PRINCIPLES OF TAXATION LAW

UNIVERSITY INSTITUTE OF LEGAL STUDIES

PANJAB UNIVERSITY , CHANDIGARH
2021-2022

PRINCIPLES OF TAXATION LAWS

TOPIC- INCOME FROM HOUSE PROPERTY

SUBMITTED TO :
Ms. KRITI

SUBMITTED BY:
SIMRANJEET KAUR
ROLL NO. 39/18
B.A. LL.B.
SEMESTER - 10th

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ACKNOWLEDGEMENT

I would like to express my sincere gratitude to my teacher Ms. Kriti for

providing her able guidance throughout the execution and completion
of this project. I would also like to thank her for providing me with an
opportunity to further explore the topic – ‘INCOME FROM
HOUSE PROPERTY’.

I would also like to be thankful to the editors of the online resources

that I have consulted. I would also like to thank my friend Chahat
Sharma for helping me throughout the completion of project.

SIMRANJEET KAUR

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TABLE OF CONTENTS

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What is the meaning of “Income from House Property”?

The Income Tax Act has divided the income received by an individual in various heads for simplification
of tax computation and Income from House property is one of them. The income earned by the ownership
of a property is said to be Income from House property. House, building, office, or shop can be termed as
house property. All the properties are taxable be it commercial or residential. If the property is used for
residential purpose it is taxed under income from house property. On the other hand if the property is used
for business or profession then it is considered as income from business or profession.

Earlier it was just Section 9 in the 1922 Act which dealt with the taxability of ‘income from house
property’. Sections 22 to 27 of the Income Tax Act, 1961 provide for taxation of income from house
property. It is actually Section 9 of the Income Tax Act, 1922 which has been divided up and redrafted to
form six sections (Ss. 22-27) in the 1961 Act.

SECTION 22 – CHARGEABILITY

A house property is taxable under this head if following conditions are satisfied:

1) The property should consist of building or land appurtenant thereto;

2) The assessee should be owner of the property;

3) It should not be used by the assessee for his own business or profession

Unless all the aforesaid conditions are satisfied, the income from property is not chargeable
to tax under the head ‘Income from House property’.

Income from property is one of the most important heads of income under the Act. The tax
payers have been keen to know about the exemptions and deductions available to them on
repayment of interest and principal of the loan obtained to purchaser the house property, if
that house property is let out or self-occupied.

The annual value (AV) of the property of which the assessee is the owner is chargeable to tax
under the head “house property”. It is imperative to note though, that the purpose of
occupation is also a determinant.

Major Conditions for Chargeability are as follow :

1) The property should consist of building or land appurtenant thereto
“Building” means a structure made up of any material (wood, mud, stones, bricks or
concrete) and which can be used as a dwelling house, store house, office, factory, dance
hall, music hall, stadium, theatre or swimming pool. Some important points are as follow:
 A structure is building even if it is used for temporary purpose.

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 Roof is not always necessary for a structure to be building as it depends upon the use
for which the structure is to be used. If it is to be used as stadium or swimming pool,
roof is not required whereas in other cases, roof is important.
 An incomplete structure without a roof or without doors cannot be called as building.

“Land appurtenant thereto” – Appurtenant means attached to that building or connected with
the building. Therefore, any land which is attached to the building is also covered under
section 22. The land attached to residential building may be in the form of path connecting
that building to the street, compounds, courtyards, backyards, stable, cattle shed etc.
However, the land attached to non- residential building may be in the form of path
connecting that building to the road, or connecting one department to other department,
parking space etc.

2) The assessee should be the owner of the property

The meaning given to the word "owner" in Section 22 must not be such, which makes the
provision capable of being employed as an instrument of oppression. This implies that the
meaning accorded to the term must be one which is not contrary to the principles underlying
the Income-Tax Act. Hence, for the purpose of Section 22, the owner must be that person
who can exercise the rights of the owner, not on the behalf of the owner but in his own right.
An owner does not mean only a legal owner i.e., registered owner of the house property.
However, it also includes a Deemed owner.1

Section 27- Deemed Ownership : Income from house property is taxable in the hands of
its owner. However, in the following cases, legal owner is not considered as the real owner
of the property and someone else is considered as the deemed owner of the property to pay
tax on income earned from such house property:
 An individual, who transfers the house property to his spouse or minor child without
adequate consideration, not being a transfer in connection with an agreement to live
apart, or to a minor child not being a married daughter, shall be deemed to be the
owner of the house property so transferred [Sec 27(1)].
 The holder of an impartible estate shall be deemed to be the individual owner of all
the properties comprised in the estate. An impartible estate is a property which

1
Income Tax Act,1961, Sec 27.

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cannot be divided and to which an assessee succeeds under law e.g., since a temple
since a temple cannot be divided so any family member succeed to it under law is
deemed owner of that temple [Sec 27(2)].
 A member of a company or co-operative society or association of persons to whom
a building or part thereof is allotted or leased under a house building scheme shall be
deemed to be the owner of that building or part thereof [Sec 27(3)].
 A person who acquires actual physical possession of an immovable property under
section 53A of the Transfer of Property Act, 1882 shall be deemed to be the owner
of that property even if it is not registered in his name [Sec 27(4)].
In the case of Sushma Rani Bonsai v. CIT 2, it was observed that there should be
written agreement for transfer of an immovable property between buyer and seller
as per section 53A of TPA,1882 and the buyer should have paid a part of the
consideration and should be ready to pay remaining consideration. Here the
important fact is that the purchaser is ready to make payment whenever the payment
becomes due.
 A person who acquires a right in a building or part thereof under section 269UA(f)
shall be deemed to be the owner of that building or part thereof. This section talks
about lease for 12 years where the period of 12 years may be fixed initially or after
extension [Sec 27(5)].
Exception: In the following cases, lessee would not be deemed owner of the house
property:
(i) if original lease period is less than one year,
(ii) if original lease is from month to month.

3) It should not be used by the assessee for his own business or profession

For a house property to be taxable, it should not be used by the assessee for his own business
or profession such as office, factory, godown, dance hall, music hall, theatre, swimming pool
or stadium. Therefore, if it is used by the assessee for himself then it should be used for
residential purpose and if it is let out then it can be used by the tenant for residential purpose
or for business or profession i.e. commercial purpose.

2
(2007) 165 Taxman 145 (Del) (Mag.).

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In CIT vs. Delhi Cloth and General Mills Ltd.3, it was held where residential quarters
situated in the factory campus were given to employees by the assessee at nominal rent, the
purpose of letting the residential quarters is to run the business efficiently and smoothly.
Therefore, the annual value will not be chargeable to tax under this head of income under
section 22 and rent from employees is business income.
In CIT vs. National Newsprint and Paper Mills 4, was held where a few rooms in the
factory were let out by the company to Government at nominal rent for locating a branch of
nationalized bank, post office, police station, railway station quarters for carrying on its
business efficiently and smoothly, it was held that as letting of was incidental to business of
the company, therefore annual value will not be chargeable to tax under this head of income
and rent is business income of the company.

DETERMINATION OF ANNUAL VALUE

ANNUAL VALUE WHERE THE PROPERTY IS LET OUT FOR THE WHOLE YEAR
(SECTION 23(1))
In case of let out House Property, Gross Annual Value is: (a) Reasonable Expected Rent or
(b) Actual rent received or receivable by the assessee, whichever is higher.
Reasonable expected rent is (a) Municipal value or (b) Fair rent, whichever is higher subject
to the maximum of Standard rent if rent Control Act is applicable.

Municipal value – It is the value as assessed by the local authority for imposing municipal
taxes. In the case of Clive Buildings Cola Ltd. v. CIT 5, it was observed the taxes including
service taxes (fire tax, conservancy tax, education, water tax, etc.) levied by any municipal
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. In C.I.T v. R Venugopala Riddiar 6, it was observed that where the
property is situated outside the country taxes levied by local authority in that country are

3
(1966) 59 ITR 152( P& H)
4
(1978) 114 ITR 388 (MP).
5
(1989) 44 Taxman 160.
6
(1965) 58 ITR 439 (Mad.).

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deductible in deciding the annual value of the property.

Fair rent – It is the rent which a similar property situated in similar locality can fetch.

Expected rent - The sum for which the property might reasonably be expected to be let out
from year to year.
Standard rent - It is fixed under the Rent Control Act where a higher rent than the standard
rent cannot be expected by the owner.
Actual rent received or receivable by the assessee does not include unrealized rent and
rent for the vacant period.

Unrealized rent – Rent which could not be realized by the assessee because of some dispute
with the tenant is known as unrealized rent. It is to be deducted from the annual rent if
conditions laid down in Rule 4 of Income Tax Rules, 1962 are fulfilled:

 If tenancy is bona fide.

 The tenant is not occupying any other property of the assessee.
 All the reasonable steps had been taken by the assessee to get the house property
vacated.
 All the reasonable steps had been taken by the assessee to institute legal
proceedings for recovery of rent.
Rent for the vacant period – If the property remained vacant for some time during the
current previous year, the rent of the vacant period is to be reduced from the annual rent.

POSSIBILITIES GROSS ANNUAL VALUE OF LET OUT

HOUSE PROPERTY
When actual rent received or receivable is less Actual rent received or receivable by the
than Reasonable expected rent only due to assessee
vacancy
When actual rent received or receivable is less Reasonable expected rent – Loss due to
than Reasonable expected rent partly due to vacancy
vacancy and partly due to other factors
When actual rent received or receivable is less Reasonable expected rent
than Reasonable expected only due to factors
other than vacancy

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The Hon’ble Supreme Court in case of Chennai Properties and Investments Ltd. v. CIT7
observed that income from letting out of properties by a company, whose main object as per
its memorandum of association is to acquired and let out of properties is taxable as its
business income under the head “Profits and gains of business or profession.”

ANNUAL VALUE WHERE PROPERTY IS SELF-OCCUPIED OR

UNOCCUPIED [SECTION 23(2)]
(a) Where a property is used by the assessee throughout the previous year for his (or
family member) own residential purpose Or

(b) Where such property could not be occupied by the assessee throughout the previous year
for his (or family member) own residential purpose because either due to employment or
business or profession, he is residing at some other place and no other benefit is derived
from such property,
- then Gross Annual Value would be NIL.

Concession for two Houses only: Where the assessee has occupied more than two houses
for the purposes of residence for himself and family members, he has to make a choice of
two houses only in respect of which he would like to claim exemption. Other self-occupied
houses will be treated as if they were let out and their annual value will be determined in the
same manner as we have discussed in the case of let out property.
 Annual Value would be takes as Nil.
 It is imperative that the property is self-occupied or unoccupied for the whole year.
 This benefit is for two houses.
 This benefit is for individual/HUF only.
 No deduction is allowed for Municipal Taxes for such property.

In CIT v. Hariprasad Bhojnagarwala 8, 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 individual related to each other i.e., a

7
(2015) SC.
8
(2012) Guj.

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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 consists of artificial persons, it cannot be
said to be a fictional entity. It was observed that since singular includes plural, the word
“owner” would include “owners” and the words “his own” used in section 23(2) would
include “their own”. Therefore, the court held that the HUF is entitled to claim benefit of
self-occupation of house property under Section 23(2).

ANNUAL INCOME WHERE THE PROPERTY IS PARTLY LET OUT

AND PARTLY SELF- OCCUPIED DURING THE PY (SECTION 23(3))
(a) Property let out partially:
When a portion of the house is self-occupied for the full year and a portion is self-occupied
for whole year, the annual value of the house shall be determined as under:
(i) From the full annual value of the house the proportionate annual value for self-occupied
portion for the whole year shall be deducted.
(ii) The balance under (i) shall be the annual value for let out portion for a part of the year.

(b) House let out during any part of the previous year and self-occupied for the remaining
part of the year: In this case the benefit of Section 23(2) is not available and the income will
be commuted as if the property is let out.

(c) Self-occupied House remaining vacant: If the assessee has reserved any two houses
(owned by him) for his residence or he is owner of two houses, one of which is meant for
his own residence but could not be occupied by him for residential purposes in the previous
year owing to the fact that he had to live at some other place in a house not belonging to
him, then he can claim non-occupation or vacancy allowance during the previous year for
the period during which house remained vacant. The reason for his living at a different place
might be for business or professional or for a standard employee due to transfer etc. The
annual value of the house, which remained vacant in this circumstance, shall be nil.
The above mentioned concession will be granted to the assessee only if he has neither let
out the said house nor has derived any benefit from it during the period for which it remained
vacant. Only deduction for interest on borrowed capital upto a maximum of Rs. 2,00,000 is
allowed if the following conditions are satisfied:
(a) Capital is borrowed for Purchase/Construction of property;

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(b) Capital borrowed on or after the 1st day of April 1999 and such acquisition or
construction is completed within 5 years from the end of the financial year in which capital
was borrowed.

ANNUAL INCOME DEEMED TO BE LET-OUT PROPERTY (SECTION 23(4))

Section 23(4) states that if the house property is self-occupied for a part of the previous
year and let- out for the remaining previous year then the Gross Annual Value of the
property:
(a) for the let-out period will be determined according to section 23(1).

(b) for the self-occupied period will be determined according to section 23(2)

ANNUAL VALUE NATIONAL INCOME FROM HOUSE PROPERTY HELD AS

STOCK IN TRADE (SECTION 23(5))
Annual value of house property held by a person as stock in trade shall be taken as NIL if
following conditions are satisfied:
(a) The property (consisting of buildings or land appurtenant thereto) is held as stock in
trade by the owner of property;
(b) The property (or any part of property) is not let out during whole or any part of the
previous year.
This concession is available only for 2 years from the end of the financial year in which
certificate of construction of the property is obtained from the competent authority.

DEDUCTIONS FROM NET ANNUAL VALUE (SECTION 24)

There are two deductions from annual value. They are:

(a) Standard deduction: 30% of NAV; and
(b) Interest on borrowed capital.

Standard deduction: 30% of NAV

(a) This is not available when the annual value is NIL.
(b) This is a flat deduction irrespective of the actual expenditure incurred.

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Interest on Borrowed Capital:

(a) Interest on borrowed capital for purchase/construction/ repair/ renewal/ reconstruction
is allowed as a deduction from gross annual value.
(b) Pre-construction period interest is also allowed as a deduction. Pre-construction period
refers to the period starting from the date of taking loan and ending with the end of financial
year immediately preceding the previous year in which construction is completed (or the
date of repayment of loan; whichever is earlier). This can be claimed for a period of 5 equal
instalments starting from the year of acquisition / completion of construction.
(c) No deduction shall be made under the second proviso unless the assessee furnishes a
certificate, from the person to whom any interest is payable on the capital borrowed,
specifying the amount of interest payable by the assessee for the purpose of such acquisition
or construction of the property, or conversion of the whole or any part of the capital
borrowed which remains to be repaid as new loan.

Self-occupied properties: Since the value is nil, there is no Standard deduction available. In
case the capital is borrowed :

a) For repairs / renewals/ reconstruction, the maximum allowable deduction on account of

interest is limited to INR 30,000.
b) For acquisition / construction, the deduction would depend on whether the loan was
taken prior to or later
(i) In case capital borrowed prior to 1.4.99; the maximum allowable deduction on
account of interest is limited to INR 30000;
(ii) In case capital borrowed post 1.4.99; as long as acquisition o r
construction was completed within 5 years from the end of the FY in which
the capital was borrowed, and the assessee is in possession of a certificate on
interest payable from the lender, the maximum allowable deduction on
account of interest is limited to INR 2,00,000.Where the assessee has opted
for two houses to be treated as self-occupied, the combined total deduction of
the amount of interest given above shall in aggregate remain maximum to Rs.
30,000 or Rs. 2,00,000 as the case may be.

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INADMISSIBLE DEDUCTION (SECTION 25)

Interest under the Act, which is payable outside India, shall not be allowed as a deduction,
if tax has not been deducted from such interest and there is no person in India who could be
treated as an agent.

HOUSE PROPERTY JOINTLY OWNED BY TWO OR MORE

PERSONS [SECTION 26]

Where two or more persons jointly own a house property consisting of buildings or land
appurtenant thereto then such persons are known as co-owners. Further, where respective
shares of co-owners are:
(a) definite and ascertainable then such co-owners shall not be assessed as AOPs but the
proportionate share of each co-owner in the income from house property as calculated in
accordance with sections 22-25 shall be included in his Total Income.
(b) not definite and ascertainable then each co-owner shall be deemed to have equal share in
the house property. Hence, proportionate share of each co-owner in the income from house
property as calculated in accordance with sections 22-25 shall be included in his Total
Income.

HOUSE PROPERTY INCOMES – EXEMPTED FROM TAX

There are certain cases where the income from the house property is tax-free. They are
neither taxable nor included in the total income for taxation. The income that are exempted
from tax are described as below:
1. The revenue generated from the buildings in and around the agricultural land that

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forms a part of agricultural income is exempted from tax.9

2. Income from property confined to local authorities is tax exempted.10
3. House property income of a political party is free from tax.
4. Revenue earned from a property belonging to an approved scientific research
association is exempted from tax [Sec 10(21)].
5. Property income of educational organizations, medical institutions are free tax [Sec
10(23C)].
6. Income from property subjected to charitable or religious institutions are free from tax
[Sec 11].

COMPOSITE RENT

Sometimes owner charges rent form tenant not only for the house property but also as service
charges/hire charges for various facilities, plants, machinery etc. provided with the house.
Such total rent is known as composite rent. It can be of two types:
(a) Composite rent which include rent for house property and service charges for various
facilities provided along with the house such as lift, gas, etc. then such rent will be split up
and part of the rent attributable to house property shall be income under this head of income
and remaining part of composite rent received for rendering services shall be assessable as
income from other sources.
(b) Composite rent which includes rent for house property and hire charges for plant,
machinery belonging to owner then composite rent may or may not be separable.
Where it is separable – Where letting of property is separable from letting of other assets
like plant, machinery and furniture and rent from house property is separable from hire
charges for machinery, plant or furniture then rent for house shall be taxable under the head
“Income from House Property” and remaining rent i.e., hire charges would be taxable under
head “Profit and Gains of Business or Profession” or “Income from other sources”.
Where it is not separable – Where letting of property is not separable from letting of other
assets like plant, machinery and furniture and rent from house property is not separable

9
Income Tax Act, 1961, s. 27.
10
Id. at s.10(20).

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from hire charges for machinery, plant or furniture then rent for house shall be taxable under

this head and remaining rent i.e., hire charges would be taxable under head “Profit and Gains

of Business or Profession” or “Income from other sources” and not under the head “House

Property”.

CONCLUSION

Income from the house property is one of the major source of income to be taxed
under the provisions of the Income tax Act, 1961. Different provisions of the Act –
Section 22 to 27 deals with the taxation of house property. Like any other sources of
tax, property tax revenues have been a part in funding the development of our
country. But by ignorance or deliberately some of them escape from the obligation
to pay tax. Computerized register of properties and taxpayer helps to introduce online
payment of tax. This helps in both avoiding the interface between taxpayer and
collector and ensuring of tax payments.

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REFERENCES

1. Dr. Vinod K. Singhania and Kapil Singhania, Direct Taxation: Law and Practice
of Income Tax – Professional Edition as amended by Finance Act 2019 (Taxmann,
New Delhi, 2019).
2. Dr. Jyoti Rattan, Taxation Laws (Bharat Law House, New Delhi, 11thedn. 2019)
3. https://tax2win.in/guide/house-property
4. https://blog.ipleaders.in/section-24-of-income-tax-act-1961/
5. https://taxadda.com/deduction-of-interest-section-24b-income-tax-
act/#:~:text=Section%2024b%20of%20income%20tax,basis%2C%20not%20on%2
0paid%20 basis
6. https://incometaxindia.gov.in/tutorials/12.%20income-from-house-property.pdf
7. https://taxguru.in/income-tax/taxation-income-house-
property.html#:~:text=It%20is%20the%20notional%20income%20from%20the%2
0house%2
0property%20that%20is%20taxed.&text=The%20annual%20value%20of%20any,'i
ncome%2 0from%20house%20property'.

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