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Saturday, Oct 05, 2002

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Opinion - Taxation


Cracks in the house

S. Murlidharan

There are snafus in the house property tax regime, says S. Murlidharan

THE regime for assessing income from house property has indeed become very simple from April 1, 2002: from the annual value deduct 30 per cent thereof towards standard deduction which is presumptively considered to be the expenditure one will incur on a house property apart from interest on borrowings.

Interest on borrowings is deductible in addition, at actuals. Simple as the regime is, it has rubbed at least two segments of assessees on the wrong side besides exposing the Revenue to the bluff and bluster of buccaneer assessees.

These three specific facets of the new regime are discussed herein.

Relief for vacancy

If a property is a let out property and was vacant during the whole or any part of the previous year, the annual value would stand proportionately reduced.

How is one to prove his bona fides? To put it differently, what are the criteria to be fulfilled in order to make the grade as a let property?

Suppose a person has constructed a house, which remains vacant for the entire previous year following completion of construction.

Can he claim the annual value to be nil by saying that this is a let property and he could not find a tenant therefor?

Is it that he will be taken at his word or is it that the tax administration will do something more to question the bona fides of his claim like asking for his municipal tax assessment assuming the municipality concerned levies a higher tax for let properties vis--vis the self-occupied ones?

The loose regime for claiming vacancy relief may embolden persons having multiple self-occupied properties to clothe the additional properties with the colour of let property so as to hoodwink the tax administration.

It is worth noting that self-occupied properties in excess of one are deemed to be let properties. Intrepid assesseees may get round this difficulty by investing these additional properties with the character of let properties and claiming vacancy relief.

Partly self-occupied during the year

The new regime gives a short shrift to those who occupied their only house for a part of the year, for `self-occupation'.

This house will not qualify for exemption because one of the conditions therefor is that the house in question should not have been let during the whole or any part of the previous year. Which makes the house assessable as a let-out property on the basis of its annual value that would correspond to the market or potential rent it would have fetched for the entire year. That it was self-occupied for a portion of the year is not considered at all.

The harshness of this dispensation would be felt by those who are constrained to let out their only house, which hitherto has been self-occupied, during the course of a financial year when, say, they are transferred to another place.

Recovery of unrealised rent

When a person is unable to realise a part of, or the entire, rent for the year, the annual value of the property would stand reduced by the amount that has not been realised.

Earlier, there was a one-year cooling-off period. That is, relief for unrealised rent could not be claimed in the same previous year to which it relates. Be that as it may.

Should however the unrealised rent be subsequently recovered, the entire amount so recovered would be taxable as income from house property in the year in which it is recovered.

There is nothing wrong in this in principle except that the standard deduction of 30 per cent ought to be allowed from the unrealised rent recovered subsequently. This omission in Section 25AA is conspicuously made good in Section 25B that deals with arrears of rent.

When rent is revised retrospectively and such revision has the effect of pushing up the annual value that was brought to tax, the excess would be brought to tax on receipt as arrears after deducting 30 per cent of it towards standard deduction.

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