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Depreciation and Income from house property

BHARAT (PRACTICE) (54 Points)

23 February 2010

An individual carrying on profession has used his office for the purpose of profession for part of the year approx.9 months. On this premises, depreciation has been regularly claimed and allowed. During the year under consideration , premises was used only for part period (9months ) for the balance 3 months , the said property was let out.My queries:

1) Whether assessee can claim depreciation in this year particularly in view of the fact that rental income is also generated from the said premises for three months?

2) Whether Rent income of only three months to be considered under Income from House property?

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5 Replies

Amir (Learner) (4016 Points)
Replied 23 February 2010

Dear Bharat Sir,

We have discussed this question so many times in one form or the other.

Anyways, to me

Depreciation shall be claimed for entire Previous Year, becos there is no provision in the act or rule which allows u to reduce WDV of the block except the sale consideration of the assets.

I mean no provision is there for retierals of assets as in case of disposal/sale.

Further, there are various judgements which have held that to claim depreciation it is not necessary that asset should be used for entire previous year......

Infact u will find many judgements where depreciation is allowed even when asset was not put to use at all(But there are equally contarary judgements as well)

Further my view is Full year Depreciation on this Building will be allowed in the next year as well even if Building stays let out for the entire FY.

As far as Income from House property is concerned, it is to be computed on the basis of annual value since the property was not lying vacant therefore Loss due to vacancy cannot be claimed & expected rent of entire Year will be taxable.................

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Max Payne (employed) (2569 Points)
Replied 24 February 2010

Dear friends,

Correct me if i am wrong... I am of the opinion that the three months rent should be income from other sources.... not income from HP....

I cant recall the case laws, but there has been some cases where,

(a) If the asset is leased with a view to earn income during the period the factory was closed, it was assessed as PGBP,

(b) Where the assets were leased without intention to use them for production during the year, it was assessed as IFOS.....

It was held in one case P J Eapen Vs CIT/ITO (i am not sure who), by the HC of Kerala, that unless the said source is in existence for full year, the income should be computed as if from IFOS and not HP.... (logic the HC has said is that Act envisages ANNUAL Value, so the implication is existence of the source for the entire year, WHICH I ADMIT, IS ARGUEABLE)

Leave the second para of what i said, cos its debateable... But i think the first para is relevant... ESPECIALLY COS THERE IS NO REDUCTION IN BLOCK... Depreciation should be allowed in computing PGBP, but I feel for 3 months rent, it should be assessed from IFOS....

Please tell me the correct position....

Amir (Learner) (4016 Points)
Replied 24 February 2010

Dear Bharat Sir,

Ya G.K. has rightly said that u first have to decide whether that Income is taxable under head "House Property" or "PGBP/Other Sources".......But I think ur case is simple (retieral for business use) otherwise u must have mentioned the facts.......Anyways G.K. reminded us......

Now G.K.

House Property & PGBP

PGBP, If let out is only for a intervening period like say strike,etc , - similar principle was laid down that if let out is for limited period it could not be equated with the letting out of a building on lease from month to month or year to year, wherein it could be said that the building was being exploited by the owner to earn a rental income -- CIT v. Halai Nemon Association [2000] 243 ITR 439 (Mad.).

But Bhai, the judgement will apply only where the letting out was "purposely for a limited period & that too with the intention of using the asset again in the business" ....Intention of letting out is to be seen......

House Property & Other Sources

Bhai the case of P.J. Epson v CIT, which u have mentioned had diffrent facts. in that case assessee had constructed the property during the previous year itself so assessee himself argued that Annual Value cannot be taxed under House Property since the property was in existence for 10 months only in the previous year....... Honb'l HC said fine but then it's not that what cannot be taxed as "House Property" cannot be taxed at all..........the receipts falls very much in the defination of income therefore it can be taxed as "Other sources"

Hence we caanot apply the above case in the prsent facts............

I hope it is clear.......

Max Payne (employed) (2569 Points)
Replied 24 February 2010

Amir bro... Please explain little more after reading below...

But Eapen's case, the source was not in existence for whole year, so it was IFOS... It came in to existence during the year so it was IFOS..

Til now the building was not a "source", it was only a business asset....

THE BUSINESS ITSELF WAS THE SOURCE for which house was being used....

Now, HOUSE IS THE NEW SOURCE coming into existence during the year......

So, why eapen's case rule cant be applied here to make it IFOS and not Income from HP....?

I am admitting that Eapen's case itself is a questionable decision, but if it is IFOS, there would be no interest limit as in section 24..... also all expenses could be claimed..... if it is IFOS......

Amir (Learner) (4016 Points)
Replied 24 February 2010

Bhai,

I hope u could make out the diffence in the following two cases -

Case 1 - Asset was not in existence at all.

Case 2 - Asset was not in existence for Letting out.

In both the above cases one thing is COMMON the assset was not available for letting out.

Now Honb'l HC has held that we cannot apply the concept of "Annual Value" since the asset was not in existence for the entire year.

Further expected rent is "the sum for which the property might reasonably be expected to let from year to year"

Now, Law has not specified that property at which point of time in the year to be taken for this purpose..

I mean as on last day, as on first day or some where in between, it could be anything, to me "As per assessee's choice" so why not when there is no property at all.

In case 2 -

As per assessee's choice obviously - but at least we have a property in this case........So it can be taxed as House Property...

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