Can I seek tax benefits on Advance rental receipts

881 votes

Sections 22 to 27 of Income-Tax Act, 1961 (the Act) deal with “income from house property”. Income from house property. Under section 22, what is chargeable to tax as income from house property is the “annual value” of any building or any land appurtenant. The tax is payable by the owner of the property, only in respect of any portion of such property not occupied by the owner himself for the purposes of any business or profession carried on by him.
Under section 4, income-tax is charged on the income of a person, including income from house property, for an “assessment year” in respect of the total income of the relevant “previous year”, except where, by virtue of any specific provision of the Act, income-tax is to be charged in respect of the income of a period other than such previous year. An assessment year is defined in section 2(9) to means a period of twelve months commencing on the 1st day of April every year and a previous year is defined in section 3 as the financial year immediately preceding the assessment year.
There is no specific provision in the Act for charging income from house property in a period other than the relevant previous year. In contrast, there is a specific provision in section 15(b) providing that any “salary” paid or allowed to an assessee in a previous year before it became due to him (in other words, “in advance”) shall be chargeable to income-tax under the head salaries in the previous year in which it is received. In the absence of such a specific provision in the Act in respect of income from house property, it has to be understood that income from house property is chargeable to tax only in a previous year to which it relates, regardless of whether it is received in advance or in arrears, except when the assessee follows the cash method of accounting. However, under section 145(1), income can be computed in accordance with either cash or mercantile system of accounting regularly employed by an assessee only in respect of income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" and not in respect of income from house property. It follows therefore that income from house property is chargeable to tax in an assessment year relevant to the previous year to which such income relates, regardless of whether such income is received in advance or in arrears.
Another reason for charging income from house property in an assessment year relevant to the previous year to which such income relates is that the amount of tax chargeable is computed on the basis of the annual value of the property, which is, in turn, determined under section 23 as the higher of the sum for which the property might reasonably be expected to let from year to year or the actual rent received or receivable by the owner in respect thereof. Since the sum for which a property might reasonably be expected to be let varies from year to year, the annual value would have to be determined only in relation to the rent receivable or received during the previous year to which it relates and not in the previous year in which it is actually received, either as an advance or in arrears.
To illustrate, where a property is let out on rent for a sum of money during the previous year 2016-17, the sum of money so received shall be chargeable to tax only in assessment year 2017-18, regardless of whether such sum is received as an advance during the previous year 2015-16 or in arrears during previous year 2017-18. This is for two reasons: (i) there is no specific provision in the Act providing for taxation of income from house property in an assessment year relevant to the previous year in which such sum is actually received; and (ii) the annual value of the property is required to be determined under section 23 only in relation to the previous year to which the sum received as rent would relate, i.e., previous year 2016-17. It would follow therefore that tax benefits, i.e., deductions on advance rental receipts and allowable under section 24 can also be claimed in respect of such sum only in assessment year 2017-18 and not in the previous year in which the rent is received in advance.

LawRato LawRato