Dr.

Shannu NARAYAN
FinTax
PGP – Finance 02 Batch
Session 5
Where the property is let out for
the whole year [Section 23(1)]

Gross Annual Value (GAV)

Higher value will be taken

EXPECTED RENT
(cannot exceed standard ACTUAL RENT RECEIVED
rent)

FAIR RENT MUNICIPAL VALUE

 GAV
The higher of:
o Expected Rent (ER) and
o Actual Rent received / receivable (AR)

P.S :
 ER is the higher of Fair Rent (FR) and the Municipal Value
(MV), but capped to Standard Rent (SR).
 Fair Rent is the rental fetched by a similar property in the
adjoining neighbourhood.
 Municipal Value is the value determined by the Municipal
Authorities.
 Standard Rent is the rent fixed by the Rent Control Act.
Where let out property is
vacant for part of the year [S.
23(1)]
 Vacancy for a part of the year, it is quite probable that
the Actual Rent received/receivable may be less than
Expected Rent and therefore, Actual Rent becomes the
Gross Annual Value.
Partly let out and partly self-
occupied during the PY [S.
23(3)]
 When a portion of the house is self-occupied for the
full year AV shall be determined as under:
 (i) From the full annual value of the house the
proportionate annual value for self-occupied portion
for the whole year shall be deducted.
 (ii) The balance under (i) shall be the annual value for
let out portion for a part of the year.
Illustration
 Akhil is the owner of a house. The municipal value of
the house is Rs. 40,000. He paid Rs. 8,000 as local
taxes during the year. He was using this house for his
residential purposes but let out w.e.f. 1.1.2017@ Rs.
4,000 p.m. Compute the annual value of the house.
Solution
 Annual rent or municipal valuation (whichever is
higher) Less : Local taxes
 Annual value of the house
(No benefit shall be given for self occupied period as
the house did not remain vacant during the previous
year)
 Note: If fair rent is not gives, then assume actual rent
as fair rent.
Deductions from Net Annual
Value (S.24) Standard
Deduction:

 30% of Net Annual Value

 This is not available when the Annual Value is NIL
 This is a at deduction irrespective of the actual
expenditure incurred
Interest on Borrowed Capital
 Interest on borrowed capital is allowed as a deduction
 Pre-construction period interest is also allowed as a
deduction - for a period of 5 years from the year of
acquisition / completion of construction.
 No deduction shall be made under the second proviso
unless the assessee furnishes a certificate, from the
person to whom any interest is payable on the capital
borrowed, specifying the amount of interest payable
by the assessee for the said purpose
Summary on Allowability
Let out / Deemed to be let out property
 1) Standard deduction of 30% of NAV is fully allowed
[Section 24(a)]
 2) Interest on borrowed capital is fully allowed
[Section 24(b)]
Self-occupied properties

 1) Since the Annual Value is nil, there is no

Standard deduction available
 2) In case the capital is borrowed
 for repairs / renewals / reconstruction, the maximum
allowable deduction on account of interest is limited to
INR 30000
Contd..
 for acquisition / construction, the deduction would depend
on whether the loan was taken prior to 1.4.99 or later
 In case capital borrowed prior to 1.4.99; the maximum
allowable deduction on account of interest is limited to INR
30000
 In case capital borrowed post 1.4.99; as long as the
acquisition / construction was completed within 5 years
from the end of the FY in which the capital was borrowed,
and the assessee is in possession of a certificate on interest
payable from the lender, the maximum allowable deduction
on account of interest is limited to INR 200,000
Deemed Ownership (S.27)
Deemed Ownership
House property is transferred
by an individual to his / her
spouse, otherwise than for
adequate consideration
The transferor will be the
deemed owner Exception: In
case the transfer is necessitated
owing to a separation between,
them, the transferee will be the
deemed owner
House property is transferred
by an individual to his / her
minor child, otherwise than for
adequate consideration
The transferor will be the
deemed owner.
Exception: In case the transfer
is to a minor married daughter,
then, the transferor will not be
the deemed owner.
Deemed to be let out (S.23(4))
 Assessee given the choice of any one to be construed as
self-occupied and for that the Annual Value would be NIL
 For others, they would be treated as deemed to be let out
 The assessee is allowed by the Income Tax Act; the
flexibility to change the option to suit his needs/benefits
 In those instance, the Expected Rent becomes the Gross
Annual Value
 Municipal Taxes paid by the owner for the whole year
allowed as a deduction
Unrealised Rent
 Unrealised rent can be reduced from the actual rent
received / receivable

if it isn’t capable of being realised, if the tenancy is

bonafide, the defaulting tenant has either vacated or
steps are in progress to compel him to vacate, that he
isn’t occupying any other property of the assessee.
Income from letting of warehouse
whether would constitute Business or
Property Income
Nutan Warehousing Company Limited v. Dy.
Commissioner of Income Tax [2010] [326 ITR 94,
Mumbai]
 the transactions of the leasing deed and also the
dominant intention of the assessee if was to exploit
commercial asset by carrying out commercial activity
or not.
 If the answer is in the positive, it is to be assessed as
business income subject to examination of the terms
of warehousing agreements.
What are Income from
Business/Profession?
 Profits and gains of any business or profession
carried on by the assessee at any time during the
previous year;
 any compensation or other paymentdue to or
received by any person —
 from specific services performed for its members ;
 Profits on sale of a license granted under the
Imports (Control) Order, 1955;
 cash assistance received or receivable by any person
against exports under any scheme of the
Government of India;
Contd.
 any duty of customs or excise re-paid or re-payable as
drawback to any person against exports under the Customs
and Central Excise Duties Drawback Rules;
 any profit on the transfer of the Duty Entitlement Pass
Book Scheme;
 Any profit on the transfer of the Duty FreeReplenishment
Certificate;
 the value of any benefit or perquisite, whether convertible
into money or not, arising from business or the exercise of
a profession ;
Contd..
 any interest, salary, bonus, commission or remuneration,
by whatever name called, due to, or received by, a partner
of a firm from such firm;
 any sum received under a Keyman insurance policy
including the sum allocated by way of bonus on such
policy;
 any sum, whether received or receivable, in cash or kind,
under an agreement for—
 any sum received or receivable on account of any capital
asset being demolished, destroyed, discarded or
transferred, if the whole of the expenditure on such capital
asset has been allowed as a deduction under section 35AD.
“Business”
• The term 'business' is defined to include any —
trade,
 commerce,
manufacture, or
 any adventure or concern in the nature commerce or
manufacture.
• The definition is not exhaustive, it covers even an occupation
carried on by a person with a view to earning profit.
• Profit motive - The word "business" would mean some real,
substantial and systematic or organized course of activity with a
set purpose which would normally be profit motive.
Trade & Commerce
Trade:
• Trade primarily means the exchange of goods for goods or goods for
money.
• It would also signify that it is a kind of repeated activity in the nature
of business carried on with a profit motive.
Commerce:
• If a person purchases goods with a view to sell them at profit, it is an
ordinary case of trade and If such transactions are repeated on a large
scale, it is called commerce.
• In determining a case of trade or commerce, in crucial issue is that of
investment.
• One has to take into account the nature of the assets, the occupation
of assessee, the frequency and volume of transactions etc. to
distinguish trading from commercial activity.
Manufacture
• Manufacture is the making of articles or materials by
physical labour or mechanical Power.
• The essence of manufacturing is that something is
produced or brought into existence which is different from
that out of which it is made, in the sense that the thing
produced is by itself commercial commodity which is
capable as such of being sold or supplied.
• Means an activity that original article or thing resulting in
transformation of the object or article or thing having a
different name, character and use.
“Profession”
• The expression ‘profession’ has been defined in
section 2(36) of the Act to include any ‘vocation’.
• According to generally accepted principles the
meaning of the term ‘profession’ involves the concept
of an occupation requiring either intellectual skill or
manual skill controlled and directed by the
intellectual skill of the operator.
• A profession is normally associated with the exercise
of intellectual or technical equipment resulting from
learning or service.
• Profession involves occupation requiring purely
intellectual or manual skill
Exception to Business carried
during previous year
The following receipts are taxable even if no business or profession
is carried on by the assessee during the previous year –
 Recovery or excess recovery against a deduction claimed earlier
 Sale of an asset used for scientific research
 Recovery or excess recovery against bad debts claimed
 Amount withdrawn from a reserve created under section
36(1)( viii)
 Sum received after discontinuance of a business or profession
 Sale of depreciable assets by power generating unit
 Sum received for restrictive covenant
Profit or Gain
• The tax is upon income, profits or gains; it is not a tax on gross
receipts.
• The profit of a trade or business is the surplus by which the
receipts from the trade or business exceeded the expenditure
necessary for the purpose of earning those receipts.
• As accounting year is a self-contained year, taxable profit is the
profit accrued or arising in that year. Anticipated or potential
profits or losses, which may occur in future, are not considered
for arriving at taxable income of a previous year.
 Income from illegal business
• The income-tax law is not concerned with the legality or
illegality of business or profession. The income of illegal
business or profession is not exempt from tax.
Method of Accounting
 Cash system of accounting; or
Mercantile system of accounting

• All significant accounting policies adopted be disclosed

• Such disclosure shall form part of the financial statement.
• Any change in the accounting policies having significant/material
effect on the results for the current or future years must be disclosed.

• For this, the major consideration in selection of the

accounting policies must be
 Prudence
 Substance over form
 Materiality
 Consistency