED PROPERTY OR UNOCCUPIED PROPERTY – Sec. 23(2)

The annual value of self-occupied property can be adopted as Nil. Similarly, if
a property cannot be actually occupied by reason of the fact that owing to his
employment, business or profession carried on at any other place, the assessee has
to reside at that other place in a building not belonging to him, the annual value of
such house shall also be taken to be nil. Accordingly, the municipal and other
taxes levied by the local authority and the adhoc deduction of 30% are not
deductible. However, interest on loans borrowed up to a maximum of Rs.1,50,000
(or Rs.30,000 in certain specific situations) shall be allowed as a deduction.
Therefore, computation in the case of self-occupied property shall be as follows :
Rs.
Annual value as per Sec. 23(2) Nil
Less : Deduction u/s 24(b) – Interest on Loan Borrowed XXX
Loss from house property XXX
In case such a property is acquired or constructed out of loan borrowed on or
after 1.4.1999 and where such acquisition or construction is completed within 3
years from the end of the financial year in which such loan is borrowed, then
interest shall be allowed up to Rs.1,50,000 instead of Rs.30,000. In respect of self-

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occupied property not falling in this category, the limit of such deduction shall
continue to be Rs.30,000.
If the assessee owns more than one house property falling under the above
mentioned category, then the income from any one such property, at the option of
the assessee, shall be computed as indicated above. The other self-occupied
property shall be treated as “deemed let-out property”.

Students may note that the enhanced limit of Rs.1,50,000 applies only if the
loan is used for the purpose of acquisition or construction of house property and
not for any other purposes. Whereas the normal limit of Rs.30,000 is available not
only for acquisition or construction but also for repair, renovation or reconstruction
of the house property. In order to claim interest in respect of self-occupied property
up to Rs.1,50,000 as deduction, assessee shall furnish a certificate, from the
person to whom interest is payable on the capital borrowed towards construction or
acquisition of the property, specifying the amount of interest payable.

Deemed Let-out Property – Sec. 23(4)

In the case of a deemed let-out property, the nature of which is self-occupied
property or unoccupied property, the computation of income shall be similar to that
of let-out property but subject to certain modifications. The relevant points are
listed herebelow :
(a) Fair rent has to be adopted as gross annual value. The question of considering
actual rent received or receivable does not arise. Consequently, no adjustment
arises on account of property remaining vacant or on account of unrealizable
rent.
(b) Municipal taxes actually paid can be claimed as deduction.
(c) Both the deductions permissible u/s 24 can be claimed as available in the case
of a let out property. The ceiling prescribed for one self-occupied property in
respect of interest on loan borrowed does not apply to a deemed let out
property.

Fair rent is taken as municipal valuation or the rent which similar property in
the same locality would fetch, whichever is higher. However, if Standard Rent is
fixed for that property, then Fair rent cannot exceed the standard rent.

Where an assessee owns two or more house properties meant for self-
occupation, he can opt to treat one such house property as self-occupied. The
remaining house or houses shall be deemed as let out properties. This option can
be changed year after year in a manner beneficial to the assessee. Generally, the
house with the higher gross annual value shall be treated as self-occupied so that
the house with lesser gross annual value shall be liable to tax as deemed let out
property. However, one more aspect that has to be considered before exercising
this option is the amount of interest on loan borrowed in respect of each property.
While interest can be claimed without any limit as deduction in the case of a
deemed let out property, deduction in respect of interest gets restricted in the case
of self-occupied or unoccupied property subject to a maximum amount of
Rs.30,000 or Rs.1,50,000, as the case may be.

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House Property – A portion let-out and a portion self-occupied :

Any portion or part of a property which is let out shall be computed separately
under the ‘let out property’ category and other portion or part which is self-occupied
shall be computed under the ‘self-occupied property’ category. For instance, if a
building or a floor in a building of which assessee is the owner comprises of
independent, self-contained flats/units of residence/apartments, then income from
each unit can be computed separately where one flat is self-occupied and the other
unit/units is/are let-out. There is no need to treat the whole property as a single
unit for computation of income from house property unless the entire house if self-
occupied. Municipal valuation or fair rent, is not given separately, shall be
apportioned between the let out portion and self-occupied portion either on plinth
area or built-up floor space or on such other reasonable basis.
Similarly, where in a building, the ground floor is let-out and the first floor is
self-occupied or vice versa, such a property need not be recognized as a single unit.
Instead, income from the floor, which is let-out can be computed separately subject
to the principles applicable to a let-out property and income from the floor which is
self-occupied can be computed separately by applying the principles relating to self-
occupied property as if each such floor is an independent property. On the other
hand, if both the ground floor and first floor are occupied wholly for self-occupation,
the entire house should be treated as a single unit and computation should be done
accordingly.
Property taxes if given on a consolidated basis, can be bifurcated as
attributable to each such portion or floor on a reasonable basis. Floor area or
annual value can be considered as the appropriate basis for such bifurcation.
Interest expenditure relating to the let out floor can be claimed fully without any
restriction and the interest attributable to the self-occupied floor shall be allowed
up to Rs.30,000 or 1,50,000 as the case may be. The analogy applicable to self-
occupied property equally applies to unoccupied property mentioned under clause
(b) of sub-section (2) of Section 23.

House Property – Let out for a period and self-occupied for a period :
If a single unit of property (house, flat or apartment) is self-occupied for few
months and let out for the other months, then fair rent of the property for the whole
year will be taken into account for determining the annual value. The fair rent for
the whole year shall be compared with the actual rent and whichever is higher shall
be adopted as the annual value. In this case, the actual rent shall be the rent for
the period for which the property was let-out during the previous year. Even in
such a case, property taxes and interest on loan for the whole year shall be allowed
as deduction.
If a property is let for whole or any part of the previous year then such
property shall be covered by the category ‘let out property’. It cannot be brought
under the category of self-occupied property or unoccupied property covered by
Section 23(2). This is made clear by sub-section (3) of Section 23 which provides
that the provisions of sub-section (2) shall not apply if the house is actually let
during the whole or any part of the previous year or any other benefit is derived by

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the owner from it. Therefore, such a property has to necessarily be governed by
sub-section (1) of Section 23 and annual value shall be determined accordingly.

Inadmissible Expenses – Sec. 25

In the case of interest on loan borrowed payable outside India, deduction will
be allowed only if tax is deducted at source or tax is paid.

Unrealised rent received subsequently to be charged to Income Tax – Sec.

25AA :
Where the assessee cannot realize rent from a property let to a tenant and
subsequently the assessee has realized any amount in respect of such rent, the
amount so realized shall be deemed to be income chargeable under the head
“Income from House Property” and accordingly charged to income tax as the income
of that previous year in which such rent is realized whether or not the assessee is
the owner of that property in that previous year.

Arrears of Rent Received – Sec. 25B

Where the assessee is the owner of any property which has been let to a tenant
and he receives any amount by way of arrears of rent from such property which was
not charged to tax earlier, the amount so received shall be chargeable to tax under
the head “Income from House Property”. It shall be charged to tax as the income of
the previous year in which such rent is received even if the assessee is no loner the
owner of such property. In computing the income chargeable to tax in respect of
the arrears so received, 30% shall be allowed and consequently, 70% alone shall be
chargeable to tax. The deduction of 30% is irrespective of the actual expenditure
incurred.

Illustration :
Mr. L has received a sum of Rs.15,000 from a defaulted tenant during July,
2006 out of the arrears of Rs.25,000 due from him. Mr. L had claimed the
unrealized rent of Rs.25,000 for the assessment year 2003-04, which the Assessing
Officer fully allowed as deduction u/s 24. Incidentally, Mr. L had sold his property
during March, 2006. Advise him about the chargeability of the amount of
Rs.15,000 realised from the defaulted tenant. What will be your answer if the
Assessing Officer had allowed only Rs.20,000 as deduction instead of Rs.25,000?

Ans : Computation of taxable quantum of unrealized rent recovered

Where the Assessing Officer allowed the entire claim of unrealized rent as
deduction, the sum of Rs.15,000 recovered is chargeable to tax in the year of
receipt. The position does not change even if Mr. L had disposed off the property in
March, 2006. The sum of Rs.15,000 becomes chargeable under the head “Income
from House Property” for the assessment year 2007-08.
However, if the Assessing Officer allowed only Rs.20,000 as unrealized rent as
against the arrears of Rs.25,000, the amount chargeable to tax out of the sum of
Rs.15,000 recovered is Rs.10,000 computed as below :
Particulars Rs.
Unrealised Rent recovered 15,000

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Less : Unrealised rent for which no deduction was allowed
Deduction claimed (Rs.25,000) less deduction allowed (Rs.20,000) 5,000
Taxable amount recovered 10,000

Unrealised rent is excluded from actual rent, subject to fulfillment of

conditions under Rule 4, in the determination of annual value u/s 24.
Subsequently, when the amount is realized, it gets taxed u/s 25AA in the year of
receipt. On the other hand, the assessee may have sought enhancement of rent
from the tenant and same could have been in dispute. Subsequently, as and when
the additional rent is realized, the same is liable to tax as it was not charged to tax
in any earlier years. Such an amount is assessable u/s 25B. The basic difference
between Sec. 25AA which deals with unrealized rent received subsequently and Sec.
25B which deals with arrears of rent received is that 30% of the amount is not
available as deduction u/s 25AA, whereas it is allowed as deduction u/s 25B.

Co-ownership – Sec. 26
(1) If two or more persons jointly own a property and if their shares are definite
and ascertainable, then the income from such property cannot be taxed as
income of an association of persons.
(2) The share income of each such co-owner should be determined and included
in his individual assessment. Each co-owner is entitled for the concessional
computation relating to one self-occupied property with reference to his share
of property under this occupation.
(3) When property is owned by two or more persons whose shares are definite and
ascertainable, the share of each such person in the income from the property
is includible in his respective total income u/s 22, even if the co-owners are
also receiving charges from the lessees for air conditioning facility which is
assessable as income from other sources u/s 56. D.C. Shah Vs. CIT 118 ITR
419 (Kar.). Property held by co-owners are assessable individually in respect of
lease rent and not as an association of persons – CIT Vs. Shivsagar Estate, 257
ITR 59 (SC).

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