Income is chargeable to tax under the head house property if following conditions are satisfied:
- Rental income must be earned from a property which consist of building or lands appurtenant thereto; and
- Assessee must be the owner of the building; and
- such property is not used by the assessee for the purpose of any business or profession carried on by him/her, the profit of which are chargeable to income tax.
Rental income must be from a house property
To get the rental income taxed under the head house property, there must be a house property which must consist of building or land appurtenant thereto. This means in case any income is derived from a vacant land or bare ground, it will not be taxed under the head income from house property as there is no building.
However, it does not mean that such income will not be taxable. It will be taxed under the head “income from other sources” or “income from business” depending upon the facts.
House property and building has not been defined under the income tax act, 1961. Therefore, we have to consider the dictionary meaning.
House property means not only the building and the site on which the it stands but also the site appurtenant to the building necessary for its enjoyment. Therefore, it includes garden, compound and yard which are enjoyed as part of the building. However, it does not include vacant site suitable for building.
Assessee must be the owner
To get the rental income taxed under the head house property, the assessee must be the legal owner of the building or land appurtenant thereto. Any income derived from a building or land appurtenant thereto which is not owned by the assessee cannot be taxed under the head income from house property.
For instance, if Mr A being the owner of the building gives it on rent to Mr B for Rs 20,000 per month and Mr B sublets it to Mr C for Rs 30,000 per month. In this case, income derived by Mr B from Mr C cannot be taxed under the head income from house property as Mr B is not the owner of the building. Income of Mr B will either be taxed under the head income from business or income from other sources, depending on the facts. Mr A’s income will be taxable under the head “income from house property” being the owner of the building.
In case of a company, you must check the main object of the company mentioned in the memorandum of association. If the main object is to acquire properties and let out those properties, to lease properties and to earn rent, then the rental income received therefrom was shown as Income from business. This means in such a case, it will not be taxable under the head income from house property.
In case of a partnership firm, the firm being the owner of the building or land appurtenant thereto will be charged to tax under the head “income from house property”. Partners of the firm will not be taxed for income from such property.
If the income is chargeable to tax under the head income from house property, then the first thing you should find out is annual value. As per our tax laws annual value is the amount for which the property might reasonably be expected to let from year to year.
We have few exceptions to the above rules on ownership of the building or land appurtenant thereto. As per section 27 in following cases, a person will be treated as deemed to be the owners of the building or land appurtenant thereto for the purpose of section 22 to 26 even though they are not the legal owner;
- transfer to spouse;
- transfer to minor child;
- holder of an impartial estate;
- members of co-operative society;
- persons in possession of the building or land appurtenant thereto;
- persons having right in a property for a period not less than 12 years.
