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Income Tax Deduction on Income From House Property

Source:TheFinancialExpress

Income from house property earned either through renting-out or transferring a property, shall be chargeable under income tax under the head of 'income from house property'. House property may include any building, house or land.

Conditions:

1. The property should consist of any building, house and/or land

2. The assesse should be the owner of the property

3. The property shall not be used for any purpose except by the owner for the purpose of running any business or profession, the profits which are chargeable under Income Tax Act.


Appurtenant  

It means an attachment which runs along with the property, constituting a property or right subsidiary to one which is more important. For e.g., an appurtenant would be the air conditioning unit installed in a house.  As per Trim v Sturminster Rural District Council [(1938) 2 KB 508], Appurtenant never extends to include the land itself.    

 

ITO v Dr KK Bhatnagar (32 SOT 55 Lucknow)

The facts of the case are that the assessee sold his ancestral property and hence claimed deduction u/s 54, 54 (E) and 54 (F) (relief from capital gains tax) of the IT Act, which is deduction if the long-term capital gain is invested within 2 years of time. The ancestral property that was sold was comprised of the ancestral house, cowsheds, servant quarters, sit-outs, pathways and vacant land as well. The construction was scattered over the land. The assessee said that the capital gain he acquired from the sale of the ancestral property was used in acquiring/constructing a residential house for himself and also in investing SIDBI bonds. The assessing officer passed an order in accordance with the claim of the assessee. But the CIT used its power and cancelled the order of assessing officer u/s 263 (for the purpose of revision of order, the commissioner may examine the record for any proceeding under this act) of the act. CIT was only exempting the assessee under section 54 (F). The land sold by the assessee, does it also form appurtenant to the building or was an independent land, that could only be covered u/s 54 (F) of the act. Because section 54 explicitly includes building and land appurtenant to land. The land was not yielding any income other than income from house property.

The issue before the tribunal was that whether the assessee is applicable foe deduction u/s 54 (F) along with 54(E) and 54(F). Whether the land sold to form the appurtenant to the building or was an independent land. If the land is not appurtenant to the building it would be covered u/s 54 F, otherwise, it would be covered u/s 54.   

The Income Tax Appellate Tribunal laid down a test:

1. If the building together with the land is treated as an invisible unit and enjoyed by the person living there, then the land would be appurtenant to the building.

2. If the building has extensive land, and if the land is utilised by the occupier as a single unit, then the enquiry has to be made by the Assessing officer that if any portion of the land is utilized for the independent use, then it will not cause any determent to the enjoyment of the building per se. This enquiry shall be made from the occupier’s point of view.     

3. If there is any evidence that the occupier is utilising the land for any commercial or agricultural or any independent activity apart from the enjoyment of the building per se, then it will not be treated as an appurtenant to the building.  

4. If occupier deriving any income from the land which is not taxable u/s 22 of the act, then the land will not be appurtenant to the building.

5. If there is any material pointing out that the occupier uses the land other than the purpose of proper and effective use of the building, the income tax authority shall determine the surplus land, which will not be termed as appurtenant to the building.

6. The land is appurtenant to the building if it is invisible part and parcel of building for the use and enjoyment by the occupier and it is not used for any other activity and also not yielding any income u/s 22 of the act.   

7. Deduction u/s 54 (profit on sale of residential property) can be valid, even if the income under the head ‘house property’ is zero on the grounds of self-occupation of the building by the owners.

8. Even if the land appurtenant to the building is sold in portions, it will not cease to be appurtenant to the land. We will have to see the condition of appurtenant to the building and use by the occupier prior to the sale and not at the time or after the sale.  

The tribunal held the land to be appurtenant to the building being an individual part used by the assessee and his family for its enjoyment of building and was not yielding any income. The order u/s 263 was incorrect and not suitable in law.

 

Section 27 of the IT Act

Section (iii) says that any association (e.g. company etc) will deemed to be the owner if they have the taken the building on lease.
Section (iii) (a) says that if the person took over the possession of the building to perform part of contract u/s 53 (acquiring capital assets) of the IT Act, then he shall deem to be the owner of the building. 



CIT v Podar Cement Pvt. Ltd. (1997)
The assessee (company) purchase 4 flats and paid full consideration. They only took the possession and not the ownership of the property and hence they claimed that the rental income from the flat is the 'income from other sources'. But ITO (Income Tax Officer) rejected this claim of the assessee.
The term 'owner' as per common law means a person has the legal ownership after complying with the required procedure as established by the law of  -Transfer of Property Act and Registration Act. 


The Supreme Court said that under common law owner is person who has valid title conveyed to him after complying with Transfer of property Act. But in context to section 22 of the Income Tax Act, subjected to the ground realities and objective of the act, owner is the person who is entitled to receive income from the house property in his own right. Thus the court held that the assessee is the owner and have to pay income tax on the 'house property' income. The company will have effective ownership u/s 27(iii), 27 (iii a) and 27 (iii b) and set aside the judgement of the tribunal. 



CIT v Delhi Cloth & General Mills Co. Ltd. (1966)
The assessee was a public limited company having several buildings in the factory premises. The employees of the corporation were given the flats on rent, which were within the factory premises and certain amount uses to be deducted from their salary and the company was receiving that in the form of rent. The flat was not given to the outsiders. ITO treated this income u/s 22 as income from the house property.


The issue before the High Court: Whether the Income is to be treated as from the house property or be treated as business income.

Judgement: The Punjab & Haryana High Court said that the corporation has not made the building for the purpose of renting the flats out in order to generate income. But to assist the employee for achieving the larger interest of the corporation. 

Income generated from the building appurtenant which the corporation rents out to its employees only will fall under the ambit of section 10 of the Income Tax Act.
It shall be treated as income from the business and not from the house property. The buildings are the part and parcel of the corporation's larger interest and objective, which is to run business.

Trivia: "It is generally advisable to the income tax officers that in case of confusion between the provision of the Income Tax act whether the tax liability has to imposed or not, then they shall take the decision in the favour of the government rather than the assessee"

 

Section 23 of the IT Act

Annual valuation of the property u/s 22(income from house property) shall deem determined as given under section 23, i.e.:

1. The actual rent received or receivable

2. Municipal value/tax

3. Fair rent of the property

4. Standard rent

Income from house property

· Calculate gross annual value

· Then subtract municipal taxes

· This will tell us the net annual value.

· Then apply standard deduction, and deduction u/s 24 and interest on borrowed.

(Income from the self-acquired property would be nil)

Stock in trade

The stock in trade referred to that the stocks which are yet to sell.


CIT v DLF Office Developers

DLF constructed a multistorey building and let out for sale to tenants. The tenant was also paying the maintenance charges to the DLS for the services rendered. Amount paid to the DLS was the part of the rent. DLS (a separate company) was formed in order to keep the management of maintenance. For the purpose of section 23 (1) of the IT act, is it to be included in the term ‘rent’. Assessee is the owner of the building. Various services provided by the DLS is not provided to the owner but to the tenants. Maintenance was the responsibility of the owner. Commissioner passed an order in favour of assessing officer, whereas the tribunal overruled the order. 

Delhi High Court held that the arrangement between DLS and tenants is the part of the business transaction, which is entered under regular course of business by DLS. DLS may be part of the same group but will be considered as a separate corporate entity. The assessee firm has not been able to found to have actually enjoyed the service charge paid to DLS. This very tax planning by the corporation was not illegal. Tax evasion is illegal and tax planning is not. This is a clear case of tax evasion.   

NOTE30% Standard deduction is allowable out of house property income. House needs maintenance, there are depreciation and other cost faced by the owner over the house property. Prior to deduction, a number of maintenances were allowed but after the amendment straight away 30% standard deduction was allowed over house property. Even if self-occupied as well as if rented out, in both cases standard deduction will be applicable.


CIT v Indira Balkrishan
The deceased left behind 3 widows and 2 daughters. The widows were the legal heirs of the property of the deceased. There was Mitakshara law which was applicable. Tribunal treated these 3 widows as 'association of persons'. The tribunal held that widows did not exercise the right to separate possession and enjoyment but rather choose to enjoy the property jointly.
The issue before the court was that as per the succession law, the shares of each widow shall be ascertained or not?
Supreme court held that tribunal was in error that all the 3 widows are the co-owners of the property. The court could not found any evidence that the 3 widows have combined in a joint enterprise to produce income. On the contrary the court has found that the widows has not exercised their right to separate enjoyment. Except for the fact that they jointly receive interest and dividend amount there is no other evidence that they have done an act which has helped them to produce income with respect to shares and deposits. Hence they does not form AOP u/s 3 of the act.  

Section 26 of the Income Tax Act
If a property is owned by more than 1 person and has appurtenant then they may be taxed under any of the various status like BOI, AOP or partnership. This section is only applicable when the shares are definite and ascertainable and then the respective share is taxable as an individual and not as BOI (Body of Individuals) or AOP (Association of Partners) or any partnership. Which means that if the property (capital asset) is sold, then the capital gain tax will be applicable on each member and not over the property as a whole and for the purpose of section 54, each of the co-owner is entitled to claim benefit.   

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