TAX LAW ASSIGNMENT: TAXABILITY OF HOUSE PROPERTY INCOME IN

SPECIAL CASES WITH TAX PLANNING WITH CASE LAW

To run a nation judiciously, the government needs to collect tax from the eligible citizens; paying
taxes to the local government is an integral part of everyone’s life, no matter where we live in the
world. Now, taxes can be collected in any form such as state taxes, central government taxes, direct
taxes, indirect taxes, and much more. types of taxation in India is divided into two categories, viz.
direct taxes and indirect taxes. This segregation is based on how the tax is being paid to the
government.

What is Tax and its Types?

A tax is a mandatory fee or financial charge levied by any government on an individual or an

organization to collect revenue for public works providing the best facilities and infrastructure. The
collected fund is then used to fund different public expenditure programs. If one fails to pay the taxes
or refuses to contribute towards it will invite serious implications under the pre-defined law.

Types of Taxes

Be it an individual or any business/organization, all have to pay the respective taxes in various forms.
These taxes are further subcategorized into direct and indirect taxes depending on the manner in
which they are paid to the taxation authorities.

Direct Tax

 The definition of direct tax is hidden in its name which implies that this tax is paid directly to
the government by the taxpayer The general examples of this type of tax in India are Income
Tax and Wealth Tax.From the government’s perspective, estimating tax earnings from direct
taxes is relatively easy as it bears a direct correlation to the income or wealth of the
registered taxpayers.

Indirect Tax

 Indirect taxes are slightly different from direct taxes and the collection method is also a bit
different. These taxes are consumption-based that are applied to goods or services when
they are bought and sold.The indirect tax payment is received by the government from the
seller of goods/services.The seller, in turn, passes the tax on to the end-user i.e. buyer of the
good/service.Thus the name indirect tax as the end-user of the good/service does not pay
the tax directly to the government.Some general examples of indirect tax include sales tax,
Goods and Services Tax (GST), Value Added Tax (VAT), etc.

Tax on Income from House Property

Under the Income Tax Act, 1961, income generated from house property is subject to
taxation. The Annual Value of any property is its taxable value and the owner who receives
the income from the property is liable to pay the applicable tax.
 conditions for taxability of “Income from House Property”?

The income from house property is added to your gross total income only when it

fulfills three basic conditions -

 You are the owner of that property.

 Property consist of any buildings and/or land.Building can be residential house,

factory building, shops, offices etc.

 The property is used for any purpose except used by you(owner)for the purpose of

running your business or profession.

 Important Note: The rent from the vacant land is considered as income from other

sources.

 Basics of House Property Tax

 A house property could be your home, an office, a shop, a building or some land

attached to the building like a parking lot. The Income Tax Act does not differentiate

between commercial and residential property. All types of properties are taxed
under the head ‘income from house property’ in the income tax return. An owner

for the purpose of income tax is its legal owner, someone who can exercise the

rights of the owner in his own right and not on someone else’s behalf. Income from

house property is the income earned by an individual (mainly rent)

through the ownership of a property which may consist of a residential

building, flat, shop or land attached to it.

Income Chargeable to Tax Under the Head House Property

 Rental income from a property owned (includes co-owner and deemed owner*) by the
taxpayer. The property may be residential, commercial (shop, office) or land.Lease amount
received from leasing the property.Income received from a leased property (as a lessee) for
12 years or more.

Income Not Chargeable to Tax under Head Income from House property

 Rental income received by any other entity other than individual is charged under
PGBP.Rental income from sub-letting is taxable under "Income from other sources" or
business/profession income.Income from selling the house/property is chargeable under
Capital GainsIf other assets are rented out along with the property (example: furniture,
Generator) that are inseparable, the income is charged under head “Profit under Head
Business and Profession (PGBP) “or Income from other sources.”Income from Carrying out
business or profession in a House / Shop / Property is charged under head business or
profession.

*Deemed Owner

As per section 27 of the Income Tax Act, 1961, Income from house property is taxable in the hands of
deemed owner as well.A deemed owner is the individual who doesn’t have the ownership/transfer
rights of the property but has control over the property.

However, even if a person isn't the official owner, they are treated as the owner for tax purposes and
the rental income is taxed in their hands. These situations include:
  1. When an individual transfers their property to their spouse or minor child without
adequate consideration, the transferor is deemed as the owner.

 2. In the cases of impartible estates, the holder is treated as the owner of the estate's
property.

 5. Leasing a property for 12 years or more makes the lessee the deemed owner. Shorter
leases are exempt from this.

Taxability of Income form House Property

The income from the house property depends on the status of the house. According to the Income
Tax act, any property or house property could be one of the following 3 types.

1. Self-Occupied Property

A self-occupied property is owned by the taxpayer and serves as their primary residence throughout
the year, not being rented out.

An exception applies: if certain criteria are met, even if the owner doesn't reside there all year:

 The taxpayer owns the property.

 They are unable to live there due to work or business elsewhere.

 The property is unleased all year.

 No other benefits are gained from it.

2. Let-Out Property

When the property is let out, the actual rent received, or receivable is considered as the annual value
of the property.

Deemed to be Let-Out Property

If an individual owns more than one property and all except two are self-occupied, the one which is
not self-occupied is deemed to be let-out. In such cases, a notional rent (rent that could be received)
is considered as the annual value of the property.

CALCULATING

Calculation of Taxable Income Under

House Property
The calculation of taxable income under the head house property is
majorly done in 3 parts.
1. Determine the GAV of Property*
2. Determine the Net Annual Value (NAV) = GAV – Municipal Taxes / property Tax
 3. Value after Standard Deduction = NAV -30% of NAV
4. Deduct Interest on Home Loan: Less Interest Paid on Home Loan (Up to 2 Lakh
for Self-Occupied and no capping for let out property)

*Step 1: Determination of Gross Annual Value

(GAV)
This is the toughest part of the entire calculations process. GAV should be
calculated for both let out Property and deemed let out property.
GAV for Let out Property:
The Gross Annual Value for a Let-out Property will be Higher of the
following.
1. Reasonable Expected Rent of the Property
2. Actual Rent of the Property
Reasonable Expected Rent of the property:
The reasonable expected rent of the property will also be higher of the
following.
a. Municipal Rental Value: It is the value as determined by municipality in the
survey.
b. Fair Rent of similar property in similar locality
Note: If the property is covered under Rent Control Act, then the
reasonable expected rent Can not exceed the maximum recoverable rent
from tenant (also called Standard Rent).
Example 1:

Rental
Property A Property B Property C
Income

Municipal
Rs. 8,00,000 Rs. 2,00,000 Rs. 8,00,000
Value

Fair Rent Rs. 2,50,000 Rs. 2,50,000 Rs. 2,50,000

Standard Not
Rs. 80,000 Rs. 9,50,000
Rent Applicable

Reasona Rs. 8,00,000 Rs. 80,000 (FV is Rs. 800,000 (Municipal

ble (Municipal higher, but it can’t value is higher, and
Expected Value is exceed Standard below standard rent
Rent highest) Rent) ceiling)

Actual Rent of the Property

Actual rent means the rent for the property during the year, including rent
during vacancy periods. If certain conditions are met, unpaid rent is
subtracted from actual rent.
Unpaid rent is rent the owner couldn't collect, if.
The rental agreement is real.
The tenant who didn't pay has left or efforts are made to make them leave.
The tenant doesn't have another property of the owner.
The owner tried to get the rent, even legally, or can prove legal action won't
work.
Explanation: If you are receiving rent of Rs 10,000 pm for your house
property, which I vacant for 2 months during the financial year. The actual
rent for the year from the house property would still be Rs 1,20,000.
Example of Calculation of a Let-out Property
Extending the Example 1

Propert Propert
Rental Income Property C
yA yB

Reasonable Expected Rs. Rs.

Rs. 8,00,000
Rent 8,00,000 80,000

Rs. Rs. Rs 8,50,000 (1,00,000

Actual Rent of Property
7,20,000 6,40,000 unrealized)

Rs. Rs. Rs. 800,000 (as 1 lakh is

GAV
8,00,000 6,40,000 unrealized)

GAV is a deemed Let out Property

If you have more than one property, you can claim a maximum of two as
self-occupied. For all other properties, you need to pay taxes even if it has
been vacant. As the property can generate revenue, it would be taxable
on the reasonable expected rent.
For Deemed Let out property, Gross Annual Value is Reasonable Expected
Rent as the actual rent received is nil.

Deductions Allowed
Not the entire amount that is received from house property is taxable,
there are a few deductions allowed.
1. Municipal Taxes: There are the annual taxes that are paid to local
authority/municipality.
2. Standard Deductions: A standard deduction of 30% on Net annual value is
allowed to cover the expenses related to repairs, maintenance, painting, etc.
This could be claimed irrespective of the actual amount spent to a maximum
limit of 30%.
3. Interest on Loan: An amount of interest paid on home loan is deductible on
the NAV of the house property. The amount of allowed deduction varies
according to the category of the house- whether let out or self-occupied,
construction period and date on which loan is availed.
 Max
Deducti Entire
Rs 2,00,000 Rs 30,000
on Interest
Allowed

Any property loan

taken before 1999.
If the
If the property is Self- Construction of the
Conditio property is
Occupied or Deemed house took more than
ns let out
let out property 5 years.
property
Loan is taken for repair
or renewal purpose.
4. Deductions on Income Tax: Besides the direct deductions, there are few
deductions allowed under section 80C, 80E and 80 EEA. These are majorly the
deduction allowed on total income irrespective of the income from house
property.

House Property Income Calculation

Chart
Particulars Amount

Gross annual value XXXX

Less: - Municipal taxes paid during the year XXXX

Net Annual Value (NAV) XXXX

Less: - Deduction

- Deduction under section 24(a) @ 30% of NAV XXXX

- Deduction under section 24(b) on interest (XXXX)

Income from house property XXXX

Example of Calculation of Income for House Property

Let's consider a property with the following details:
Gross annual value: Rs. 5,00,000
Municipal taxes paid during the year: Rs. 20,000
Interest on loan borrowed for the year: Rs. 1,00,000

Particulars Amount
 Gross annual value ₹5,00,000.00
Less: - Municipal taxes paid during the year ₹20,000.00

Net Annual Value (NAV) ₹4,80,000.00

Less: - Deduction under section 24

-₹1,44,000.00
- Deduction under section 24(a) @ 30% of NAV -₹1,00,000.00
- Deduction under section 24(b) on interest

Income from house property ₹2,36,000.00

Income from House Property acc to income tax act , 1961

As per Section 22 of the Income Tax Act, 1961

(1) The process of computation of income under the head “Income from house property” starts with
the determination of annual value of the property

(2) The annual value of any property comprising of building or land appurtenant thereto, of which
the assessee is the owner, is chargeable to tax under the head “Income from house property”.
However, where the property is occupied for the purpose of any business or profession carried on by
him, the profit of which is chargeable to tax as profits or gains from business or profession, the
annual value of such property would not be chargeable to tax under the head “Income from house
property”.For the purpose of section 22, the owner has to be a legal owner. However, the Supreme
Court in the case of CIT v/s. Podar Cement (P) Ltd. etc. 226 ITR 625 (SC). held that ‘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.

Conditions for chargeability

 The property should consist of any building (residential, factory buildings, offices, shops,
godowns and other commercial premises) or land appurtenant thereto.

 Assessee must be the owner of the property

 The property may be used for any purpose, but it should not be used by the owner for the
purpose of any business or profession carried on by him, the profit of which is chargeable to
tax.

 Property held as stock-in-trade etc. - Annual value of house property will be charged under
the head “Income from house property”, where it is held by the assessee as stock-in-trade of
a business also.

Income from residential property situated outside india

(1) In case of a resident in India (resident and ordinarily resident in case of individuals and HUF),
income from property situated outside India is taxable, whether such income is brought into India or
not.

(2) In case of a non-resident or resident but not ordinarily resident in India, income from a property
situated outside India is taxable only if it is received in India.

Determination of annual value [section 23]

Where the property is let out throughout the previous year [Section 23(1)(a)/(b)]

Where the property is let out for the whole year, then the GAV would be higher of the –

(a) Expected Rent (ER) and

(b) Actual rent received or receivable during the year

 The Expected Rent (ER) is higher of fair rent (FR) and municipal value (MV), but restricted to
standard rent (SR).

 Municipal value is the value determined by the municipal authorities for levying municipal
taxes on residential property.

 Fair rent means rent which similar property in the same locality would fetch

 The standard rent (SR) is fixed by the Rent Control Act.

Where let out property is vacant for part of the year [Section 23(1)(c)]

Where let out property is vacant for part of the year, loss due to vacancy is deductible from the
higher of Expected Rent and actual rent received or receivable and remaining amount will be the
GAV of the property.

In the case of self-occupied property or unoccupied property [Section 23(2)]

(a) If the property is self-occupied for own residence or was unoccupied throughout the previous
year, its Annual Value will be Nil, as no benefit is derived by the owner from such property.

The expression “Unoccupied property” refers to a property which cannot be occupied by the owner
by the reason of his employment, business or profession at a different place and he/she resides at
such other place in a building that does not belonging to him/her.

(b) The benefit of exemption of one self-occupied house (two self-occupied properties - from A.Y
2020-21) is available only to an individual/HUF.

(c) No deduction for municipal taxes is allowed in respect with such property

Where a house property is let-out for part of the year and self-occupied for part of the year [Section
23(3)]

(a) If a single unit of a property is self-occupied for part of the year and let-out for the remaining part
of the year, then the ER for the whole year shall be taken into account for determining the GAV.

(b) The ER for the whole year shall be compared with the actual rent for the let out period and
whichever is higher shall be adopted as the GAV.
(c) However, municipal tax for the whole year is allowed as deduction, provided it is paid by the
owner during the previous year.

In case of deemed to be let out property [Section 23(4)]

(a) Where the assessee owns more than one Residential property for self-occupation, then the
income from any one such property (two such properties - from A.Y 2020-21), at the option of the
assessee, shall be computed under the self-occupied property category and its annual value will be
nil..

(b) The other self-occupied/unoccupied properties shall be treated as “deemed let out properties”.

(c) This option can be changed year after year in a manner beneficial to the assessee.

(d) In case of deemed let-out property, the ER shall be taken as the GAV.

(e) The question of considering actual rent received/receivable does not arise. Consequently, no
adjustment is necessary on account of property remaining vacant or unrealized rent.

(f) Municipal taxes actually paid by the owner during the previous year, in respect of the deemed let
out properties, can be claimed as deduction.

In case of a house property held as stock-in-trade [Section 23(5)]

(a) In some cases, property consisting of any building or land appurtenant thereto may be held as
stock-in-trade, and the whole or any part of the property may not be let out during the whole or any
part of the previous year.

(b) In such cases, the annual value of such property or part of the property shall be NIL.

(c) This benefit would be available for the period up to one year (up to two year - from A.Y 2020-21)
from the end of the financial year in which the certificate of completion of construction of the
property is obtained from the competent authority.

In case of a house property, a portion let out and a portion self-occupied

(a) Income from any portion or part of a property which is let out shall be computed separately
under the “let out property” category and the other portion or part which is self-occupied shall be
computed under the “self-occupied property” category.

(b) There is no need to treat the whole property as a single unit for computation of income from
house property.

(c) Municipal valuation/fair rent/standard rent, if not given separately, shall be apportioned between
the let-out portion and self-occupied portion either on plinth area or built-up floor space or on such
other reasonable basis.

(d) Property taxes, if given on a consolidated basis can be bifurcated as attributable to each portion
or floor or on a reasonable basis.

Unrealized rent

 The Actual rent received/receivable should not include any amount of rent which is not
capable of being realized.

 However, the conditions prescribed in Rule 4 should be satisfied. They are –

(a) The tenancy is bona fide;

(b) The defaulting tenant has vacated, or steps have been taken to compel him to vacate the
property;

(c) The defaulting tenant is not in occupation of any other property of the assessee;

(d) The assessee has taken all reasonable steps to institute legal proceedings for the recovery of the
unpaid rent or satisfies the Assessing Officer that legal proceedings would be useless.

House Property taxes(Municipal taxes)

 House property taxes are allowed to be deducted from the GAV subject to the following two
conditions: (a) It should be borne by the assessee (owner); and (b) It should be actually paid
during the previous year.

 If property taxes levied by a local authority for a particular previous year is not paid during
that year, no deduction shall be allowed in the computation of income from house property
for that year.

 However, if in any subsequent year, the arrears are paid, then, the amount so paid is allowed
as deduction in computation of income from house property for that year.

Deductions from annual value [section 24]

There are two deductions from annual value. They are –

(a) 30% of NAV; and

(b) Interest on borrowed capital

(a) 30% of NAV is allowed as deduction under section 24(a):

(a) This is a flat deduction and is allowed irrespective of the actual expenditure incurred.

(b) The assessee will not be entitled to deduction of 30%, in the following cases, as the annual value
itself is nil.

(i) In case of self-occupied property or

(ii) In case of property held as stock-in-trade and the whole or any part of the property is not let out
during the whole or any part of the previous year, up to 1 year (2 years - from A.Y 2020-21) from the
end of the financial year in which certificate of completion of construction of the property is
obtained from the competent authority.

(b) Interest on borrowed capital is allowed as deduction under section 24(b):

Interest payable on loans borrowed for the purpose of acquisition, construction, repairs, renewal or
reconstruction of house property can be claimed as deduction.

Interest payable on a fresh loan taken to repay the original loan raised earlier for the aforesaid
purposes is also admissible as a deduction.

Deduction in respect of self-occupied house property where annual value is nil

In this case, the assessee will be allowed a deduction on account of interest (including 1/5th of the
accumulated interest of pre-construction period) as under –

S No. Conditions Amount of Ded

Loan borrowed before 1.4.99:

Actual interest
(A) Where the property has been acquired, constructed, repaired, renewed or
₹ 30,000.
reconstructed with borrowed capital before 1.4.99.

Loan borrowed on or after 1.4.99: (i) Where the property is acquired or constructed
with capital borrowed on or after 1.4.99 and such acquisition or construction is Actual interest
(B)
completed within 5 years from the end of the financial year in which the capital was ₹ 2,00,000
borrowed.

(ii) Where the property is acquired or constructed with capital borrowed on or after
Actual interest
1.4.99 and such acquisition or construction is not completed within 5 years from the
of ₹ 30,000.
end of the financial year in which the capital was borrowed.

(iii) Where the property is repaired, renewed or reconstructed with capital borrowed Actual interest
on or after 1.4.99. of ₹ 30,000.

Important points:

(a) The ceiling limit would not apply to let-out/deemed let-out property: The ceiling prescribed for
one self-occupied property as above in respect of interest on loan borrowed does not apply to a
deemed let-out property.

(b) Interest allowable on accrual basis: Deduction under section 24(b) for interest is available on
accrual basis. Therefore interest accrued but not paid during the year can also be claimed as
deduction.

(c) Unpaid purchase price would be considered as capital borrowed: Where a buyer enters into an
arrangement with a seller to pay the sale price in installments along with interest due thereon, the
seller becomes the lender in relation to the unpaid purchase price and the buyer becomes the
borrower. In such a case, unpaid purchase price can be treated as capital borrowed for acquiring
property and interest paid thereon can be allowed as deduction under section 24.

(d) Interest on unpaid interest is not deductible.

Provision for arrears of rent and unrealized rent received subsequently [section 25a]

Arrears of Rent / Unrealized Rent

 Taxable in the year of receipt/realization

 Deduction of 30% of rent received/realised is available

 Taxable even if assessee is not the owner of the property in the financial year of
receipt/realization.
Treatment of income from co-owned property [section 26]

(1) Where property is owned by two or more persons, whose shares are definite and ascertainable,
then the income from such property cannot be taxed as income of an AOP.

(2) The share income of each co-owner should be determined in accordance with sections 22 to 25
and included in his individual assessment.

(3) Where the house property owned by co-owners is self-occupied by each of the co-owners, the
annual value of the property of each co-owner will be Nil and each co-owner shall be entitled to a
deduction of ` 30,000 / ` 2,00,000, as the case may be, under section 24(b) on account of interest on
borrowed capital.

(4) Where the house property owned by co-owners is let out, the income from such property shall be
computed as if the property is owned by one owner and thereafter the income so computed shall be
apportioned amongst each co-owner as per their specific share.

Deemed ownership [section 27]

As per section 27, the following persons, though not legal owners of a property, are deemed to be
the owners for the purposes of section 22 to 26.

 Transfer to a spouse – In case of transfer of house property by an individual to his or her

spouse otherwise than for adequate consideration, the transferor is deemed to be the owner
of the transferred property. Exception– In case of transfer to spouse in connection with an
agreement to live apart, the transferor will not be deemed to be the owner. The transferee
will be the owner of the house property.

 Transfer to a minor child– In case of transfer of house property by an individual to his or her
minor child otherwise than for adequate consideration, the transferor would be deemed to
be the owner of the house property transferred. Exception– In case of transfer to a minor
married daughter, the transferor is not deemed to be the owner.

 Holder of an impartible estate– The impartible estate is a property which is not legally
divisible. The holder of an impartible estate shall be deemed to be the individual owner of all
properties comprised in the estate.

 Member of a co-operative society etc.– A member of a co-operative society, company or

other association of persons to whom a building or part thereof is allotted or leased under a
House Building Scheme of a society/company/association, shall be deemed to be owner of
that building or part thereof allotted to him although the co-operative society/company/
association is the legal owner of that building.

 Person in possession of a property– A person who is allowed to take or retain the possession
of any building or part thereof in part performance of a contract of the nature referred to in
section 53A of the Transfer of Property Act shall be the deemed owner of that house
property.

 Person having right in a property for a period not less than 12 years– A person who
acquires any rights in or with respect to any building or part thereof, by virtue of any
transaction as is referred to in section 269UA(f) i.e. transfer by way of lease for not less than
12 years, shall be deemed to be the owner of that building or part thereof. Exception – In
 case the person acquiring any rights by way of lease from month to month or for a period
not exceeding one year, such person will not be deemed to be the owner.

Cases where house property income is exempt from tax

 Section 10(1) - Income from any farm house forming part of agricultural income.

 Section 10(19A) - Annual value of any palace in the occupation of an ex-ruler.

 Section 10(20) - Income from house property of a local authority.

 Section 10(21) - Income from house property of an approved scientific research association.

 Section 10(23C) - Property income of universities, educational institutions, etc.

 Section 10(24) - Property income of a registered trade union.

 Section 11 - Income from house property held for charitable or religious purpose.

 Section 13A - Property income of any political party.

CASE LAWS:

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.

Background:

The case of CIT v. Podar Cement (P) Ltd. revolves around the interpretation of the term "owner"
under Section 22 of the Income Tax Act, 1961, which pertains to the taxation of income from house
property. The primary issue was whether the term "owner" refers only to a registered owner or
whether it could include persons with possession and control over the property but without formal
legal title.

Facts of the Case:

 Several companies, including Podar Cement (P) Ltd., purchased immovable properties and
took possession of them based on agreements to sell. These companies did not register the
sale deeds in their names but had possession and control over the properties.
 The companies received rent from these properties and declared rental income as "income
from other sources" instead of "income from house property" under Section 22 of the
Income Tax Act, 1961.
  The tax authorities contended that these companies were "owners" of the properties for tax
purposes and that the rental income should be taxed as "income from house property,"
which allows for certain deductions.
 The companies argued that since they did not have registered sale deeds, they could not be
considered the legal owners for the purposes of Section 22.

Legal Issue:

The key issue before the court was whether a person in possession of property under an agreement
to sell, without formal registration of the sale deed, could be treated as an "owner" for the purpose
of Section 22 of the Income Tax Act, 1961.

Decision:

The Supreme Court held that the term "owner" under Section 22 does not solely refer to the legal
owner with a registered title. The Court emphasized the need to interpret tax laws in a manner that
reflects commercial realities and not just technical legal formalities.

 The Court ruled that a person in possession of property, who exercises control over it and
receives income from it, can be considered the owner for tax purposes under Section 22.
 The Court also observed that the intention of Section 22 is to tax the actual income derived
from property, and this should not be restricted to the technical legal owner.- CIT v. Podar
Cement (P) Ltd. 226 ITR 625 (SC).

Contribution of capital by partners in the form of land – No document evidencing Registration of

transfer by partner in favour of partnership under Registration Act. – Transfer not genuine – Land
does not become property of firm – House property income to be assessed in the hands of partners -

Background:

The case of CIT v. Kashiram Ramgopal Agencies deals with the applicability of Section 40(b) of the
Income Tax Act, 1961, which concerns the disallowance of certain payments made to partners by a
partnership firm. The core issue was the interpretation of what constitutes "interest" under Section
40(b) and whether certain types of payments to partners should be disallowed as deductions for the
firm.

Facts of the Case:

 Kashiram Ramgopal Agencies was a partnership firm, and the issue revolved around the
interest paid by the firm to its partners.
 During the relevant assessment year, the firm had made payments to its partners, which it
claimed as deductible expenditure.
 The Income Tax Department disallowed the deduction under Section 40(b) of the Income Tax
Act, which prohibits the deduction of any interest paid to a partner on their capital account.
Legal Issue:

The key issue before the court was whether the payment in question, made by the firm to its
partners, constituted "interest" within the meaning of Section 40(b) of the Income Tax Act, and
whether it should be disallowed as a deductible expense.

Arguments:

 Assessee's Argument: The firm argued that the payment was not in the nature of "interest"
as defined under Section 40(b), and therefore, it should be allowed as a deduction. They also
contended that the transaction was of a different nature, not falling under the disallowance
provision.
 Revenue's Argument: The Income Tax Department argued that the payments made by the
firm to its partners clearly constituted "interest" and were thus not allowable as deductions
under Section 40(b).

Decision:

The Gauhati High Court ruled in favor of the Income Tax Department, holding that the payments
made to the partners by the firm were indeed "interest" under Section 40(b) of the Income Tax Act.

 The court emphasized that Section 40(b) aims to prevent firms from claiming deductions for
interest paid to their partners, as such payments are not considered allowable expenses
under the Act.
 The nature of the payment, whether termed differently, was effectively interest on the
capital contributed by the partners, and hence, it fell within the purview of Section 40(b).
-CIT Vs Kashiram Ramgopal Agencies (Gau) 231 ITR 10

S.N. Syed Mohammed Saheb & Bros. Vs CIT (Ker) 68 ITR 791 Purchase of properties in joint names of
partners with funds of firm – Properties treated as that of firm right from inception and depreciation
claimed on it – Income from properties treated as firm’s income and divided among partners –
Properties cannot be transferred to partners by book entries of firm – Income from property cannot
be assessed as that of AOP but belong to firm.

Background:

The case of S.N. Syed Mohammed Saheb & Bros. v. CIT concerns the interpretation of provisions
under the Income Tax Act, 1961, relating to the deductibility of certain business expenses and the
nature of income that qualifies for such deductions. The central issue was whether certain payments
made by the assessee could be claimed as allowable business expenses for the purpose of calculating
taxable income.

Facts of the Case:

 S.N. Syed Mohammed Saheb & Bros. was a partnership firm engaged in the business of
selling tobacco and other products.
  During the relevant assessment year, the firm made certain payments to its employees and
claimed these payments as deductible business expenses.
 The Income Tax Department questioned the nature of these payments and disallowed them,
stating that they did not qualify as allowable deductions under the Income Tax Act.

Legal Issue:

The key issue before the Kerala High Court was whether the payments made by the firm to its
employees were eligible for deduction as business expenses under the Income Tax Act, or whether
they were rightly disallowed by the Income Tax Department.

Arguments:

 Assessee's Argument: The assessee firm argued that the payments made were legitimate
business expenses incurred wholly and exclusively for the purpose of carrying on its
business, and thus should be allowed as deductions in computing the firm’s taxable income.
 Revenue's Argument: The Income Tax Department contended that the payments made by
the firm were not wholly and exclusively for the purpose of business and did not meet the
criteria for allowable deductions under the Income Tax Act.

Decision:

The Kerala High Court ruled in favor of the Income Tax Department, holding that the payments made
by the firm were not deductible as business expenses.

 The court observed that for an expense to qualify as a deductible business expense under
the Income Tax Act, it must be incurred "wholly and exclusively" for the purpose of the
business. In this case, the court found that the payments in question did not meet this
criterion.
 The court emphasized that merely labeling a payment as a business expense does not make
it automatically deductible. The assessee must prove that the expense was necessary for
carrying on the business.

CIT Vs Syed Saddique Imam and Others (Patna)111 ITR 475, 117 ITR 62
A gift by a Mohammedan to his wife in lieu of the dower debt after marriage is sale of property –
Such a transfer has to be made by a registered instrument if value of immovable property is more
than Rs.100 – Till such registration, house property income to be assessed in the hands of the
husband

Background:

The case of CIT v. Syed Saddique Imam and Others addresses the taxability of income from properties
and concerns the issue of ownership for tax purposes. The key question revolved around whether
certain income derived from properties could be taxed in the hands of legal heirs when the estate of
the deceased was not fully administered and the legal ownership had not yet passed to the heirs.

Facts of the Case:

 Syed Saddique Imam passed away, leaving behind properties and income generated from
those properties.
 The heirs of Syed Saddique Imam received income from these properties after his death,
although the estate had not been fully administered, and the legal ownership of the
properties had not been transferred to the heirs.
 The Income Tax Department sought to tax the income from the properties in the hands of
the heirs under the provisions of the Income Tax Act.
 The heirs contended that since the estate had not been fully administered and they had not
taken legal ownership of the properties, the income should not be taxable in their hands.

Legal Issue:

The central issue before the Patna High Court was whether the income from the properties of a
deceased person could be taxed in the hands of the legal heirs when the estate had not been fully
administered, and the legal ownership had not passed to the heirs.

Arguments:

 Assessee's Argument (Heirs of Syed Saddique Imam): The heirs argued that the estate of
the deceased was still in the process of administration, and since the legal title to the
properties had not yet been transferred to them, the income should not be taxed in their
individual hands. They claimed that the income belonged to the estate, not to them as
individuals.
 Revenue's Argument: The Income Tax Department contended that since the heirs were in
receipt of the income from the properties, they were liable to be taxed on that income,
irrespective of whether the estate had been fully administered or not. The Revenue argued
that the income was being enjoyed by the heirs and should be taxed accordingly.

Decision:

The Patna High Court ruled in favor of the Income Tax Department, holding that the income from the
properties was taxable in the hands of the heirs, even though the estate had not been fully
administered and legal ownership had not passed to them.

 The court observed that the income from the properties was being enjoyed by the heirs, and
for all practical purposes, they were in possession of the properties and receiving the
income. As such, the income was taxable in their hands.
 The court rejected the argument that the income belonged solely to the estate of the
deceased. It held that since the heirs were in receipt of the income and had beneficial
enjoyment of the properties, they were liable to pay tax on the income.
B.M. Gupta & Sons (HUF) Vs ACIT (Del) 299 ITR 410

Interest-free security deposit taken by assessee hugely disproportionate to monthly rent charged –
Device to circumvent liability to income tax – Notional interest on security deposit to be treated as
income from House Property

The case of B.M. Gupta & Sons (HUF) v. ACIT deals with the taxability of income received from a
Hindu Undivided Family (HUF) under certain conditions and whether the income could be clubbed
under the personal income of the Karta (head of the HUF). The issue at hand was whether income
from the HUF's assets could be taxed in the hands of the individual Karta when such income was
transferred to the Karta without any legitimate justification.

Facts of the Case:

 B.M. Gupta & Sons was a Hindu Undivided Family (HUF) with substantial income from
various sources.
 During the relevant assessment year, a portion of the HUF's income was transferred to the
individual account of the Karta (the head of the HUF).
 The Income Tax Department sought to tax this income in the hands of the Karta on the basis
that the income was diverted for personal use and did not remain the income of the HUF.
 The Karta argued that the income belonged to the HUF, and the mere transfer of funds to his
individual account did not change its nature as HUF income.

Legal Issue:

The key issue before the Delhi High Court was whether the income transferred from the HUF's assets
to the personal account of the Karta could be taxed in the hands of the Karta as his individual
income.

Arguments:

 Assessee's Argument (B.M. Gupta & Sons, HUF): The HUF argued that the income in
question continued to be HUF income, regardless of whether it was transferred to the
individual account of the Karta. The assessee contended that the income was derived from
the assets of the HUF, and merely transferring the funds did not change its character.
 Revenue's Argument: The Income Tax Department contended that the transfer of income to
the Karta's individual account indicated that the income was for his personal use and should
be taxed as his personal income. The Department argued that the diversion of HUF income
to the Karta's personal account made it liable for tax in the hands of the Karta.

Decision:

The Delhi High Court ruled in favor of the Income Tax Department, holding that the income
transferred from the HUF's assets to the personal account of the Karta was taxable in the hands of
the Karta as his individual income.
  The court observed that when HUF income is transferred to the Karta's personal account
without any legitimate business or family necessity, it takes on the character of the Karta's
individual income and is taxable as such.
 The court further noted that the mere fact that the income was originally derived from HUF
assets does not shield it from being taxed as individual income if it is diverted for personal
use.

Assessee-company was engaged in business of construction and development of

residential/commercial units. It had given some commercial units on lease and received rent there
from. Assessee claimed that leasing of residential/ commercial units was also commercial utilization
of immovable property and, hence, income derived there from was to be assessed as income from
business. Assessee failed to prove that lease rent received by it was from exploitation of property by
way of complex commercial activities – therefore income was assessable under head ‘Income from
house property’

Background:

The case of Roma Builders (P.) Ltd. v. Jt CIT (OSD) deals with the issue of taxation of unexplained cash
credits under Section 68 of the Income Tax Act, 1961. The central issue was whether certain loans
reflected in the books of the company could be treated as unexplained cash credits and added to the
assessee’s income, given that the assessee claimed the loans were genuine and came from legitimate
sources.

Facts of the Case:

 Roma Builders (P.) Ltd. was a real estate and construction company.
 During the relevant assessment year, the company had shown certain loans in its books of
accounts.
 The Assessing Officer (AO) questioned the genuineness of these loans, contending that the
company failed to provide satisfactory explanations or sufficient evidence to substantiate the
loans.
 The AO invoked Section 68 of the Income Tax Act, which allows for the addition of
unexplained cash credits as income when the assessee cannot provide proper evidence of
the nature and source of the funds.
 Roma Builders (P.) Ltd. argued that the loans were genuine and came from identifiable
sources, and therefore, they should not be treated as unexplained cash credits.

Legal Issue:

The key issue before the ITAT was whether the loans reflected in the books of the assessee could be
considered as genuine or if they could be treated as unexplained cash credits under Section 68 and
taxed as income of the company.
Arguments:

 Assessee's Argument (Roma Builders): The assessee company argued that the loans were
genuine and provided details of the lenders, including their identities and confirmations of
the transactions. It contended that it had discharged its burden of proof under Section 68 by
providing sufficient details about the nature and source of the loans.
 Revenue's Argument: The Revenue, through the Assessing Officer, argued that the assessee
failed to provide adequate evidence to prove the genuineness of the loans. The AO
maintained that the explanations given by the company were unsatisfactory and that the
loans should be treated as unexplained cash credits under Section 68, thus justifying their
addition to the company’s income.

Decision:

The ITAT, Mumbai, ruled in favor of Roma Builders (P.) Ltd., holding that the company had sufficiently
discharged its burden of proving the identity of the lenders, the genuineness of the loan
transactions, and the creditworthiness of the lenders.

 Burden of Proof: The tribunal observed that under Section 68 of the Income Tax Act, the
assessee is required to establish three things: (i) the identity of the creditor, (ii) the
genuineness of the transaction, and (iii) the creditworthiness of the creditor.
 Assessee's Compliance: The tribunal noted that the assessee had provided relevant
documents to establish the identity of the lenders and that there was no material to suggest
that the loan transactions were bogus or not genuine.
 Revenue’s Failure: The ITAT criticized the Assessing Officer for not bringing any concrete
evidence to prove that the loans were unexplained or unaccounted for. The tribunal
emphasized that once the assessee has provided sufficient documentation to substantiate
the loans, the burden shifts to the Revenue to disprove the assessee's claims.

Roma Builders (P.) Ltd. VS. Jt CIT (OSD) 131 ITD 91 (MUM.)

Tax planning :

Tax planning refers to the process of arranging financial affairs in a way that maximises tax benefits
and minimises tax liabilities. It involves analysing an individual's or an organisation's income,
expenses, investments, and other financial activities to identify potential tax-saving opportunities.

By understanding the provisions of the tax laws, taxpayers can make informed decisions regarding tax
payments and take advantage of available legal provisions and exemptions. An effective tax plan
involves identifying tax-saving expenses and investments and developing a sound financial strategy
all the while ensuring full legal compliance.

Importance of Tax Planning

Taxes are a guaranteed expense, but unlike fixed costs, they can be influenced by your financial
decisions. Tax planning empowers you to navigate the tax regulations and strategically use available
deductions, exemptions, and rebates to reduce your tax burden.

In Income Tax Act, 1961, various deductions as well as exemptions are available for those who own a
house property or thinking of owning one in future. By availing these tax benefits, major tax saving is
possible. Hence, becoming aware about these benefits is all important to reduce the tax burden. .

Benefits Available Under Income Head:

House Property Various deductions are available while computing income earned from house
property comprising Standard Deduction, Deduction of Municipal Tax paid as well as deduction of
interest on loan taken for the purpose of said house property.

– Deduction of Municipal Tax – Municipal tax or any other tax levied by state government, recovered
by municipality, Local Authority or gram panchayat is allowed as deduction upto the extent of actual
amount paid by owner during the year.

Statutory/ Standard Deduction [Section 24(a)]- Standard deduction of 30% on net annual value is
allowed as deduction wherein Net annual value shall be calculated as follows – [NAV= Gross annual
value – Municipal taxes paid during the year]

Deduction of interest on loan taken [Section 24(b)]- Interest on loan taken for the purpose of
acquisition, construction, repair, renovation etc. of house property shall be allowed as deduction
from Net Annual Value. Loan may be taken from banks, financial institutions, trust, friends and family
etc. Following two points may be noted – Interest shall be allowed on due basis and not on payment
basis like municipal taxes. Interest on interest shall not be allowed as deduction Quantum of
Deduction –

Benefits Available Under Income Head: Other Sources [Section 56(2)(X)] Where Immovable property
being land or building or both has been received for inadequate consideration as a gift then the
difference between stamp duty value and sales consideration of the property shall be taxable under
the head income from other sources if – (a) Difference between SDV and sales consideration exceeds
fifty thousand rupees and (b) Stamp Duty Value is more than 110% of sales consideration However,
here also relief has been provided by government by increasing the tolerance band to 120% instead
of 110% subject to fulfilment of all of the below conditions – 1. The transfer of such residential unit
takes place during the period beginning from the 12th day of November, 2020 and ending on the
30th day of June, 2021; 2. Such transfer is by way of first time allotment of the residential unit to any
person; and 3. The consideration received or accruing as a result of such transfer does not exceed
two crore rupees.

 Conclusion – At this, one may conclude that various tax benefits are provided by government
in the form of exemptions/ deductions. All what is needed awareness and professional’s
advice. If proper tax planning has been carried out, then one may not feel the burden of
tax/less tax burden with regard to income from house property. After all, government has
considered the fact that house is a basic necessity of an individual and hence, accordingly
provided these benefits.

CONCLUSION FROM PPT