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
- Income from House property
- Profits and gains of business or profession
- Capital gains and
- 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’.
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 prerequisite. 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
- 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’.
Who is legal Owner?
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  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.
In the following situations the ownership shall be deemed for taxing income from house property in view of section 27 of the Act:
- 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))
- In the case of holder of an impartible estate (Section27(ii))
- 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.
- 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)].
- 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.
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 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].