ICAI Notes- Unit 2: Heads of Income | Taxation for CA Intermediate PDF Download

 Page 1


INCOME FROM HOUSE PROPERTY 
 3.135 
LEARNING OUTCOMES 
UNIT – 2: INCOME FROM HOUSE PROPERTY 
After studying this unit, you would be able to- 
? comprehend when income is chargeable under the head
“Income from house property”;
? appreciate the meaning and tax treatment of composite
rent;
? determine annual value of different categories of house
property;
? compute income from house property for different
categories of house property;
? comprehend and apply the tax treatment on recovery of
unrealized rent and arrears of rent;
? compute income from co-owned property.
© The Institute of Chartered Accountants of India
Page 2


INCOME FROM HOUSE PROPERTY 
 3.135 
LEARNING OUTCOMES 
UNIT – 2: INCOME FROM HOUSE PROPERTY 
After studying this unit, you would be able to- 
? comprehend when income is chargeable under the head
“Income from house property”;
? appreciate the meaning and tax treatment of composite
rent;
? determine annual value of different categories of house
property;
? compute income from house property for different
categories of house property;
? comprehend and apply the tax treatment on recovery of
unrealized rent and arrears of rent;
? compute income from co-owned property.
© The Institute of Chartered Accountants of India
 
3.136 
INCOME TAX LAW 
2.1 CHARGEABILITY [SECTION 22] 
(i) The process of computation of income under the head “Income from
house property” starts with the determination of annual value of the
property. The concept of annual value and the method of determination is
laid down in section 23.
(ii) The annual value of any property comprising of building s or lands
appurtenant thereto of which the assessee is the owner is chargeable to
tax under the head “Income from house property”.
Exceptions: Annual value of the following properties are chargeable under the 
head “Profits and gains of business or profession”- 
(i) Portions of property occupied by the assessee for the purpose of any
business or profession carried on by him
(ii) Properties of an assessee engaged in the business of letting out of
properties.
Annual value is the amount for which the property might reasonably be 
expected to let from year to year.  
2.2 CONDITIONS FOR CHARGEABILITY 
(i) Property should consist of any building or land appurtenant thereto.
(a) Buildings include not only residential buildings, but also factory
buildings, offices, shops, god owns and other commercial premises.
(b) Land appurtenant means land connected with the building like
garden, garage etc.
Income from letting out of vacant land is, however, taxable under 
 the head “Income from other sources” or “Profits and gains from 
 business or profession”, as the case may be. 
(ii) Assessee must be the owner of the property
(a) Owner is the person who is entitled to receive income from the
property in his own right.
(b) The requirement of registration of the sale deed is not warranted.
© The Institute of Chartered Accountants of India
Page 3


INCOME FROM HOUSE PROPERTY 
 3.135 
LEARNING OUTCOMES 
UNIT – 2: INCOME FROM HOUSE PROPERTY 
After studying this unit, you would be able to- 
? comprehend when income is chargeable under the head
“Income from house property”;
? appreciate the meaning and tax treatment of composite
rent;
? determine annual value of different categories of house
property;
? compute income from house property for different
categories of house property;
? comprehend and apply the tax treatment on recovery of
unrealized rent and arrears of rent;
? compute income from co-owned property.
© The Institute of Chartered Accountants of India
 
3.136 
INCOME TAX LAW 
2.1 CHARGEABILITY [SECTION 22] 
(i) The process of computation of income under the head “Income from
house property” starts with the determination of annual value of the
property. The concept of annual value and the method of determination is
laid down in section 23.
(ii) The annual value of any property comprising of building s or lands
appurtenant thereto of which the assessee is the owner is chargeable to
tax under the head “Income from house property”.
Exceptions: Annual value of the following properties are chargeable under the 
head “Profits and gains of business or profession”- 
(i) Portions of property occupied by the assessee for the purpose of any
business or profession carried on by him
(ii) Properties of an assessee engaged in the business of letting out of
properties.
Annual value is the amount for which the property might reasonably be 
expected to let from year to year.  
2.2 CONDITIONS FOR CHARGEABILITY 
(i) Property should consist of any building or land appurtenant thereto.
(a) Buildings include not only residential buildings, but also factory
buildings, offices, shops, god owns and other commercial premises.
(b) Land appurtenant means land connected with the building like
garden, garage etc.
Income from letting out of vacant land is, however, taxable under 
 the head “Income from other sources” or “Profits and gains from 
 business or profession”, as the case may be. 
(ii) Assessee must be the owner of the property
(a) Owner is the person who is entitled to receive income from the
property in his own right.
(b) The requirement of registration of the sale deed is not warranted.
© The Institute of Chartered Accountants of India
  
INCOME FROM HOUSE PROPERTY 
 
 3.137 
(c) Ownership includes both free-hold and lease-hold rights. 
(d) Ownership includes deemed ownership (discussed later in point 2.11) 
(e) The person who owns the building need not also be the owner of the 
land upon which it stands. 
(f) The assessee must be the owner of the house property during the 
previous year. It is not material whether he is the owner in the 
assessment year. 
(g) If the title of the ownership of the property is under dispute in a court 
of law, the decision as to who will be the owner chargeable to income -
tax under section 22 will be of the Income -tax Department till the 
court gives its decision to the suit filed in respect of such property. 
In case of recovery of unrealized rent and arrears of rent, 
ownership of that property is not relevant. (discussed later in 
point 2.9) 
(iii) Use of property 
 The property may be used for any purpose i.e., commercial or residential 
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. 
 The income earned by an assessee engaged in the business of letting out of 
properties on rent would be taxable as business income
1
.   
(iv) 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.  
However, the annual value of property being held as stock in trade would 
be treated as NIL for a period of two years from the end of the financial 
year in which certificate of completion of construction of the property is 
obtained from the competent authority, if such property is not let -out 
during such period [Section 23(5)]. 
Where the assessee is a builder/construction company, the house 
property would be its stock-in-trade and rental income therefrom 
would be assessable under the head “Income from House 
1
Supreme Court ruling in Rayala Corporation (P) Ltd. v. Asstt. CIT (2016) 386 ITR 500
© The Institute of Chartered Accountants of India
Page 4


INCOME FROM HOUSE PROPERTY 
 3.135 
LEARNING OUTCOMES 
UNIT – 2: INCOME FROM HOUSE PROPERTY 
After studying this unit, you would be able to- 
? comprehend when income is chargeable under the head
“Income from house property”;
? appreciate the meaning and tax treatment of composite
rent;
? determine annual value of different categories of house
property;
? compute income from house property for different
categories of house property;
? comprehend and apply the tax treatment on recovery of
unrealized rent and arrears of rent;
? compute income from co-owned property.
© The Institute of Chartered Accountants of India
 
3.136 
INCOME TAX LAW 
2.1 CHARGEABILITY [SECTION 22] 
(i) The process of computation of income under the head “Income from
house property” starts with the determination of annual value of the
property. The concept of annual value and the method of determination is
laid down in section 23.
(ii) The annual value of any property comprising of building s or lands
appurtenant thereto of which the assessee is the owner is chargeable to
tax under the head “Income from house property”.
Exceptions: Annual value of the following properties are chargeable under the 
head “Profits and gains of business or profession”- 
(i) Portions of property occupied by the assessee for the purpose of any
business or profession carried on by him
(ii) Properties of an assessee engaged in the business of letting out of
properties.
Annual value is the amount for which the property might reasonably be 
expected to let from year to year.  
2.2 CONDITIONS FOR CHARGEABILITY 
(i) Property should consist of any building or land appurtenant thereto.
(a) Buildings include not only residential buildings, but also factory
buildings, offices, shops, god owns and other commercial premises.
(b) Land appurtenant means land connected with the building like
garden, garage etc.
Income from letting out of vacant land is, however, taxable under 
 the head “Income from other sources” or “Profits and gains from 
 business or profession”, as the case may be. 
(ii) Assessee must be the owner of the property
(a) Owner is the person who is entitled to receive income from the
property in his own right.
(b) The requirement of registration of the sale deed is not warranted.
© The Institute of Chartered Accountants of India
  
INCOME FROM HOUSE PROPERTY 
 
 3.137 
(c) Ownership includes both free-hold and lease-hold rights. 
(d) Ownership includes deemed ownership (discussed later in point 2.11) 
(e) The person who owns the building need not also be the owner of the 
land upon which it stands. 
(f) The assessee must be the owner of the house property during the 
previous year. It is not material whether he is the owner in the 
assessment year. 
(g) If the title of the ownership of the property is under dispute in a court 
of law, the decision as to who will be the owner chargeable to income -
tax under section 22 will be of the Income -tax Department till the 
court gives its decision to the suit filed in respect of such property. 
In case of recovery of unrealized rent and arrears of rent, 
ownership of that property is not relevant. (discussed later in 
point 2.9) 
(iii) Use of property 
 The property may be used for any purpose i.e., commercial or residential 
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. 
 The income earned by an assessee engaged in the business of letting out of 
properties on rent would be taxable as business income
1
.   
(iv) 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.  
However, the annual value of property being held as stock in trade would 
be treated as NIL for a period of two years from the end of the financial 
year in which certificate of completion of construction of the property is 
obtained from the competent authority, if such property is not let -out 
during such period [Section 23(5)]. 
Where the assessee is a builder/construction company, the house 
property would be its stock-in-trade and rental income therefrom 
would be assessable under the head “Income from House 
1
Supreme Court ruling in Rayala Corporation (P) Ltd. v. Asstt. CIT (2016) 386 ITR 500
© The Institute of Chartered Accountants of India
 
 
 
3.138 
INCOME TAX LAW 
Property”. However, where the assessee is engaged in the business of letting 
out of properties, income therefrom would be assessable under the head 
“Profits and gains of business or profession”.  
2.3 COMPOSITE RENT 
(i) Meaning of composite rent: The owner of a property may sometimes 
receive rent in respect of building as well as – 
(1) other assets like say, furniture, plant and machinery. 
(2) for different services provided in the building, for e .g., – 
(a) Lifts; 
(b) Security; 
(c) Power backup; 
The amount so received is known as “composite rent”. 
(ii) Tax treatment of composite rent  
 Where composite rent includes rent of building and charges for different 
services (lifts, security etc.), the composite rent is has to be split up in the 
following manner- 
(a) the sum attributable to use of property is to be assessed under 
section 22 as income from house property; 
(b) the sum attributable to use of services is to be charged to tax under 
the head “Profits and gains of business or profession” or under the 
head “Income from other sources”, as the case may be. 
(iii) Manner of splitting up 
If let out building and other assets are inseparable 
 Where composite rent is received from letting out of building and other 
assets (like furniture) and the two lettings are not separable i.e. the other 
party does not accept letting out of building without other assets, then the 
rent is taxable either as business income or income from other sources, the 
case may be. 
 This is applicable even if sum receivable for the two lettings is fixed 
separately. 
 
 
© The Institute of Chartered Accountants of India
Page 5


INCOME FROM HOUSE PROPERTY 
 3.135 
LEARNING OUTCOMES 
UNIT – 2: INCOME FROM HOUSE PROPERTY 
After studying this unit, you would be able to- 
? comprehend when income is chargeable under the head
“Income from house property”;
? appreciate the meaning and tax treatment of composite
rent;
? determine annual value of different categories of house
property;
? compute income from house property for different
categories of house property;
? comprehend and apply the tax treatment on recovery of
unrealized rent and arrears of rent;
? compute income from co-owned property.
© The Institute of Chartered Accountants of India
 
3.136 
INCOME TAX LAW 
2.1 CHARGEABILITY [SECTION 22] 
(i) The process of computation of income under the head “Income from
house property” starts with the determination of annual value of the
property. The concept of annual value and the method of determination is
laid down in section 23.
(ii) The annual value of any property comprising of building s or lands
appurtenant thereto of which the assessee is the owner is chargeable to
tax under the head “Income from house property”.
Exceptions: Annual value of the following properties are chargeable under the 
head “Profits and gains of business or profession”- 
(i) Portions of property occupied by the assessee for the purpose of any
business or profession carried on by him
(ii) Properties of an assessee engaged in the business of letting out of
properties.
Annual value is the amount for which the property might reasonably be 
expected to let from year to year.  
2.2 CONDITIONS FOR CHARGEABILITY 
(i) Property should consist of any building or land appurtenant thereto.
(a) Buildings include not only residential buildings, but also factory
buildings, offices, shops, god owns and other commercial premises.
(b) Land appurtenant means land connected with the building like
garden, garage etc.
Income from letting out of vacant land is, however, taxable under 
 the head “Income from other sources” or “Profits and gains from 
 business or profession”, as the case may be. 
(ii) Assessee must be the owner of the property
(a) Owner is the person who is entitled to receive income from the
property in his own right.
(b) The requirement of registration of the sale deed is not warranted.
© The Institute of Chartered Accountants of India
  
INCOME FROM HOUSE PROPERTY 
 
 3.137 
(c) Ownership includes both free-hold and lease-hold rights. 
(d) Ownership includes deemed ownership (discussed later in point 2.11) 
(e) The person who owns the building need not also be the owner of the 
land upon which it stands. 
(f) The assessee must be the owner of the house property during the 
previous year. It is not material whether he is the owner in the 
assessment year. 
(g) If the title of the ownership of the property is under dispute in a court 
of law, the decision as to who will be the owner chargeable to income -
tax under section 22 will be of the Income -tax Department till the 
court gives its decision to the suit filed in respect of such property. 
In case of recovery of unrealized rent and arrears of rent, 
ownership of that property is not relevant. (discussed later in 
point 2.9) 
(iii) Use of property 
 The property may be used for any purpose i.e., commercial or residential 
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. 
 The income earned by an assessee engaged in the business of letting out of 
properties on rent would be taxable as business income
1
.   
(iv) 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.  
However, the annual value of property being held as stock in trade would 
be treated as NIL for a period of two years from the end of the financial 
year in which certificate of completion of construction of the property is 
obtained from the competent authority, if such property is not let -out 
during such period [Section 23(5)]. 
Where the assessee is a builder/construction company, the house 
property would be its stock-in-trade and rental income therefrom 
would be assessable under the head “Income from House 
1
Supreme Court ruling in Rayala Corporation (P) Ltd. v. Asstt. CIT (2016) 386 ITR 500
© The Institute of Chartered Accountants of India
 
 
 
3.138 
INCOME TAX LAW 
Property”. However, where the assessee is engaged in the business of letting 
out of properties, income therefrom would be assessable under the head 
“Profits and gains of business or profession”.  
2.3 COMPOSITE RENT 
(i) Meaning of composite rent: The owner of a property may sometimes 
receive rent in respect of building as well as – 
(1) other assets like say, furniture, plant and machinery. 
(2) for different services provided in the building, for e .g., – 
(a) Lifts; 
(b) Security; 
(c) Power backup; 
The amount so received is known as “composite rent”. 
(ii) Tax treatment of composite rent  
 Where composite rent includes rent of building and charges for different 
services (lifts, security etc.), the composite rent is has to be split up in the 
following manner- 
(a) the sum attributable to use of property is to be assessed under 
section 22 as income from house property; 
(b) the sum attributable to use of services is to be charged to tax under 
the head “Profits and gains of business or profession” or under the 
head “Income from other sources”, as the case may be. 
(iii) Manner of splitting up 
If let out building and other assets are inseparable 
 Where composite rent is received from letting out of building and other 
assets (like furniture) and the two lettings are not separable i.e. the other 
party does not accept letting out of building without other assets, then the 
rent is taxable either as business income or income from other sources, the 
case may be. 
 This is applicable even if sum receivable for the two lettings is fixed 
separately. 
 
 
© The Institute of Chartered Accountants of India
  
INCOME FROM HOUSE PROPERTY 
 
 3.139 
If let out building and other assets are separable 
Where composite rent is received from letting out of building and other 
assets and the two lettings are separable i.e. letting out of one is acceptable 
to the other party without letting out of the other, then  
(a)  income from letting out of building is taxable under “Income from 
house property”; 
(b) Income from letting out of other assets is taxable under “Profits and 
gains of business or profession” or “Income from other sources”, as 
the case may be. 
This is applicable even if a composite rent is received by th e assessee from 
his tenant for the two lettings. 
2.4 INCOME FROM HOUSE PROPERTY  
SITUATED OUTSIDE INDIA 
(i) In case of a resident in India (resident and ordinarily resident in case of 
individuals and HUF), income from house property situated outside India is 
taxable, whether such income is brought into India or not.   
(ii) 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. 
2.5 DETERMINATION OF ANNUAL VALUE  
[SECTION 23] 
(i) Determination of annual value for different types of house properties 
(1) 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 the higher of –  
Determination 
of Gross 
Annual Value 
(GAV)
Municipal tax 
paid by the 
owner during 
the previous 
year
Net Annual 
Value (NAV)
© The Institute of Chartered Accountants of India