Changes Without A Purpose

The basis for taxing income earned from house property under the Income Tax Act is its annual value over the years. The liability depends upon the assessee, who is the owner of the property. For arriving at the income (as stated in Section 22 read with Section 23), the annual value of the property is taken into account. By definition, the term annual value means the sum for which the property might reasonably be expected to be let out from year to year. It does not cover assessment of all income from house property or land. Rather, it covers only cases of property income in the hands of the owners.

 

Over the years, computation of income, allowance of expenditure and various other connected issues have been settled by the courts or the circulars/instructions issued by the CBDT. There are no major controversies concerning the assessment of income from this source. Taxpayers and assessing officers are used to the fact that while taxing income from this source, there could be a departure from the doctrine of real income.

No one has ever challenged in court seeking inclusion of income on a notional basis with respect to property which is let out. In short, the legal position regarding income from this source is well settled and well understood.

In spite of this, the Income Tax Expert Group, which submitted its report in February this year, has suggested radical changes in the procedure regarding taxation of income from this source on the ground that this method of computation is vague and lends itself to litigation. This explanation is not very convincing in the light of the points mentioned above.

The group has suggested that income from house property should henceforth be assessed on the basis of actual receipt, that is on cash basis. For working out taxable income from the rents received, standard deduction (equal to one-fourth the rent received to cover cost of repairs, expenses on insurance premia, ground rent, land revenue) and expenses actually incurred during the year should be allowed as deduction. The expenses that could be deducted include the taxes levied by local authorities and any other annual charge and interest on money borrowed to purchase the property. But such interest relating to self-occupied properties (presently allowable upto Rs 15,000 annually) has been considered inadmissible, without assigning any reasons.

The advantages perceived by the proposed changes are:

Simplicity;

Doing away with the need of working out vacancy allowance and claims for irrecoverable rents;

Exemption of income from self occupied property and allowance of any expenses concerning these (this is already there).

If these deductions exceed the rent received, the deficiency will be allowed to set off in the same year under income from other sources, and carried forward for eight years to be set off under income from house. In order to curtail tax avoidance by owners by way of taking deposits, it has been recommended that, for interest free or concessional interest rates that exceed six months rent, a sum equal to 15 per cent would be treated as deemed income.

These suggestions, prima facie, seem unwarranted. If implemented, they would unnecessarily create confusion and lead to tax avoidance. In paragraph six of the suggestions, the group has accepted the position that this method of taxation could facilitate tax evasion.

Thus, the income tax department would be facing a major handicap while tackling under-reporting of actual rents. However, the group has ignored these objections to the scheme by stating that these should be encountered through investigation. It is surprising that the group has suggested a walk through a road full of potholes.

It is also strange that standard deduction is being suggested on presumptive basis for expenses like insurance premia, ground rent and land revenue, to name only a few, where the amounts are fixed, based on actuals. Further, the suggestion to permit the tax department to substitute municipal valuation for rents received is not different from the existing pattern and that being so, there is hardly any ground for effecting the changes suggested in the assessment of income from this source.

In paragraph 14 of the preamble to the report, it has been said that tax laws cannot be simplified beyond a point as it leads to a conflict between simplicity and precision. However, a completely opposite stand has been taken while making these suggestions. The group seems to have overlooked the solemn principle in income taxation that a good taxation system is based on equity, efficiency and effectiveness and suggestions for improvement have to be made keeping in view the overall interest of revenue, the way tax laws are complied within a country and the stark economic and fiscal realities.

Viewed in the light of these standards, the suggestions are a big disappointment and need to be ignored while drafting the proposed new tax code.

The legal position regarding income from house

property is well settled and understood. In spite of this, the IT Expert Group has suggested radical changes in the procedure involved in taxation of income from this source.