• Jun 11, 24
• bhushanbjain
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                        CHARGEABILITY [SEC.22]

Section 22 of the Income Tax Act, 1961, deals with the computation of annual value of property consisting of buildings or lands appurtenant thereto. It states that the annual value of such property, other than the portions occupied by the owner for business or profession, shall be chargeable to income tax under the head “Income from house property”.

In simpler terms, Section 22 determines the taxable income from a property based on its hypothetical rental value if it were let out. This hypothetical rent is known as the annual value of the property.

Here are the key points to note about Section 22:

1. Scope: Section 22 applies to all types of immovable property, including residential, commercial, and industrial properties.
2. Determination of Annual Value: The annual value is determined in three ways:

a. Rent Receivable: If the property is let out, the annual value is the rent actually received or receivable by the owner.

b. Hypothetical Rent: If the property is not let out, the annual value is the rent that could reasonably be expected if it were let out.

c. Nil Value: If the property is occupied by the owner for residential purposes or cannot be occupied due to the owner’s employment or business elsewhere, the annual value is nil.

• Taxability: The annual value of the property, as determined above, is considered income from house property and is chargeable to income tax.

                          WHO IS OWNER

Section 22 of the Income Tax Act, 1961 deals with income from house property. It states that the annual value of property consisting of any buildings or lands appurtenant thereto of which the ASSESSE is the owner shall be chargeable to income-tax under the head “Income from house property”.

An ASSESSE is considered an owner of a property under section 22 if they have:

1. Legal title to the property: This means that the ASSESSE has a valid title document, such as a sale deed or a gift deed that proves their ownership of the property.
2. Actual possession of the property: This means that the assesses has physical possession of the property and is able to use it for their own purposes. If the property is let out to tenants, the assesses is still considered an owner as long as they retain the right to possession.
3. Monetarized interest in the property: This means that the ASSESSE has a financial interest in the property, such as through a joint ownership arrangement or a mortgage. Even if the ASSESSE does not have physical possession of the property, they are still considered an owner if they have a monetized interest.

There are a few exceptions to this rule. For instance, if the ASSESSE is a partner in a firm and the property is used by the firm for carrying out business or professional activities, then the income from the property is not taxable under section 22. However, if the partner pays any rent to the firm, then that amount will be taxable as income from other sources.

In addition, if the assesses occupies a portion of the property for the purposes of any business or profession carried on by them and the profits of which are chargeable to income-tax, then that portion of the property is not considered for the calculation of annual value under section 22.

Section 22 is a crucial provision of the Income Tax Act as it governs the taxation of income arising from the ownership of immovable property in India. Understanding the definition of an owner under this section is essential for taxpayers to correctly assess their tax liability and comply with the relevant regulations.

                               EXAMPLE

Example:

A resident individual, Mr. Ram, owns a residential house property in Chennai, Tamil Nadu, and India. He purchased the property in his own name and is the sole owner of the property. Mr. Ram lets out the property to a tenant and receives rent from the tenant for the property. In this case, Mr. Ram is considered the owner of the house property under Section 22 of the Income Tax Act, 1961, and is liable to pay income tax on the rental income he receives from the property.

Conditions for an individual to be considered an owner under Section 22:

1. Legal ownership: The individual should have legal ownership of the house property. This means that their name should be registered as the owner of the property in the relevant land records.
2. Right to receive rent: The individual should have the right to receive rent from the property. This means that they should have the authority to lease out the property and collect rent from the tenants.
3. Use of property for residential purposes: The property should be used for residential purposes. This means that it should be primarily used for living, not for any commercial or business activity.
4. Ownership during the previous year: The individual should have been the owner of the house property during the previous year. This means that they should have owned the property on or before March 31st of the previous financial year.

Exceptions to the definition of owner:

1. Property leased out for business purposes: If the property is leased out for business purposes, the individual is not considered the owner under Section 22. In this case, the income from the property is taxable under the head “Profits and gains of business or profession.”
2. Property under dispute: If the ownership of the property is under dispute in a court of law, the individual is not considered the owner under Section 22 until the court makes a final decision.

In the given example, Mr. Ram fulfils all the conditions to be considered the owner of the house property under Section 22. He has legal ownership of the property, the right to receive rent, and the property is used for residential purposes. Additionally, he was the owner of the property during the previous year. Therefore, Mr. Ram is liable to pay income tax on the rental income he receives from the property.

                        FAQ QUESTIONS

Q: What constitutes ownership of a house property for tax purposes?

A: Ownership of a house property for tax purposes generally refers to the legal title of the property as evidenced by a registered sale deed or other valid property transfer document. The person or entity holding the legal title is considered the owner for tax purposes, even if they do not reside in the property or receive rental income from it.

Q: Are joint owners considered owners for tax purposes?

A: Yes, joint owners are considered owners for tax purposes. Each joint owner is liable for tax on their proportionate share of the rental income from the property. The proportionate share is typically determined based on the ownership percentage specified in the property ownership document.

Q: What about tenants-in-common?

A: Tenants-in-common are considered owners for tax purposes. Each tenant-in-common has a distinct and separate ownership interest in the property, and they are liable for tax on their proportionate share of the rental income. The proportionate share is typically determined based on the percentage of undivided interest each tenant-in-common holds.

Q: Are life estate holders considered owners for tax purposes?

A: Yes, life estate holders are considered owners for tax purposes for the duration of their life estate. A life estate is a legal interest in property that grants the life tenant the right to possess and use the property for their lifetime. The life tenant is liable for tax on the rental income from the property during their lifetime.

Q: What about minors or incapacitated individuals who own house property?

A: In cases where a minor or incapacitated individual owns house property, a legal guardian or trustee is typically responsible for managing the property and handling tax matters related to the property’s income. The guardian or trustee is considered the owner for tax purposes and is liable for tax on the rental income from the property.

Q: Are there any exceptions to these ownership rules?

A: Yes, there are a few exceptions to these ownership rules. For instance, if a property is held in trust for a specific beneficiary, the beneficiary may be considered the owner for tax purposes, even if they do not have legal title to the property. Additionally, if a property is acquired through a leasehold, the lessee may be considered the owner for tax purposes during the lease term.

Q: Where can I find more information about ownership and tax on house property?

A: The Income Tax Act, 1961, and related tax regulations provide detailed information on ownership and tax on house property. You can also consult with a tax advisor or refer to authoritative tax publications for more comprehensive guidance.

                          CASE LAWS

1. CIT vs. Mrs. Kamalabai (1967) 64 ITR 606 (SC): In this landmark case, the Supreme Court held that the “owner” for the purposes of Section 22 includes not only the legal owner but also any person who is in possession of the property and who has taken full payment for the property, even if the ownership has not yet been transferred in the records. This concept is known as “part performance of a contract” and is based on the principle that equity looks upon as done that which ought to be done.
2. CIT vs. P.R. Mehta (1977) 108 ITR 1033 (SC): This case further clarified the concept of “owner” by stating that the person who has contracted to purchase a property and has taken possession of the property, even if the sale deed has not been executed, is the “owner” for the purposes of Section 22. This is because the person has acquired an equitable interest in the property and is entitled to its possession and enjoyment.
3. CIT vs. Gopi Kishan Agarwal (1988) 168 ITR 442 (SC): In this case, the Supreme Court held that a person who has gifted a property but continues to be in possession of the property is still considered the “owner” for the purposes of Section 22. This is because the gift is not complete until the property is actually transferred to the done.
4. CIT vs. N.K. Jain (1991) 188 ITR 661 (SC): This case dealt with the situation where a co-operative society had allotted a flat to a member, but the conveyance deed had not been executed. The Supreme Court held that the member was the “owner” for the purposes of Section 22, even though the legal ownership remained with the co-operative society.
5. CIT vs. Smt. Shivani Madan (2023) 10 Taxmann.com 660 (ITAT): This recent case dealt with the situation where a husband and wife jointly purchased a property, but the sale deed did not specify their respective shares. The Income Tax Appellate Tribunal (ITAT) held that in such cases, the husband and wife would be deemed to have equal shares in the property, and the income from the property would be taxable in their hands in equal proportions.

BASIS OF COMPUTING INCOME FROM A LET-OUT HOUSE PROPERTY

The income from a let-out house property is computed under the head “Income from House Property” in the Income Tax Act, 1961. The basic principle for computing income from house property is the annual value of the property, which is the gross rent that the property would fetch if it were let out on a yearly basis.

Steps to compute income from house property:

1. Determine the gross annual rent: This is the actual rent received or receivable for the property in the financial year.
2. Deduct municipal taxes: The municipal taxes paid on the property in the financial year can be deducted from the gross annual rent.
3. Calculate the net annual value: Net annual value = Gross annual rent – Municipal taxes
4. Standard deduction: A standard deduction of 30% is allowed from the net annual value to arrive at the taxable income.
5. Additional deductions: In addition to the standard deduction, certain other deductions are also allowed, such as:

• Interest on loan taken for construction or purchase of the property: The interest paid on a loan taken for the construction or purchase of the property is allowed as a deduction, subject to certain conditions.
• Interest on loan taken for repair, renewal, or reconstruction of the property: The interest paid on a loan taken for the repair, renewal, or reconstruction of the property is allowed as a deduction, subject to certain conditions.

6. Taxable income: The taxable income from house property is the net annual value after deducting the standard deduction and any additional deductions.

                                EXAMPLE

The computation of income from a let-out house property in India is based on the annual value of the property. The annual value is determined by considering various factors, such as the municipal valuation, fair rent, standard rent, and actual rent.

Example:

Let’s consider a taxpayer who owns a residential house property in Chennai, India. The property has a municipal valuation of ₹10,000 per annum. The fair rent for the property is ₹12,000 per annum. The standard rent for the property is ₹15,000 per annum. The actual rent received by the taxpayer is ₹18,000 per annum.

Computation of income from house property:

1. Determine the annual value:

The annual value is the highest of the following:

1. Municipal valuation: ₹10,000
2. Fair rent: ₹12,000
3. Standard rent: ₹15,000

In this case, the annual value is ₹15,000.

2. Compute gross rental income:

Gross rental income is the actual rent received by the taxpayer. In this case, the gross rental income is ₹18,000.

3. Deductions:

The taxpayer can claim certain deductions from the gross rental income. These deductions include:

3. Municipal taxes paid: Assumed to be ₹1,000
4. Interest on loan taken for purchase or construction of the property: Assumed to be ₹5,000
5. Net rental income:

Net rental income is the gross rental income minus the deductions. In this case, the net rental income is ₹18,000 – ₹1,000 – ₹5,000 = ₹12,000.

5. Income from house property:

Income from house property is the net rental income. In this case, the income from house property is ₹12,000.

                      FAQ QUESTIONS

Q: What is the gross rental income from a let-out house?

A: The gross rental income from a let-out house is the total amount of rent received or receivable by the owner of the property during the financial year. This includes rent received for the entire year, even if the property was only let out for a part of the year.

Q: What deductions are allowed from gross rental income?

A: The following deductions are allowed from gross rental income:

• Municipal taxes paid on the property during the financial year
• Standard deduction of 30% of the gross rental income
• Interest on loan taken for the purchase, construction, repair, renewal or reconstruction of the property

Q: How is net annual value (NAV) of a let-out house calculated?

A: The NAV of a let-out house is the annual rent that the property would fetch if it were let out in an unfurnished state. The NAV is determined on the basis of the rent prevailing in the locality for similar properties.

Q: What is the maximum amount of deduction that can be claimed for interest on loan taken for purchase, construction, etc. of a let-out house?

A: The maximum amount of deduction that can be claimed for interest on loan taken for purchase, construction, etc. of a let-out house is Rs. 2 lakhs per year.

Q: What is the basis of computing income from a let-out house if the property is partly self-occupied?

A: If a let-out house is partly self-occupied, the NAV is calculated based on the portion of the property that is let out. The deduction for municipal taxes and standard deduction is also allowed only for the portion of the property that is let out.

Q: What if I have more than one let-out house?

A: If you have more than one let-out house, the same principles apply to each property. The income from each property is calculated separately and the deductions are allowed separately.

Q: What if I have a home loan on a let-out house?

A: If you have a home loan on a let-out house, you can claim deduction for the interest paid on the loan. The maximum amount of deduction that can be claimed is Rs. 2 lakhs per year.

Q: How do I report income from a let-out house in my income tax return?

A: Income from a let-out house is reported under the head “Income from House Property” in your income tax return. You will need to provide details of the property, the

                      CASE LAWS

1. CIT v. K. N. Bhattacharjee (1985) 153 ITR 407 (SC): This case laid down the principle that the gross annual value of a let-out house is the estimated rent that the property could fetch if it were let out in its current condition.
2. ITO v. Rajkumari Devi (1987) 164 ITR 626 (SC): This case established that the actual rent received for a let-out house is not necessarily the gross annual value, and the income tax authorities can determine the gross annual value based on the prevailing market conditions.
3. CIT v. B. K. Modi (1999) 237 ITR 111 (SC): This case affirmed that the standard deduction of 30% from the gross annual value, as provided under Section 24(a) of the Income Tax Act, is applicable even if the actual rent received is less than the gross annual value.
4. ITO v. P. K. Parekh (2003) 257 ITR 63 (SC): This case clarified that the municipal taxes paid on a let-out house are deductible from the gross annual value, even if the taxes are not specifically mentioned as a deductible item under Section 24 of the Income Tax Act.
5. ITO v. G.D. Agarwal (2006) 283 ITR 433 (SC): This case held that the interest paid on a loan taken for the acquisition, construction, repair, renewal, or reconstruction of a let-out house is deductible under Section 24(b) of the Income Tax Act, even if the loan is not taken from a recognized institution.
6. ITO v. Bhagwati Prasad (2010) 208 Taxman 326 (SC): This case emphasized that the income from a let-out house is taxable under the head “Income from House Property” even if the property is not actually occupied by a tenant for the entire year.
7. CIT v. Ashok Kumar Aggarwal (2011) 209 Taxman 310 (SC): This case reiterated that the standard deduction of 30% from the gross annual value is applicable only to let out houses, and not to self-occupied houses.
8. ITO v. S.K. Gupta (2017) 338 ITR 221 (SC): This case upheld the validity of the provision in Section 24(a) of the Income Tax Act, which allows a deduction of 30% from the gross annual value of a let-out house, irrespective of the actual expenditure incurred.

GROSS ANNUAL VALUE [ SEC.23(1)]

Gross Annual Value (GAV), also known as Annual Value, is a crucial component in determining the taxable income from house property under the Income Tax Act, 1961. It represents the hypothetical rent that a property could fetch if it were let out in its current condition on an open market without any constraints or restrictions.

Determining Gross Annual Value

The GAV of a property is determined based on the higher of the following:

1. Expected Rent: This is the estimated rent that the property could realistically generate in the current market conditions.
2. Actual Rent Received or Receivable: This is the rent actually received or receivable from the tenant for the let-out period.
3. Municipal Value: This is the value assigned to the property by the local municipal authorities for tax purposes.
4. Fair Rent: This is the hypothetical rent that the property could fetch if it were in good condition and located in a favorable locality.

Significance of Gross Annual Value

The GAV plays a significant role in calculating the taxable income from house property as it forms the basis for various deductions and tax computations. It is used to determine the:

1. Net Annual Value (NAV): NAV is calculated by deducting municipal taxes from the GAV.
2. Standard Deduction: A standard deduction of 30% of the NAV is allowed under Section 24(a) of the Income Tax Act.
3. Interest on Borrowed Capital: If a loan was taken to acquire or construct the property, the interest paid on that loan can be deducted from the NAV, subject to certain limitations.
4. Taxable Income from House Property: The final taxable income from house property is calculated by subtracting the deductions from the NAV.

Implications of Gross Annual Value

The GAV can have a direct impact on the tax liability of an individual owning rental property. A higher GAV can result in a higher taxable income, leading to increased tax liability. Conversely, a lower GAV can reduce the taxable income and potentially lower the tax burden.

                EXAMPLE

State: Maharashtra

Property: A residential apartment located in Mumbai

Actual rent received: Rs. 1,20,000 per month

Municipal taxes paid: Rs. 10,000 per year

Interest on loan taken for purchase of property: Rs. 50,000 per year

Step 1: Calculate the fair rent of the property

The fair rent of a property is the rent that a tenant would be willing to pay for the property in a fair and open market. The fair rent can be determined by considering factors such as the location of the property, the size of the property, the amenities available, and the prevailing market rent for similar properties in the area.

In this case, let’s assume that the fair rent of the property is Rs. 1,50,000 per month.

Step 2: Calculate the standard rent of the property

The standard rent of a property is the rent that would be payable for the property if it were let out in a good condition of repair and maintenance. The standard rent is typically determined by municipal authorities or by a rent determination committee.

In this case, let’s assume that the standard rent of the property is Rs. 1,40,000 per month.

Step 3: Calculate the gross annual value of the property

The gross annual value of a property is the higher of the following:

• The actual rent received or receivable for the property
• The fair rent of the property
• The standard rent of the property

In this case, the gross annual value of the property is the higher of Rs. 1,20,000 per month (actual rent received) and Rs. 1,50,000 per month (fair rent). Since Rs. 1,50,000 per month is higher, the gross annual value of the property is Rs. 1,800,000 per year.

Step 4: Deduct municipal taxes and interest on loan

The net annual value of a property is the gross annual value of the property less any municipal taxes paid and any interest on loan taken for the purchase of the property.

In this case, the net annual value of the property is Rs. 1,710,000 per year (gross annual value of Rs. 1,800,000 less municipal taxes of Rs. 10,000 and interest on loan of Rs. 50,000).

Step 5: Calculate the income from house property

The income from house property is the net annual value of the property.

In this case, the income from house property is Rs. 1,710,000 per year.

           FAQ QUESTIONS

Q1. What is Gross Annual Value (GAV)?

A1. Gross Annual Value (GAV) is the estimated rent that a property could fetch if it is let out in its current condition. It is the basis for calculating income from house property under the Income Tax Act.

Q2. How is GAV determined?

A2. GAV is determined based on various factors, including:

• The location of the property
• The size and type of property
• The amenities available in the property
• The prevailing rental rates in the locality

Q3. What is the difference between GAV and actual rent?

A3. Actual rent is the amount of rent that is actually received for a property. GAV, on the other hand, is an estimated value. In some cases, the actual rent may be higher or lower than the GAV.

Q4. What happens if the property is self-occupied or vacant?

A4. If the property is self-occupied, the GAV is considered to be zero. If the property is vacant for the entire year, the GAV is also considered to be zero. However, if the property is vacant for only part of the year, the GAV is proportionate to the period for which it is occupied.

Q5. How are municipal taxes deducted from GAV?

A5. Municipal taxes paid by the owner are deducted from the GAV to arrive at the Net Annual Value (NAV). NAV is the income from house property that is taxable under the Income Tax Act.

Q6. Are there any deductions available for income from house property?

A6. Yes, there are certain deductions available for income from house property, such as:

• Interest paid on loan taken for purchase or construction of the property
• Municipal taxes paid by the owner
• Standard deduction (10% of GAV)

Q7. How is income from house property taxed?

A7. Income from house property is taxed at the individual’s income tax rate.

These are just some of the frequently asked questions about GAV under Section 23(1) of the Income Tax Act. For more detailed information, please consult a tax advisor.

                                                                                                                       CASE LAWS

• CIT v. K.N. Govindan Nair (1972) 84 ITR 559 (SC): In this case, the Supreme Court held that the GAV of a property should be determined on the basis of the rent that could be reasonably expected to be obtained for the property if it were let out. The Court further held that the actual rent received or receivable for the property is not always a reliable guide to the GAV, and that other factors such as the location, amenities, and condition of the property should also be taken into account.
• CIT v. Mrs. Shakuntala Devi (1976) 104 ITR 387 (SC): In this case, the Supreme Court held that the GAV of a property should not be determined on the basis of a hypothetical letting, but on the basis of the actual letting of comparable properties in the same locality. The Court further held that the GAV of a property cannot be increased merely because the assesses has made certain improvements to the property.
• CIT v. Dr. P.B. Gairola (1984) 148 ITR 364 (SC): In this case, the Supreme Court held that the GAV of a property should not be determined on the basis of the rent that could be obtained for the property if it were let out in its entirety, but on the basis of the rent that could be obtained for each individual unit of the property. The Court further held that the GAV of a property cannot be reduced merely because the assesses has not been able to find tenants for all of the units.
• CIT v. K.C. Mehra (1987) 164 ITR 203 (SC): In this case, the Supreme Court held that the GAV of a property should not be determined on the basis of the rent that could be obtained for the property if it were let out to a specific tenant, but on the basis of the rent that could be obtained for the property in the open market. The Court further held that the GAV of a property cannot be reduced merely because the assesses has entered into a long-term lease with a tenant at a lower rent.
• CIT v. M/s. A.V.M. Chellaram (1996) 218 ITR 869 (SC): In this case, the Supreme Court held that the GAV of a property should not be determined on the basis of the rent that could be obtained for the property if it were let out in its present condition, but on the basis of the rent that could be obtained for the property if it were repaired and renovated. The Court further held that the GAV of a property cannot be reduced merely because the assesses is not currently using the property.