Monday 22 September 2014

Understanding Income from House Property: Vol – II.


In our part – I of House Property income ( link provided at the end of the article) we had  discuss the section with latest case laws.  In continuation given below here more recent judgments in  respect of house property income.

·         
Annual Value : The A.O. being not satisfied with rental income shown by assessee, deputed an Inspector to determine  market rate of rent, who reported a higher rent. Without giving assessee opportunity to cross examine inspector, the A.O. determined higher rent by adding notional interest on the security deposit. The CIT(A) directed A.O. to conduct inquiry, but he reported that there was no requirement in his remand report. The Tribunal held notional interest on interest free Security deposit cannot be a determining factor to arrive at fair rent. When despite directions from CIT(A), the A.O. did not choose to determine market rental value of property, rental income offered by assessee was to be treated as Annual letting Value of property. Refer, Dy.CIT .v. Diven Dembla, 145 ITD 377.

·         Notional Rent : Assessee had let out its two properties and received rent. From same lessees assessee had also  received interest free deposits. A O held that actual rent charged by assessee was concessional rent in  view of interest free deposit and, thus, notional interest on interest free deposits had to be added in   rental income because same was embedded in rent negotiated.CIT(A) has confirmed the addition.   Before the Tribunal the assessee contended that Municipal valuation of both properties which was  filed first time before the Tribunal was less than value of actual rent received. Tribunal held that since   the said documents were very vital documents and were not available before A.O. or CIT(A),the matter was restore back for reconsideration. Refer, Sushre Trading Ltd. .v. ITO, 60 SOT 55.    
Assessee received the possession of property in December 2005.Assessee took three months to complete the furniture work and the property was let out from April 2006. AO held that as the property was in possession of the assessee, the provisions of section 23(1) were attracted and annual value of the property was deemed to be the income of the assessee. Tribunal held that where on account of interior work being carried out during the year the property could only be leased out from the next financial year , no notional rent could be added as the income of the assessee in the current year.(ITA no 4032/Mum/2009 dt 25-05- 2012 Bench “F’). Refer, Bhawanji Kunverji Haria v. DCIT, BCAJ–September-P. 28(Mum.)(Trib.).
It is open to the Assessing authority to take note of the amount of advance paid which gives an indication of fair rent of property that it fetches in market. However, the addition of notional interest on the interest free security deposit to the rent agreed upon is not permissible in law. Refer, CIT v. Shastha Pharma Laboratories P. Ltd, 216 Taxman 73.  
Income from house property-Annual value- Annual Letting Value has to be determined as per market rent & not municipal rateable value if property is not subject to “bona fide” rent control. Refer, Woodland Associates Pvt. Ltd v. ITO, Mumbai ITAT.
·         Head of Income: Assessee, a hundred per cent subsidiary, constructed a factory shed with funds borrowed from holding  company .Same was let out to holding company immediately after construction. Assessee neither paid  any interest to holding company, nor used shed for its own business purpose. Assessee showed rental  income as business income and claimed depreciation. Since business asset was created by assessee  was only for purpose of holding company and not for use of assessee itself, it could not be said that business asset was given on rent for exploitation by way of commercial activities and, hence, rental  income was to be treated as income from house property. Refer, Perfect Scale Company (P.) Ltd. .v. Dy.CIT, 60 SOT 255.

In the case of J.B. Estates v. ITO, 142 ITD 355(Hyd.)(Trib.), it was held that income from lease property is rental income and not business income.

However, in the case of Mahesh Investments v. ACIT, 357 ITR 42 (Karn.)(HC), the ITAT held that lease from commercial property is business income.

Renting of office premises to a single party was assessable as income from house property. Refer, Anik Financial Services (P.) Ltd. v. ITO, 144 ITD 151.

The Court held that rental income from unsold flats in the hands of builder/developer, which are shown as ‘business assets’ should be assessed under the head Income from house  property and not as business income. Refer, New Delhi Hotels Ltd. v. ACIT, ITA Nos. 238, 238 & 240 of 2013 dt.17-05-2013.

Two consecutive licence agreements for eleven years and ten years being different and not a camouflage to conceal a licence of twenty one years or to circumvent the provisions of s. 27(iiib) r/w s.269UA(f) which were not there when the first agreements was entered into, assessee’s income in the form of rent and compensation from sub licencees was therefore assessable as business income and not as income from house property. Appeal of department was dismissed . Refer, CIT v. Pelican Investments (P) Ltd, 79 DTR 474.

·         Interest : Prepayment charges for closure of loan is allowable as deduction. Refer, Windermere Properties (P.) Ltd. v. Dy.CIT, 58 SOT 167 (Mum.)(Trib.).

The assessee claimed deduction against the rental income of Rs. 10,49,604 on account of interest paid to the bank on borrowed capital, under the head “Income from house property”. the Assessing Officer disallowed the claim. The Commissioner (Appeals) upheld this. On appeal the Tribunal held that admittedly, the total interest paid by the assessee with her husband on the borrowed loans during the year under consideration was Rs.10,39,604 out of which deduction of Rs. 5,14,802 had been allowed in the hands of the husband. When the rental income from the individual flats owned by the assessee and her husband had been included in their respective hands, deduction on account of the interest paid on borrowed capital utilised for the purchase of the flat was to be allowed in equal proportions in the hands of the assessee and her husband. Refer, Gurudas Mann v. Dy. CIT, 21 ITR 57 (Chandigarh)(Trib.).

·         Partnership: Property let out to partnership firm where the assessee was partner, income from house property which was used in the business carried out in partnership firm which the assessee was a partner would qualify for the exemption provided under section 22.Tribunal relied on CIT v. Rabindranth Bhol (1995) 211 ITR 799 (Orissa)(HC)(ITA no 4032/Mum/2009 dt 25-05-2012 Bench “F’). Refer, Bhawanji Kunverji H aria v. DCIT, BCAJ –September-P. 28 (Mum.)(Trib.).

·         Deemed Occupied: Assessee owned three properties, viz., R-1, R-2 and M – Assessee declared nil income from house property on ground that R-2 was self occupied for residence and other two remained vacant throughout year which were earlier let out to PSUs. It was held that provisions of section 23(4)(b) are very clear that where property consists of more than one house, annual value thereof shall be determined under section 23(1), as if such property had been let. Refer, ACIT v. Prabha Sanghi, 139 ITD 504.

The web-link of part – I is given below:



In case you have any further clarification, feel free to contact me at taxbymanish@yahoo.com or else you can view more articles & news related to Indian tax & finance at http://taxbymanish.blogspot.in/.

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