FACULTY OF LAW

JAMIA MILLIA
ISLAMIA
Tax Law

Income from House

Property

Submitted By:ANILESH TEWARI

B.A.LL.B(Hons)
3rd Year/6th Semester

ACKNOWLEDGEMENT
I would like to thank my teacher Dr Kahkashan Y. Danyal for being a great teacher and for
giving me support and guidance regarding this assignment. . I would also like to thank my
friends and peers for their encouragement throughout the making of this assignment.

Anilesh Tewari

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INTRODUCTION
Section 4 of the Income tax Act 1961 (Act hereinafter) provides for charge of income tax.
However, this section by itself does not create any liability. It has been observed by the Supreme
Court in CIT Vs. K. Srinivasan (1972) 83 ITR 346-351 that although section 4 is the charging
section, yet income tax can be charged only when the central Act, which normally is the Finance
Act, enacts that income tax shall be charged for any assessment year at the rate or rates specified
therein.
Every money receipt by a person is not chargeable to tax. Section 14 of the Act specifies five
heads of income on which tax can be imposed under the Income tax Act. In order to be
chargeable, an income has to be brought under one of these five heads. The heads are
(i) salaries
(ii) Income from House property
(iii) profits and gains of business or profession
(iv)capital gains and
(v) income from other sources.
In the discussion to follow, the relevant provisions of the Act relating to Income from House
Property would be considered and how the computation of income from this source is to be
made, namely, how the income is to be worked out and what are the deductions to be given for
computing the taxable income shall be explained. Sections 22 to 27 of the Act deal with the
subject of taxation of income from house property.

Property-the common view

In common parlance, property is understood in wide sense. It is not only the thing which is the
subject matter of ownership but is taken to mean dominon or right of ownership or even partial
ownership. Lord Longdale in John v. Skinner (1836) 5Lg 67-90 (Ch) has described it as the most
comprehensive of all the terms which can be used in as much as it is indicative and descriptive of
every possible interest which a person can have.
However, for purposes of taxation under sections 22 to 27 of the Act, such wider definition of
property is not relevant. The income to be taxable should be Income from House Property.
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Section 22 of the IT Act 1961

Section 22 provides for taxation of annual value of a property consisting of any buildings or
lands appurtenant thereto, of which the assessee is owner, under the head income from House
Property. Tax imposed under section 22 is a tax on annual value of house property and is not a
tax on House Property. However, if a house property is occupied by a taxpayer for the purpose
of business or profession carried on by him (the profits of which are chargeable to income tax),
annual value of such property is not chargeable to tax under the head Income from House
Property.
In the earlier discussion, the phrase lands appurtenant thereto has also been used. It needs to be
clarified in this context that income from letting of vacant plots of land when there is no
adjoining building will not be taxed under this head (but will be taxed as income from other
sources). The existence of a building is, therefore, an essential perquisite
Building will, of course, include residential house (whether let out or self occupied), office
building, factory building, godowns, flats, etc. as long as they are not used for business or
profession by owner. And the purpose for which the building is used by the tenant is also
immaterial. Thus, income from letting out godowns will be taken as income from house property.
It does not make any difference at all if the property is owned by a limited company or a firm.
CONDITIONS NECESSARY FOR TAXING INCOME FROM HOUSE PROPERTY
These are:
The property should consist of any building or land appurtenant thereto
The assessee should be the owner of the property
The property should not be used by the owner for the purpose of any business or profession
carried on by him, the profits of which are chargeable to tax.
Unless all the aforesaid conditions are satisfied, the property income cannot be charged to tax
under the head Income from House property.

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Owner-concept explained
For the purpose of section 22, the concept hitherto understood even in court decisions has been
that the owner has to be a legal owner. Annual value of property is assessed to tax under section
22 in the hands of owner even if he is not in receipt of income or even if income is received by
some other person. For instance, if a person makes gift of rental income to a friend or a relative,
without transferring ownership of the property, annual value of property is taxable in the hands
of the donor, even if rental income is received by the donee- S. Kartar Singh v. CIT (1969) 73
ITR 438 (Delhi). In other words, for the purpose of section 22, the owner must be that person
who can exercise the rights of the owner, not on behalf of the owner but in his own right-RB.
Jodha Mal Kuthiala v. CIT [1971] 82 ITR 570 (SC). However, there has been some refinement in
the concept of ownership after the decision of the Surpeme Court in the case of CIT v. Podar
Cement (P) Ltd. (1997) 92 Taxman 541 (SC)/226 ITR 625 (SC). In this case, the Supreme Court
has expressed the view that under common law owner means a person who has got valid title
generally conveyed to him after complying with the requirements of law such as the Transfer of
Property Act, Registration Act etc. But in the context of Section 22 of the Income tax Act, having
regard to the ground realities and further having regard to the object of the Income tax Act,
namely, to tax the income, owner is a person who is entitled to receive income from the
property in his own right. The requirement of registration of the sale deed in the context of
section 22 is not warranted. In view of this, where a property is handed over to a purchaser to
enjoy fruits of that property by the builder, the purchaser is to be treated as owner of that
property even though no registered document has been executed in his favour.
Ownership is relevant for the previous year
As tax is levied only on the income of previous year, annual value of property, owned by a
person during the previous year, is taxable in the following assessment year, even if the assessee
is not owner of the property during the assessment year.

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Deemed ownership
In the following situations the ownership shall be deemed for taxing income from house property
in view of section 27 of the Act:
(i) When house property is transferred to spouse (otherwise than in connection with an
agreement to live apart) or minor child (not being a married daughter) without adequate
consideration (Section 27(i))
(ii) In the case of holder of an impartible estate (Section 27(ii))
(iii) A member of a cooperative society, company etc. to whom a building or part thereof has
been allotted or leased under a house building scheme (Section 27(iii)). Thus, when a flat is
allotted by a cooperative society or a company to its members/shareholders who enjoy the flat,
technically the
co-operative society/company may be the owner. However, in such situations the allottees are
deemed to be owners and it is the allottees who will be taxed under this head.
(iv) A person who is allowed to take or retain possession of any building (or part therof) in part
performance of a contract of the nature referred to in section 53A of the Transfer of
Property Act, 1882, is deemed as the owner of that building (or part thereof) [Sec. 27 (iiia)].
(v) A person who acquires any rights (excluding any rights by way of a lease from month to
month or for a period not exceeding one year) in or with respect to any building (or part thereof)
by virtue of any such transaction as is referred to in section 269UA(f) [i.e. if a person takes a
house on lease for a period of 12 months or more, is deemed as the owner of that building or part
thereof] [Sec. 27 (iiib)].
Persons who purchase properties on the basis of Power of Attorney and under long term leases
(12 months & more) are also deemed to be owners. The concept of deemed owner is introduced
to prevent misuse like transferring properties in the name of spouse or minor child etc. and for
assessment of income in the hands of beneficial owner.
Co-ownership
Section 26 concerns properties which are owned by coowners. This section provides that where
property consisting of building or buildings and land appurtenant thereto is owned by two or
more persons and their respective shares are definite and ascertainable such persons shall not, in
respect of such property, be assessed as an association of persons, but the share of each such
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person in the income from the property as computed in accordance with sections 22 to 25 shall
be included in his total income. In such an eventuality, the relief admissible under section 23(2)
shall also be separately allowable to each such person [Explanation to Section 26].

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DETERMINATION OF INCOME FROM HOUSE PROPERTY

The determination of Annual Value is important in the context of taxation of income from
House Property because though the tax under the head Income from house property is tax on
income, yet it is not in that sense a tax on income but upon inherent capacity of such property to
yield income and for this annual value is the yardstick. The inherent capacity has been defined
as the sum for which the property might reasonably be expected to be let from year to-year. It is
not necessary, that the property should be actually let. It is also not necessary that the reasonable
return from property should be equal to the actual rent realized when the property is, in fact, let
out. Where the actual rent received is more than the reasonable return, it has been specifically
provided that the actual rent will be the annual value. Where, however, the actual rent is less than
the reasonable rent (e.g. in case where the tenancy is affected by manipulation, emergency, close
relationship or such other consideration), the latter will be annual value. The municipal value of
the property, the cost of construction, the standard rent if any under the Rent Control Act, the rent
of similar properties in the same locality are relevant factors for the determination of the annual
value. However, if a property is let and was vacant during any part or whole of the year and due
to such vacancy, the rent received is less than the notional rent, such lesser amount shall be the
Annual Value. For example, in case of a house, whose municipal valuation is Rs. 24,000/- and
actual rent received is Rs. 36,000/- the annual lettable value will be taken at Rs.36,000/-. If the
actual rent received is Rs. 18,000/- and municipal valuation is Rs.24,000/-, the annual value
would be Rs. 24,000/- for the purpose of the Income-tax Act. Here, if the property was vacant for
six months and the rentreceived is Rs. 18,000/- for six months the Annual Value shall be Rs.
18,000/Where the property is subject to Rent Control Act, its annual value under section 23(1) cannot
exceed the standard rent (fixed or determined) under the Rent Control Act unless it is actually let
out for a higher amount. Such a view has been expressed by the Supreme Court in the cases of
Dewan Daulat Rai Kapoor v. NDMC (1980) 122 ITR 700 (SC); Amolak Ram Khosla v. CIT
(1981) 131 ITR 589 (SC) & Mrs. Shiela Kaushik v. CIT (1981) 131 ITR 435 (SC).

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Determination of Annual Value of Self-occupied property

In case of one self-occupied house property which has not been actually let out at any time, the
annual value is taken as nil. If, one is having more than one house property using all of them
for self-occupation, he is entitled to exercise an option in terms of which, the value of one house
property as specified by him will be taken at nil. The annual value of the other self occupied
house properties will be determined on notional basis as if these had been let out.
Annual Value of one house away from work place
A person may own a house property, say in Bangalore, which he normally uses for his residence.
He is transferred to Chennai where he does not own any house property and stays in a rental
accommodation. In such case, the house property in Bangalore cannot be used for selfoccupation and notional income therefor would normally have been chargeable although he
derives no benefit from the property. To save the taxpayer from hardship in such situations, it has
been specifically provided that the annual value of such a property would be taken to be nil
subject to the following conditions:
The assessee must be owner of only one house property.
He is not able to occupy the house property because of his employment, business etc. being
away from place where the property is situated.
The property should not have been actually let.
He has to reside at the place of employment in a building not belonging to him [Section 23(2)
(b)].
He does not derive any other benefit from the property not occupied.
Determination of Annual Value of Let out house properties
In respect of a let out house property, the rent received is usually taken as the annual lettable
value. When, however, the rent is not indicative of the actual earning capacity of the house, the
notional annual value will have to be found and adopted. The standard rent would be the Annual
Value in the case of properties, subject to Rent Control Legislation, as mentioned earlier.
However, when the actual rent received or receivable is higher than the notional value as
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calculated above, the higher figure will be taken for the purpose of Income-tax. From the annual
value as determined above, municipal taxes are to be deducted if the following conditions are
fulfilled:
The property is let out during the whole or any part of the previous year (There is no such
deduction in respect of a self-occupied house property).
The Municipal taxes must be borne by the landlord. (If the municipal taxes or any part thereof
are borne by the tenant, the same will not be deductible).
The municipal taxes must be paid during the year. (Where the municipal taxes have become
due but have not been actually paid, these will not be allowed. The municipal taxes may be
claimed on payment basis i.e., only in the year they were paid even if the taxes belonged to a
different year).
Amount left after deduction of municipal taxes is net annual value.
Other Permissible Deductions from Annual Value in cases of let out properties (Section 24)
The following deductions are permissible:
(i) deduction equal to 30% of the annual value, irrespective of any expenditure incurred by the
taxpayer (S.24(a)).
No other allowance for repairs, maintenance etc. would be allowable.
(ii) interest on borrowed capital (S. 24(b)) Interest on borrowed capital is allowable as deduction
on accrual basis (even if account books are kept on cash basis) if capital is borrowed for the
purpose of purchase, construction, repair, renewal or reconstruction of the house property.
The following aspects concerning claim for deduction of interest are to be kept in view:
(i) The interest is deductible on payable basis i.e. on accrual basis. Hence it should be claimed
on yearly basis even if no payment has been made during the year.
(ii) For claiming interest, it is not necessary that the lender should have a charge on the property
for the principal amount or the interest amount.
(iii) In Shew Kissan Bhatter v. CIT (1973) 89 ITR 61 (SC) the Supreme Court has decided that
interest payable for outstanding interest is not deductible.
(iv) Taxpayer cannot claim deduction for any brokerage or commission paid for arranging loan
either as a one time arrangement or on periodical basis till the loan continues.
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(v) In terms of circular No. 28 dated 20th August 1969, if an assessee takes a fresh loan to pay
back the earlier loan, the interest on the fresh loan would be deductible.
(vi) Interest on borrowing can be claimed as deduction only by the person who has acquired or
constructed the property with borrowed fund. It is not available to the successor to the property
(if the successor has not utilized borrowed funds for acquisition, etc). In other words, the
relationship of borrower and lender must come into existence before it can be said that any
amount or any other money is borrowed for the purpose of construction, acquisition, etc., of
house property by one person from another and there must be real transaction of borrowing and
lending in order to amount to any borrowing.
(vii) In case of Central Government employees, interest on house building advance taken under
the House Building Advance Rules (Ministry of Works and Housing) would be deductible on the
basis of accrual of interest which would start running from the date of drawal of advance. The
interest that accrues in terms of rule 6 of the House Building Advance Rules is on the balances
outstanding on the last day of each month - Circular No. 363, dated June 24, 1983.
(viii) Any interest chargeable under the Act, payable out of India on which tax has not been paid
or deducted at source, and in respect of which there is no person in India who may be treated as
an agent, is not deductible, by virtue of Section 25, in computing income chargeable under the
head Income from house property.
Interest for pre-construction period
Money may be borrowed prior to the acquisition or construction of the property. In such a case,
interest paid/ payable before the final completion of construction or acquisition of the property
will be aggregated and allowed for five successive financial years starting with the year in which
the acquisition or construction is completed. This deduction is not allowed if the loan is utilized
for repairs, renewal or reconstruction.
Example:- The assessee took a loan of Rs. 3,00,000/- in April, 1999 from a Bank for construction
of a house on a piece of land which he owns at Meerut. The loan carried interest @ 15% p.a. The
construction is completed in April 2001 and the house is given on rent from May 2001.
Meanwhile he has already incurred liability of interest of Rs. 90,000/- for F.Y. 1999-2000 and
2000 01. Because of the above provision, the assessee can claim a deduction in respect of this
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interest of Rs. 90,000/- (Over and above the yearly interest) in five equal instalments of Rs.
18,000/- each starting from the assessment year 2002-03.

Benefit for vacancy for the period when the property remains vacant (in cases of let out
properties).
If due to vacancy, the annual rent received is lower than the expected rent, then the annual rent
realized is taken as the gross annual value. However, this rule will be applicable only, if the
decline is only because of the vacancy.
Exclusion of unrealised rent from annual value (Expl. To Section 23(1))
Unrealised rent (which the owner could not realize) shall be excluded from rent
received/receivable only if the following conditions are satisfied:
a. the tenancy is bona fide;
b. the defaulting tenant has vacated, or steps have been taken to compel him to vacate the
property;
c. the defaulting tenant is not in occupation of any other property of the assessee;
d. 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.
Unrealised rent subsequently recovered would be taxable in the year of receipt. It has been
mentioned earlier that basic requirement for assessment of property income is the ownership of
the property. However, in the cases where unrealised rent is subsequently realised, it is not
necessary that the assesse continues to be the owner of the property in the year of receipt also.
(Section 25AA)
Arrears of Rent (Section 25B)
When the owner of a building receives arrears of rent from such a property, the same shall be
deemed to be the income from house property of the year of receipt irrespective of whether or
not the assessee is the owner of the property in that year. 30% of the receipt shall be allowed as

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deduction towards repairs, collection charges etc. (prior to the A.Y. 2002-03, the rate of
deduction was 25%). No other deduction will be allowed.

Set off and carry forward of loss in cases of house properties

This matter can be examined under two heads namely:
(A) Where the property has been let out
In the matter of set off of and carry forward loss from let out properties, two Sections are
relevant. Sections 70 and 71 provide that loss from one house property can be set off against the
income from another house property. The remaining loss, if any, will be set off against incomes
under any other heads like salary, business etc. In case the loss does not get wiped out
completely, the balance will be carried forward.
In regard to carried forward losses, Section 71B is to apply. This Section provides that where
the assessee incurs any loss under the head Income from house property and such loss is not
fully adjusted under other heads of income in the same assessment year, then the balance loss
shall be allowed to be carried forward and set off in subsequent years (subject to a limit of 8
assessment years) against income from house property.
Illustration I
(i) Asst. year 2011-12
A a salaried employee (salary Rs.1,40,000/-) has two properties which are let out. The loss from
one property X is Rs. 20,000/-. The income from the other property Y is Rs. 14,000/-. The
loss from property X can be set off against income from property Y. There will still be loss of
Rs. 6000/- in respect of property X. This can be set off against his salary income.

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(ii) Asst. year (as at (i) above) Bs sources of income/loss are as under:
RS.
Interest income

10,000

Income from other sources

6,000

Net loss from residential House Property (-) 36,000 (consequent to payment (-) 36,000
of
interest on funds borrowed for the construction of House after 31.03.1999)
Net loss

20,000

This loss of Rs.20,000 would be carried forward for being set off in accordance with the
provisions of Section 71B upto 8 years against income from house properties.
(B) Where the house is self occupied
In so far as income from self occupied property is concerned, the same is to be taken as Nil (see
next chapter). The only deduction permissible against this Nil income is interest on borrowed
capital which can be upto Rs. 30,000 or Rs. 1,50,000 (see discussion in chapter III). No other
deduction for self occupied property is permissible. Hence only the interest claim would be
available for set off or carry forward, if the conditions mentioned earlier are satisfied.
Illustration II
(i) Asst. Year 2011-12
As sources of income are:
RS
Salary
1,20,000
Interest on loan taken for the construction of a 30,000
house for residential purpose
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The taxable income for this asstt. year would be Rs. 90,000 on which no tax would be payable.
(ii) If the amount of interest in the above case is say Rs. 1,40,000 and funds had been borrowed
for construction of house property for self residence after 31.03.1999, then Rs. 20,000 would be
the loss which can be carried forward for being set off from property income, if any, in future
upto 8 years. It would not be available for set off against other incomes.

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COMPUTATION OF INCOME FROM SELF OCCUPIED PROPERTY

As mentioned earlier, where a person has occupied more than one house for residential purposes,
only one house, as chosen by him will be treated as self occupied and all other houses will be
deemed to be let out and the income from such houses would be computed as indicated earlier. In
regard to one house treated as used for own residential purposes throughout the year, Section 23
(2) (a) prescribes that annual value of such house shall be taken to be nil, if the conditions
mentioned below are satisfied:
a. the property (or part thereof) is not actually let during whole (or any part) of the previous year;
and
b. no other benefit is derived therefrom
Interest on borrowed capital for self occupied property
The maximum amount of interest permissible in cases of self-occupied property is Rs.1,50,000
(in respect of funds borrowed on or after 01.04.1999). Interest upto Rs.1,50,000 is deductible if
the following conditions are satisfied:
capital is borrowed on or after April 1, 1999 for acquiring or constructing a property;
the acquisition/construction should be completed within 3 years from the end of the financial
year in which capital was borrowed; and
the person extending the loan certifies that such interest is payable in respect of the amount
advanced for acquisition or construction of the house or as refinance of the principal amount
outstanding under an earlier loan taken for such acquisition or construction.
In the above context the following further aspects have to be kept in view:
1. If capital is borrowed for any other purpose (e.g. if capital is borrowed for reconstruction,
repairs or renewals of a house property), then the maximum deduction on account of interest is
Rs.30,000 (and not Rs.1,50,000).

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2. There is no stipulation regarding the date of commencement of construction. Consequently,

the construction of the residential unit could have commenced before April 1,1999 but, as long as
its construction/ acquisition is completed within 3 years, the higher deduction of Rs.1,50,000
would be available. Also, there is no stipulation regarding the construction/acquisition of the
residential unit being entirely financed by the loan taken on or after April 1, 1999. It may be so in
part.
However, the higher deduction upto Rs.1,50,000 can be taken for the loan which has been taken
and utilized for construction/acquisition after April 1, 1999. The loan taken prior to April 1, 1999
will carry deduction of interest upto Rs. 30,000 only (CBDTs circular No. 779, dated September
14, 1999).
Rs. 1,50,000 maximum deduction will not be available in the following situations:
i. if capital is borrowed before April 1, 1999 for purchase, construction, reconstruction, repairs or
renewals of a house property;
ii. if capital is borrowed on or after April 1, 1999 for reconstruction, repairs or renewals of a
house property; and
iii. if capital is borrowed on or after April 1, 1999 but construction is not completed within 3
years from the end of the year in which capital was borrowed.
In the above situations only deduction upto Rs. 30,000 can be claimed.

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DEDUCTIONS UNDER SECTION 80C IN RELATION TO INVESTMENT

IN NEW RESIDENTIAL HOUSE PROPERTY
Deduction under section 80C of the Income tax Act is available for investment in house property
subject to the satisfaction of the conditions of that section in regard to qualifying amounts in the
following circumstances to the individuals/Hindu undivided families.
Payments made towards the cost of purchase/construction of new residential house property
during the previous year are eligible for deduction under section 80C. The following payments
qualify for deduction:a. any instalment or part payment of the amount due under any self-financing or other scheme of
any development authority, housing board or other authority engaged in the construction and sale
of house property on ownership basis;
or
b. any instalment or part payment of the amount due to any company or cooperative society of
which the assessee is a shareholder or member towards the cost of the house property allotted to
him (it is not applicable if the assessee is not a shareholder or member of the
company/cooperative society which provided house to the assessee); or
c. repayment of the amount borrowed by the assessee fromi. the Central Government or any
State Government, or
ii. any bank, including a cooperative bank, or
iii. the Life Insurance Corporation of India, or
iv. the National Housing Bank, or
v. any public company formed and registered in India with the main object of carrying on the
business of providing long term finance for construction or purchase of houses in India for
residential purposes which is eligible for deduction under section 36(1) (viii), or
vi. any company in which the public are substantially interest or any cooperative society, where
such company or cooperative society is engaged in the business of financing the construction of
houses, or
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vii. the assessees employer where such employer is an authority or a board or a corporation or
any other body established or constituted under a Central or State Act,
or
viii. the assessees employer where such employer is a public company or public sector company,
or a university established by law or a college affiliated to such university or a local authority or
a cooperative society;
d. stamp duty, registration fee and other expenses for the purpose of transfer of such house
property to the assessee.
The following payments are not qualified for the purpose of section 80C :
a) the admission fee, cost of the share and initial deposit which a shareholder of a company
or a member of a cooperative society has to pay for becoming such shareholder or
member; or
b) the cost of any addition or alteration to, or renovation or repair of, the house property
which is carried out after issue of the completion certificate in respect of the house
property by the authority competent to issue such certificate or after the house property
(or any part thereof) has either been occupied by the assessee or any other person on his
behalf or been let out; or
c) any expenditure in respect of which deduction is allowable under the provisions of
section 24.
Section 80C provides that in computing the total income of an assessee, deduction shall be
provided in respect of various payments/investments made as included in the aforesaid Section
subject to a ceiling of Rs.1 lakh on the aggregate amount of such payments/investments.
Section 80C(5) stipulates that in case an assessee transfers the house property referred to above
before the expiry of five years from the end of the financial year in which possession of such
property is obtained by him, or receives back, whether by way of refund or otherwise, any sum
specified above, then no deduction shall be allowed with reference to any of the sums referred to
above and the aggregate amount of deductions of income already allowed in respect of the
previous year or years shall be deemed to be the income of the assessee of such previous year
and shall be liable to tax in the assessment year relevant to such previous year.

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CONCLUSION

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BIBLIOGRAPHY
1. Dinker Pagare; Law and Practice of Income Tax; Sultan Chand & Sons.
2. Girish Ahuja and Ravi Gupta; An Elementary Approach to Income Tax & Sales Tax;
Bharat Publications.
3. H.C. Mehrotra; Income-tax Law and Accounts; Sahitya Bhawan; latest edition.
4. Mahesh Chandra & D.C. Shukla; Income-tax Law and Practice; Pragati Publications.
5. Singhania V.K and Monica Singhania; Students Guide to Income Tax; Taxmann
Publications Pvt. Ltd.; 44th Edition.

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