Budget Suggestions on Income Tax under the Head House property for Budget-2019 by ICAI. These suggestion are broadly to
- I Improve tax collection.
- II. Reduce/minimize litigations
- III. Rationalization of the provisions of direct tax laws.
- IV. Removal of administrative and procedural difficulties relating to Direct Taxes
- Restriction of set off of loss from House Property
The Finance Act 2017 introduced a new section 71(3A) to provide that with effect from financial year
2017-18, set-off of loss under the head “Income from house property” against any other head of income should be restricted upto Rs 2 lakh per year. In other words, amount of loss under the head "Income from house property' exceeding Rs 2 lakh will not be entitled to be set-off.
This restriction affect thousands of taxpayers who have availed housing loan(s) in the past based on the provisions of the Act on set-off as it stood then. This also have an adverse impact on the real estate sector.
The restriction should apply to loss arising on account of interest payable on loans availed after 31st March 2017.
- Profits and gains of business or profession (Section 28)
In the recent supreme court ruling in Rayala corporation (P) ltd V. ACIT reported in 72 TAXMAN 149 it has been decided that “where assessee company was having house property and its business was to lease out its property and to earn rent, income so earned as rent should be treated as 'business income', and not as 'income from house property'”.
The Finance Act may consider the aforesaid decision and enact a suitable provision for treating certain rental income received by assesses as business income to end the infructuous litigations.
- Deduction for maintenance charges paid to societies, federation etc.- Section 23
In most urban areas, maintenance of building is undertaken by the society, federation, company or common body and the expenses for such maintenance are substantial. The same need to be allowed as deduction against rental income so as to ensure that it is only the real income that is brought to tax. There is a spate of litigation that prevails in the country on account of this item of expense.
Amending the law and allowing a deduction for the same would lead to considerable reduction in litigation. No provision presently exists to allow deduction for maintenance charges paid to a housing society etc even though it is a substantial and recurring expense.
New clause be inserted to provide deduction of maintenance charges paid to Society, federation etc. Contribution towards maintenance charges actually paid to society, company, federation or common body should be allowed as deduction.
- Section 23(5) – Deemed Taxability of unsold stock of house property after 1 year of lying vacant – Non-applicability of restriction contained in section 71(3A)
The Finance Act 2017 inserted sub-section (5) in existing section 23 to provide that where the house property consisting of any building and land appurtenant thereto is held as stock-in-trade and the property or any part of the property is not let during the whole or any part of the previous year, the annual value of such property or part of the property, for the period upto one year from the end of the financial year in which the certificate of completion of construction of the property is obtained from
the competent authority, shall be taken to be nil. The same is being done considering the business exigencies in case of real estate developers and would provide much needed relief to such assessees.
Another related amendment has been made in section 71 by insertion of sub-section (3A) so as to provide that set-off of loss under the head "Income from house property" against any other head of income shall be restricted to two lakh rupees for any assessment year.
Now an issue has arisen in case of assessees engaged in the business of real estate sector. Normally, the interest which the builder assessee pays on borrowings which were taken for construction purpose is allowable under section 36(1)(iii) as his income is assessable under the head business and profession. However, on a combined reading of provisions as contained in section 23(5) and 71(3A),
i.e., if the notional income is to be treated as “Nil” during the period of one year and thereafter, as income from house property, it appears that the interest deduction would be available under section 24 and consequently, the restriction contained in section 71(3A) would apply. This would create genuine difficulty, since the businesses were so far eligible for deduction of entire interest under section 36(1)(iii). Therefore, the restriction contained in section 71(3A) should not be applicable in the case of interest deduction in respect of income from house property held as stock-in trade.
Thus, on one hand, the insertion of sub-section (5)to section 23 of the Act deems the annual value of
house property held as stock-in trade, as Nil, if the same is not let out; on the other hand, the amendment to section 71(3A) restricts the claim of set off of loss from house property (arising mainly on account of interest deduction) against income from any other head. This would curtail the benefit of entire interest deduction so far available under section 36(1)(iii).
Considering the interest deduction so far available under section 36(1)(iii) in respect of loan borrowed for construction of houses held as stock-in-trade, it is suggested that the restriction as per section 71(3A) may not be made applicable in the case of interest deduction in respect of income from house property held as stock-in-trade. This would go a long way in avoiding any negative impact on the real estate sector.
- Deduction for ground rent other than u/s 24(a)
At present, there is no provision for allowing deduction towards ground rent paid in computation of
income from house property & the same has been merged into 24(a). Ground rent shall be allowed as
Deduction in addition to section 24(a) deduction since 24(a) mainly focuses on repairs & maintenance.
The logic behind this suggestion is that the repairs by way of 30% standard deduction cannot accommodate a huge lease rent which may have to be paid if the land is taken on lease & building is constructed by the assessee.
It is suggested that ground rent shall be allowed as Deduction in addition to section 24(a)
(SUGGESTIONS FOR RATIONALIZATION OF THE PROVISIONS OF THE INCOME-TAX ACT)