SCHOOL OF MANAGEMENT

DEPARTMENT OF COMMERCE

PONDICHERRY UNIVERSITY

ASSIGNMENT ON DIRECT TAX LAW AND PRACTICE

SUBMITTED BY: KIRITHIGA.S I M.COM (BUSINESS FINANCE) PONDICHERRY UNIVERSITY

ASSIGNMENT ON INCOME FROM HOUSE PROPERTY Write short note on following terms
a) Fair Rental Value:
It is the rent normally charged for similar house properties in the same locality. Although two properties cannot be alike in every respect, the evidence provided by transactions of other parties in the matter of other properties in the neighborhood, more or less comparable to the property in question, is relevant in arriving at reasonable expected rent. It is the rental value a house property can fetch. Such rental value is called Fair Rental Value (F.R.V)

b) Standard rental value:

Standard Rent is the maximum rent which a person can legally recover from his tenant under a Rent Control Act. This rule is applicable even if a tenant has lost his right to apply for fixation of the standard rent. This means that if a property is covered under the Rent Control Act, its reasonable expected rent cannot exceed the standard rent. The rent fixed under Rent Control Act, where so ever applicable is called Standard Rent.

c) Municipal rental value:

Municipal or local authorities charge house tax on properties situated in the urban areas. For this purpose, they have to determine the income earning capacity of the property so as to calculate the amount of house tax to be paid by the owner of the property. But this valuation cannot be treated as a conclusive evidence of the rental value of the property, although such valuation is given due consideration by the Assessing Officer. For the purposes of levying local taxes the local authority i.e. Municipal Corporation/Committee etc. conducts a periodical survey of the house properties in their local limits. On the basis of such survey the rental values are fixes which serves as the basis for levying tax. The rental value so fixed is called Municipal Rental Value (M.R.V)

d) Gross annual value:

The Gross Annual Value is the municipal value, the actual rent (whether received or receivable) or the fair rental value, whichever is highest. If, however, the Rent Control Act applies to the property, the gross annual value cannot exceed the standard rent under the Rent Control Act, or the actual rent, whichever is higher. The following four factors have to be taken into consideration while determining the Gross Annual Value of the property: 1. Rent payable by the tenant (actual rent) 2. Municipal valuation of the property. 3. Fair rental value (market value of a similar property in the same area). 4. Standard rent payable under the Rent Control Act.

e) Net annual value:

Net Annual Value is the rent at which the property might reasonably be expected to let on a year to year basis on the assumption that the tenant is responsible for repairs and insurance and any other expenses necessary to maintain the property in a state to command the rent. The Rate able Value of the property, in most cases, is the same as the Net Annual Value, however in a few cases the legislature provides for relief to be given by requiring a reduction from Net Annual Value to reach Rate able Value. After calculating the Annual Rental Value deduct the municipal taxes, the balance amount is called Net Annual Value (NAV). If any part of municipal or local taxes is met or paid by the tenant, the same shall not be allowed to be deducted while calculating net annual value.

f) Composite rent:
When the owner of the building gets along with the rent of the building, rent or hire of other assets (like furniture) or charges for different services provided in the building (e.g. charges for security, lift, air-conditioning etc.), the total amount so received is called composite rent. The tax treatment of composite rent is as follows: When composite rent consists of rent for building and rent for other assets (like furniture, television, etc. and the two rents are separable i.e. the other party will accept the letting of one without the other) the rent of building is taxable as Income from house property and rent or hire of other assets is taxable as Income from other sources. When composite rent consists of rent for building and charge for different services (like lift, A.C, security) the composite rent is split up and the portion which relates to rent of building is taxable as Income from house property and the portion which relates to the services offered is taxable as Profits and gains of business or profession or Income from other sources.

g) Deduction u/s 24:

Two deductions will be allowed from the net annual value (which is gross annual value less municipal taxes) to arrive at the taxable income under the head income from house property. It has to be borne in mind that the deductions mentioned here (section 24) are exhaustive and no other deductions are allowed. The deductions admissible are as under: Statutory deduction: 30 per cent of the net annual value will be allowed as a deduction towards repairs and collection of rent for the property, irrespective of the actual expenditure incurred. Interest on borrowed capital: The interest on borrowed capital will be allowable as a deduction on an accrual basis if the money has been borrowed to buy or construct the house. Amount of interest payable for the relevant year should be calculated and claimed as deduction. It is immaterial whether the interest has actually been paid during the year or not. However, there should be a clear link between the borrowing and the construction/purchase etc., of the property. If money is borrowed for some other purpose, interest payable thereon cannot be claimed as deduction. The following points are to be kept in mind while claiming deduction on account of interest on borrowed capital: 1. In case the property is let out, the entire amount of interest accrued during the year is educible. The borrowable may be for construction/acquisition or repairs/renewals. 2. A fresh loan may be raised exclusively to repay the original loan taken for purchase/ construction etc., of the property. In such a case also, the interest on the fresh loan will be allowable. 3. Interest payable on interest will not be allowed. 4. Brokerage or commission paid to arrange a loan for house construction will not be allowed. 5. When interest is payable outside India, no deduction will be allowed unless tax is deducted at source or someone in India is treated as agent of the non-resident. 6. Interest attributable to period prior to construction/acquisition Money may be borrowed prior to the acquisition or construction of the property. In such a case, the period commencing from the date of borrowing and ending on the date of repayment of loan or on March 31 immediately preceding the date of acquisition or completion of construction, whichever is earlier, is termed as the pre-construction period. The interest paid/payable for the pre-construction period is to be aggregated and claimed as deduction in five equal installments during five successive financial years starting with the year in which the acquisition or construction is completed. This deduction is not allowed if the loan is utilized for repairs, renewal or reconstruction.

h) Pre-acquisition period:
It means the period starting from the date of borrowing and ending on March 31st immediately preceeding to the year of completion of construction/acquisition. The period from 1-04-2008 to 30-06-08 shall not be included in the pre-construction period. Tax treatment: Interest for pre-acquisition/pre-construction period shall be allowed as deduction in 5 equal installments starting from the previous year in which the house is acquired or the construction is completed and for the next 4 previous years. If the construction/acquisition of house is completed during a particular previous year then whole interest of that previous year shall be treated as post-construction period interest. In other words, no part of that previous years interest shall be treated as pre-acquisition period interest.

Explain the income exempted from house property?

In the following cases, income from house property is completely exempt from any tax liability: i. Income from any farmhouse forming part of agricultural income; ii. Annual value of any one palace in the occupation of an ex-ruler; iii. Property Income of a local authority; iv. Property Income of an authority, constituted for the purpose of dealing with and satisfying the need for housing accommodation or for the purposes of planning development or improvement of cities, towns and villages or for both. (The Finance Act, 2002, w.e.f. 1.4.2003 shall delete this provision.); v. Property income of any registered trade union; vi. Property income of a member of a Scheduled Tribe; vii. Property income of a statutory corporation or an institution or association financed by the Government for promoting the interests of the members either of the Scheduled Castes or Scheduled tribes or both; viii. Property income of a corporation, established by the Central Govt. or any State Govt. for promoting the interests of members of a minority group; ix. Property income of a cooperative society, formed for promoting the interests of the members either of the Scheduled Castes or Scheduled tribes or both; x. Property Income, derived from the letting of godowns or warehouses for storage, processing or facilitating the marketing of commodities by an authority constituted under any law for the marketing of commodities; xi. Property income of an institution for the development of Khadi and village Industries;' xii. Self-occupied house property of an assessee, which has not been rented throughout the previous year; xiii. Income from house property held for any charitable purposes; xiv. Property Income of any political party.