Whether shops and offices can be considered as a self occupied property (SOP) for the purpose of exemption under the head ‘Income from House Property’?
Prior to FY 2019-20, if more than one self-occupied house property was owned by the taxpayer, only one was considered and treated as a self-occupied property and the remaining properties were assumed to be let out. The choice of which property to choose as self-occupied was left with the assessee.
However, From FY 2019-20 and onwards, the benefit of considering the houses as self-occupied has been extended to 2 houses. Now, a houseowner can claim his 2 properties as self-occupied and remaining house as let out for Income tax purposes.
Whether shops and offices can be considered as a ‘self occupied property’ for the purpose of exemption under the head “Income from House Property” is a matter of debate among professionals with no clear winner. Every Professional give his opinion as per his own interpretation of sections. This article is my personal interpretation w.r.t. whether shops/offices shall be included under the definition of self occupied property (hereby called SOP) or not?
First of all let us see whether shops/offices can be called a ‘House property’ or not.
As per the Income-tax Act, 1961 ‘House property’ means any building (or land adjacent to such building) owned by assessee himself. House property includes flats, shops, office space, factory sheds, commercial building, agricultural land and farm houses etc.
From the above definition, it is clear that shops and offices are covered under the gambit of House property.
Till here, there is no confusion. The section clearly says that shops and offices are House property. However, the real question is whether they can be considered as a ‘SOP’ for the purpose of claiming exemption under the head “Income from House Property”.
As per my opinion, Self Occupied Property only includes “Residential Homes” and not shops and offices. Income Tax Act allows assessee to hold 2 SOPs with no deemed rent.
The intention of law in bringing this amendment (i.e. to give exemption to 2 SOPS from 1 SOP) is to provide relief to the assessees who has to maintain two houses, one for his immediate family and another for his parents (probably living in another town). Due to current socio-economic conditions, an individual may have to maintain two houses at two different locations, which could be attributable to his employment, children’s education, residence for parents, so on and so forth. Thus, this concept of deemed rent to levy tax on the notional income of second house property has been viewed as detrimental and unfavourable. Through this amendment, relief has been provided to these category of assessees.
But there exist another category of assessees who possess 1 residential house and 1 (or more) shops/offices and desires to exempt their 1 shop also along with 1 residential house from payment of notional rent aka deemed rent. From their viewpoint, Shops/Offices is covered under the definition of ‘Self Occupied Property’. This interpretation (in my opinion) is defying the inention of law. The intention of law was never to give any type of relief to shop/office owners through this amendment. It is hereby clarified that Shops and offices shall not be considered as SOPs in order to save notional rent.
Few Scenario based example-
1. Assessee has no owned residential house but has 1 shop lying vacant.
Ans – It does not matter whether assessee has 1 residential house or not. Deemed rent will be charged on the shop.
2. Assessee has 2 houses. He lives in one and another one is lying vacant.
Ans – No deemed rent will be charged in such case since 2 residential house are exempt from payment of notional/deemed rent. The fact that 1 house is lying vacant will not affect the exemption.
3. Assessee has 5 shops. In all these shops, assessee carries on his own business. No deemed rent will be charged since ‘House Property’ provisions are not attracted. If a shop is neither rented nor lying vacant, then it will not attract any deemed rent.
I have attached a 1 page summary (along with flowchart) from my personal notebook on the above topic. You can download the summary for your future reference.
Author Bio
The intention of law in bringing this amendment (i.e. to give exemption to 2 SOPS from 1 SOP) is to provide relief to the assessees who has to maintain two houses, one for his immediate family and another for his parents (probably living in another town). Due to current socio-economic conditions, an individual may have to maintain two houses at two different locations, which could be attributable to his employment, children’s education, residence for parents, so on and so forth. Thus, this concept of deemed rent to levy tax on the notional income of second house property has been viewed as detrimental and unfavourable. Through this amendment, relief has been provided to these category of assessees.
Kindly redraft this para cause if you are staying at a home which is your own for the sake of employment it becomes a self occupied house and the other loses the status. Refer 23(4) it says a house which qualifies as 23(2) to begin with, one more such house will be given a SOP status. But why go through all this when you can just let it out for sometime and then make it vacant and enjoy 23(1)(c) various ITAT have allowed vacancy at a condition for not applying deemed income clause.
29.2 The substituted section 23 retains the existing concept of annual value as being the sum for which the property might reasonably be expected to be let from year to year i.e., annual letting value (ALV). However, in case of let out property, the concept of “annual rent” has been removed. The new section provides that where the property or any part of the property is let and the actual rent received or receivable is in excess of the ALV, the amount so received or receivable shall be the annual value. This will be the case even if the property (or part of the property) was vacant for a part of the year, but the actual rent received or receivable during the year is still higher than the ALV. Where the property or any part of the property is let and was vacant during the whole or any part of the previous year and owing to such vacancy, the actual rent received or receivable is less than the ALV, the sum so received or receivable shall be the annual value. In case the actual rent received or receivable during the year is less than the ALV, but not because of vacancy, it is the ALV which shall be taken to be the annual value.
Kindly ogive regards to the circular 14/2001 09/11/2001
The following section 23 shall be substituted for existing section 23 by the Finance Act, 2001, w.e.f. 1-4-2002 :
Annual value how determined.
23. (1) For the purposes of section 22, the annual value of any property shall be deemed to be—
(a) the sum for which the property might reasonably be expected to let from year to year; or
(b) where the property or any part of the property is let and the actual rent received or receivable by the owner in respect thereof is in excess of the sum referred to in clause (a ), the amount so received or receivable; or
(c) where the property or any part of the property is let and was vacant during the whole or any part of the previous year and owing to such vacancy the actual rent received or receivable by the owner in respect thereof is less than the sum referred to in clause (a ), the amount so received or receivable :
Provided that the taxes levied by any local authority in respect of the property shall be deducted (irrespective of the previous year in which the liability to pay such taxes was incurred by the owner according to the method of accounting regularly employed by him) in determining the annual value of the property of that previous year in which such taxes are actually paid by him.
Explanation.— For the purposes of clause (b) or clause (c) of this sub-section, the amount of actual rent received or receivable by the owner shall not include, subject to such rules as may be made in this behalf, the amount of rent which the owner cannot realise.
(2) Where the property consists of a house or part of a house which—
(a) is in the occupation of the owner for the purposes of his own residence; or
(b) cannot actually be occupied by the owner by reason of the fact that owing to his employment, business or profession carried on at any other place, he has to reside at that other place in a building not belonging to him,
the annual value of such house or part of the house shall be taken to be nil.
(3) The provisions of sub-section (2) shall not apply if—
(a) the house or part of the house is actually let during the whole or any part of the previous year; or
(b) any other benefit therefrom is derived by the owner.
(4) Where the property referred to in sub-section (2) consists of more than one house—
(a) the provisions of that sub-section shall apply only in respect of one of such houses, which the assessee may, at his option, specify in this behalf;
(b) the annual value of the house or houses, other than the house in respect of which the assessee has exercised an option under clause (a), shall be determined under sub-section (1) as if such house or houses had been let.
There is clear provision for above discussion. Section 23(2) is reproduced below for the ready reference.
(2) Where the property consists of a house or part of a house which—
(a) is in the occupation of the owner for the purposes of his own residence; or
(b) cannot actually be occupied by the owner by reason of the fact that owing to his employment, business or profession carried on at any other place, he has to reside at that other place in a building not belonging to him,
the annual value of such house or part of the house shall be taken to be nil.
(4)Where the property referred to in sub-section (2) consists of more than 54[two houses]—
(a) the provisions of that sub-section shall apply only in respect of 55[two] of such houses, which the assessee may, at his option, specify in this behalf;
(b) the annual value of the house or houses, 56[other than the house or houses] in respect of which the assessee has exercised an option under clause (a), shall be determined under sub-section (1) as if such house or houses had been let.
refer circular 14/2001 9/11/2001. I stand with the fact if its vacant there is no tax. Be it shop or not House or not