Do you have multiple house properties? If yes, here’s good news for you. Now, for income tax purposes, you can modify the selection of a house property as ‘self-occupied’ even during the stage of detailed tax scrutiny/assessment of your income tax return. This has been allowed by the Mumbai bench of the Income Tax Appellate Tribunal (ITAT) in a recent case.
“This ruling will enable a taxpayer to replace a house property with other house property claimed as ‘self-occupied’ in tax return in case notional rent of such property is higher, thereby reducing the notional rent to be offered for tax and eventually reducing the overall tax liability,” says Akhil Chandna, Director, Grant Thornton India LLP.
Under the existing provisions of domestic tax laws, in case an individual owns multiple house properties as ‘self-occupied’, it is at the option of such individual to treat any of the house property as ‘self-occupied’ with nil annual value and offer other house properties to tax at notional rental value, i.e. reasonable rent a property can fetch if actually rented out. In the instant case before the Mumbai bench, the taxpayer treated a respective house property as ‘self-occupied’ at the time of filing his tax return and later during his tax assessment, he opted to change the same with other house property with low notional rental value.
“This move was not allowed by the tax officer on the ground that making any such modifications during a tax assessment isn’t permissible under the law. On the contrary, the ITAT in its order stated that tax provisions related to ‘Income under the head House Property’ nowhere state that once selecting a house property as ‘self-occupied’, the taxpayer cannot make any subsequent change(s),” says Chandna.
Tax provisions related to multiple house properties
Before taking a look at this case in detail, let’s begin with the tax provisions related to self-occupied, ‘let out’ or ‘deemed to be let out’ properties under the Income Tax Act.
In case of a let out property, the rental income is taxable under the head ‘Income from House Property’. Surprisingly, even if the property is not actually let out, still it is treated as deemed to be let out if you have more than one house property. “Income tax is payable on notional rent from such properties. However, a standard deduction of 30% along with other deduction of municipal tax is permitted from the notional or actual rental income, whereas in case of a self-occupied property, the notional rent is termed as annual value which is always nil in these properties,” says CA Abhishek Soni, Founder, tax2win.in.
Further, you can avail the deduction of interest paid on home loan from all kinds of house properties, be it self occupied, let out or deemed to be let out.
Therefore, “taxpayers opt to choose that house property as ‘self-occupied’ which has more annual value in comparison to the annual value of other properties which he owns. The reason being the annual value becomes nil and lowers the tax out-go. This provision enables him to mitigate his tax liability to a great extent,” says Soni.
Since the assessee has the choice to select which property is to be treated as self occupied, therefore in some cases some issues arise with the I-T authorities. In view of such disputes, a recent judgement has been passed by the Mumbai bench of the Income Tax Appellate Tribunal (ITAT). Now, let’s discuss what the case was about and what did the ITAT upheld.
Mr. Venkatavarthan N Iyengar had three house properties, which were located at Juhu, Santacruz East and Vasai. He decided his Vasai property as ‘self-occupied’ and declared accordingly in his income tax return (ITR). Afterwards, during his tax assessment, he chose his Juhu property as ‘self-occupied’ instead of his Vasai property, but the I-T official was not satisfied and held that such a change was not permissible. Later, the dispute finally reached the bench of ITAT. Mr. Iyengar submitted to the ITAT that it is at the option of the assessee to determine which property is to be treated as ‘self-occupied’ and nowhere the I-T Act prohibits the substitution of the self-occupied property.
Finally, the ITAT also in its order upheld the submission of the assessee and said, “The I-T Act nowhere states that the option of choosing a self-occupied property, once exercised, cannot be changed.” Further, the I-T officer was directed to accept the submission by the assessee and treat his Juhu property as self-occupied.
If an assessee declares a particular house property to be self-occupied in his ITR, “then during the actual tax assessment of his case he can substitute this with another house property owned by him, which perhaps has more value. Thereby, it becomes possible for him to reduce the notional rent that has to be offered for tax and thus lower his tax outgo,” says Soni.
Thus, tax experts say, the above ruling is a welcome move for bonafide taxpayers as it reiterates the fundamental rule of not recovering tax more than that a taxpayer is actually liable to pay under the law.