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Concept of “Deemed owner”

Concept of “Deemed owner” under the Income Tax Act,1961

Dear Students/Readers,

Let us start with a small practical scenario.

Mr. Jayesh owns a hose property. It is given on lease for a period of 15 years to Mr. Kulkarni, lease rent being Rs.3,00,000 per annum. Mr. Kulkarni had sub-leased the same to Mr. Bimal for Rs. 5,00,000 per annum. It was agreed that municipal taxes of Rs. 30,000 per annum are to be borne by Mr. Kulkarni. Based on the above information, answer following issues:

  • Under which head the income from sub-leasing shall be taxable in the hands of Mr. Kulkarni?
  • Compute the taxable income in the hands of Mr. Kulkarni.

Basis of Charge for “Income under the head house property”

The head “Income from house property” is one of the significant heads of income while determining the total income of a taxpayer. This head is a notional head of income. As per the provisions of section 22 of the Income Tax Act, 1961 (Act), the annual value of house property shall be assessed under the head “income from house property” if following conditions are satisfied cumulatively.

  • The property should consist of any buildings or lands appurtenant thereto
  • The assessee should be owner of the property.
  • The property should not be used by the owner for the purpose of any business or profession carried on by him, the profits of which are chargeable to income-tax.

Ownership of house property is one of the important conditions

The income falls under the head, “Income from house property” only when the taxpayer is an owner of a house property. If taxpayer is not the owner of house property, then income from such property may be taxed under the head “Profits and gains from business or profession” or “Income from other sources”.

Concept of “deemed owner”

Section 27 of the Act stipulates that that the word “owner” includes a legal owner as well as deemed owner for the purpose of head “Income from House Property. As a result, if person is not a legal owner but falls under any of the following categories of “deemed owner”, then the head “Income from house property” gets attracted if other two conditions are satisfied.

  • Transfer of house property to a spouse without adequate consideration (not being a transfer in connection with an arrangement to live apart)
  • Transfer of house property to a minor child (not being a married daughter) without adequate consideration or minor child
  • Holder of impartible estate
  • Property held by a member of housing co-operative society
  • Holding possession of immovable property under the part performance of contract
  • Lessee holding lease rights of a house property subject to following conditions

Conditions precedent for treating lessee as a “deemed owner”

If a person acquires a right in a property by virtue of a transaction which is referred to in section 269UA(f), then he is deemed as owner of the property. Section 269UA(f) covers the case of giving a property on lease for a term of not less than 12 years (whether fixed originally or there is a provision for extension of term and the aggregate period is not less than 12 years). However, lease rights are given on month to month basis or for a period not exceeding one year then lessee shall not be considered as deemed owner.

Computation of taxable income in the hands of Mr. Kulkarni

Finally, under which head, the income earned by Mr. Kulkarni, be taxed and what shall be his taxable income? Do post your answer in comment box.

Video explanation of the concept is listed here —

CA Mehul Thakker

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