Income from House Property: 4 Questions and their Answers
Income is calculated under the Income Tax Act by aggregating various heads of income which have been enumerated in the Act. One of these components is income from house property, which is chargeable to tax under Section 22 of the Act. Section 22 states any property like buildings, or lands connected to it, which are owned by the assessee would be taxable at their annual value. The annual value is determined on the basis of the income accrued or deemed to accrue from the property owned by the assessee.
Here are 4 key issues which arise out of income from house property and their answers along with the relevant case law.
Whether income derived from house property can be taxable only in the hands of the legal owner of the property?
Short Answer: No.
Case: CIT vs. Podar Cement (P) Ltd. | Supreme Court | Cited 145+ times
Reasoning: The SC in this case ruled that for the purpose of taxation, the term 'owner' could not be interpreted in the strictest sense by restricting its meaning to only the 'legal owner' of a property. Giving a constructive interpretation to the term owner, the court opined that the income would be chargeable to tax in the hands of the person who received or was entitled to receive income from the house property in his or her own right, and not on behalf of the owner.
'One cannot reasonably and logically visualise as to when a person in actual physical control of the property realising the entire income and usufructs of the property for his own use and not for the use of any other person, having the absolute power of disposal of the income so received, should be held not liable to tax merely because a vestige of legal ownership or a husk of title in the long run may yet clothe another person with the power of a residual ownership when such contingency arises which is not a case even here.'
Can notional interest from interest free rent deposits be considered a part of income from house property?
Short Answer: No
Case: CIT vs. Moni Kumar Subba | Delhi High Court| Cited 97+ times
Reasoning: The Court ruled that to determine the 'fair rent' of a property, notional interest on interest free security deposit could not be added to the income derived from house property. Section 23(1)(a) uses the words 'the sum for which the property might reasonably be expected to let from year to year'. The language used indicates that the only the money received as rent and not the interest that may accrue to the landlord out of the deposit made by the tenant was contemplated to be added as income under this head. It was further held that in terms of tax legislation, the courts could not go beyond the letter of the law and read something extra into a provision that had not already been stipulated.
'The AO, having regard to the aforesaid provision is expected to make an inquiry as to what would be the possible rent that the property might fetch. Thus, if he finds that the actual rent received is less than the ‘fair/market rent’ because of the reason that the assessee has received abnormally high interest free security deposit and because of that reason, the actual rent received is less than the rent which the property might fetch, he can undertake necessary exercise in that behalf. However, by no stretch of imagination, the notional interest on the interest free security can be taken as determinative factor to arrive at a ‘fair rent’.'
Whether the income earned by the assessee by leasing out assets of business would be income from business or income from house property?
Short Answer: It would depend on specific facts of the case.
Case: Universal Plast ltd. Vs. CIT | Supreme Court | Cited 97+ times
Reasoning: The court considered various precedents on this issue and laid down the law as follows –
'(1) no precise test can be laid down to ascertain whether income (referred to by whatever nomenclature, lease amount, rents licence fee) received by an assessee from leasing or letting out of assets would fall under the head `Profits and Gains of business or profession'; (2) it is a mixed question of law and fact and has to be determined from the point of view of a businessman in that business on the facts and in the circumstances of each case including true interpretation of the agreement under which the assets are let out; (3) where all the assets of the business are let out, the period for which the assets are let out is a relevant factor to find out whether the intention of the assessee is to go out of business altogether or to come back and restart the same. (4) if only or a few of the business assets are let out temporarily while the assessee is carrying out his other business activities then it is a case of exploiting the business assets otherwise than employing them for his own use for making profit for that business; but if the business never started or has started but ceased with no intention to be resumed, the assets also will cease to be business assets and the transaction will only be exploitation of property by an owner thereof, but not exploitation of business assets.'
If income derived from leasing of business asset is characterised as income from house property, can depreciation be claimed on said asset?
Short Answer: No.
Case: CIT vs. New India Industries Ltd. | Gujarat High Court| Cited 39+ times
Reasoning: The court held that a business asset not being exclusively used for the purposes of the business or profession was not eligible for a claim of depreciation by the assessee. Hence, if the rent received from leasing out business asset was taken under the head of income from house property, it would be fairly obvious that the asset or building was not being used exclusively for the purpose of business or profession, and hence no claim of depreciation on it would be allowable.
'It is plain from the aforesaid provision that, in order to get deduction to depreciation, the assessee must be the owner of buildings, machinery, plant or furniture and secondly they must be used for the purpose of business or profession. In the case before us, the building is undoubtedly owned by the assessee but it cannot
be said that it was used by the assessee for the purpose of business. In this case, admittedly, the building was let out to a third party and it was used by such third party for its own business Such user cannot be said to be the user by the assessee for its own purpose. The second requirement of section 32 is not satisfied and hence the assessee was not entitled to deduction of depreciation on the building which was let to a third party.'
Authored by: Siddharth Sharma
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