Analysis of Section 24 of the Income Tax Act, 1961

Deciphering Section 24 of the Income Tax Act, 1961: Deductions from Income from House Property

Introduction

Section 24 of the Income Tax Act, 1961 (hereinafter "the Act") is a pivotal provision that enumerates the deductions permissible from income chargeable under the head "Income from House Property." The income from house property itself is levied under Section 22 of the Act, which mandates that the annual value of property consisting of any buildings or lands appurtenant thereto, of which the assessee is the owner (other than such portions of such property as he may occupy for the purposes of any business or profession carried on by him, the profits of which are chargeable to income-tax), shall be chargeable to income-tax under this head. The determination of such "annual value" is governed by Section 23 of the Act. Once the gross annual value is determined and statutory deductions under Section 24 are applied, the resultant figure represents the taxable income or loss from house property. This article seeks to provide a comprehensive analysis of Section 24, its various components, judicial interpretations, and its evolution.

Historical Context and Evolution

It is pertinent to distinguish the current Section 24 of the Income Tax Act, 1961, from Section 24 of its precursor, the Indian Income Tax Act, 1922. Section 24 of the 1922 Act primarily dealt with the "set off of losses in computing aggregate income" (Commissioner Of Income Tax, Calcutta v. Jaipuria China Clay Mines (P) Ltd., Supreme Court Of India, 1965; Dalmia Jain & Co. Ltd. v. Commissioner Of Income-Tax, Patna High Court, 1965; M/S. Lavish Apartment (P.) Ltd. v. Asst. Commissioner Of Income Tax, Delhi High Court, 2012). In contrast, Section 24 of the 1961 Act specifically addresses deductions from the annual value of house property.

Furthermore, the reference material Jamnaprasad Kanhaiyalal v. Commissioner Of Income Tax, M.P, Bhopal (Supreme Court Of India, 1981) quotes a provision also numbered Section 24(1) of the 1961 Act, which pertained to a specific, time-bound declaration scheme (operative between 19th August 1965 and 1st April 1966) for past undisclosed income. This was a special provision and should not be confused with the general and enduring provisions of Section 24 that allow for deductions from income from house property, which are the primary subject of this article.

Over the years, Section 24 of the 1961 Act has undergone amendments, notably the shift towards a standard deduction and changes in the rules for deducting interest on borrowed capital, reflecting evolving fiscal policies.

Prerequisites for Claiming Deductions under Section 24

Before deductions under Section 24 can be claimed, certain foundational conditions must be met:

1. Chargeability as "Income from House Property" (Section 22)

The income must first be classifiable as "Income from House Property" under Section 22. This involves two critical aspects:

2. Determination of Annual Value (Section 23)

The deductions under Section 24 are computed with reference to the "annual value" of the property, determined as per Section 23. Section 23 provides mechanisms for calculating the annual value, considering factors like actual rent received or receivable, and the sum for which the property might reasonably be expected to let from year to year. The Bombay High Court in Commissioner Of Income-Tax v. J.K Investors (Bombay) Ltd. (2000 SCC ONLINE BOM 970) clarified that notional interest on an interest-free security deposit cannot be included as part of "actual rent received" under Section 23(1)(b) if the actual rent itself exceeds the fair rent determinable under Section 23(1)(a).

Analysis of Deductions under Section 24 of the 1961 Act

Section 24 currently allows for two primary deductions from the Net Annual Value (NAV) of the property:

1. Standard Deduction (Section 24(a))

Section 24(a) provides for a standard deduction of a sum equal to thirty per cent of the annual value. This deduction is a flat rate and is allowed irrespective of the actual expenditure incurred by the assessee on repairs, collection of rent, insurance, etc. This provision simplifies the computation by replacing various specific itemized deductions that were permissible under earlier regimes.

2. Interest on Borrowed Capital (Section 24(b))

Section 24(b) allows for the deduction of "the amount of any interest payable on capital borrowed for the purpose of acquisition, construction, repair, renewal or reconstruction of the property." This is often a significant deduction and has been the subject of considerable litigation.

  • Purpose of Loan: The nexus between the borrowed capital and the specified purposes (acquisition, construction, repair, renewal, or reconstruction) is crucial. The Income Tax Appellate Tribunal (ITAT) in Mrs. Anita Rani, New Delhi v. ACIT, New Delhi and Mrs. Samkiksha Mahajan, New Delhi v. ACIT, New Delhi (ITAT, 2016) dealt with cases where the claim for interest deduction under Section 24(b) was contested on the grounds that loan funds were used for purchasing land and not for construction on that land. The allowability often hinges on whether the loan for land is intrinsically linked to subsequent construction.
  • Scope of "Acquisition": The term "acquisition" can be interpreted broadly. In Assistant Commissioner of Income-tax v. Virender Singh (ITAT, 2005), a claim for interest on money borrowed to pay a tenant to vacate the premises was considered. The assessee argued that this payment led to obtaining fuller rights over the property, akin to acquisition.
  • Connection with Property's Existence: In K.S. Kamalakannan v. Assistant Commissioner of Income-tax (ITAT, 2009), the ITAT considered a scenario where a loan was taken by mortgaging a property, but the original loan was not directly connected with bringing the property into existence (e.g., for acquisition or construction). The allowability of interest on such loans under Section 24(b) requires careful examination of the directness of the purpose.
  • Pre-construction Period Interest: The proviso to Section 24(b) allows for interest pertaining to the period prior to the previous year in which the property is acquired or constructed to be aggregated and allowed as a deduction in five equal annual instalments, commencing from the previous year in which the acquisition or construction is completed.
  • Proportionate Allowance: The ITAT in M. RAGHUNANDAN v. INCOME-TAX OFFICER (ITAT, 1984) addressed the issue of allowing expenses under Section 24 on a proportionate basis when income from the property is assessable only for a part of the year. The Tribunal held that interest relevant to the period for which income is computed can be allowed, citing the principle that interest accrues from day to day.
  • Limits for Self-Occupied Property (SOP): For property that is self-occupied or cannot actually be occupied by the owner owing to his employment, business or profession carried on at any other place, and he has to reside at that other place in a building not belonging to him, the deduction for interest under Section 24(b) is subject to certain monetary limits, as specified in the provisos to the section.

The Erstwhile Deduction for Annual Charge (Section 24(1)(iv) - Omitted)

Prior to its omission by the Finance Act, 2001 (with effect from 1st April 2002), Section 24(1)(iv) of the 1961 Act allowed a deduction for "where the property is subject to an annual charge (not being a charge created by the assessee voluntarily or a capital charge), the amount of such charge." This provision generated significant jurisprudence.

The Andhra Pradesh High Court in Commissioner Of Income-Tax v. Rajah Dhanrajgiriji (1984) elaborated on the requirements for claiming this deduction: (i) the property must be subject to an annual charge; (ii) such charge should not be a charge created by the assessee voluntarily; and (iii) it should not be a capital charge.

The interpretation of "voluntarily created" was crucial. The Bombay High Court in Commissioner Of Income-Tax v. Central Bank Executor And Trustee Co. Ltd. (1992 SCC ONLINE BOM 602) considered a case where an overdraft was raised on the security of house property to pay estate duty. The court discussed that "voluntarily" is used in contradistinction to "involuntarily," which implies compulsion by law or circumstances beyond the assessee's direct control in creating the charge for a non-capital purpose related to the property. Similarly, the Delhi High Court in Commissioner Of Income Tax v. Sohan Lal Through Legal Heirs (2002) reiterated that a charge created by operation of law, decree of a court, or by a predecessor in title would be considered involuntary.

Although this specific clause has been omitted, the principles laid down in these cases regarding the nature of charges and voluntariness may still hold persuasive value in analogous contexts within tax law.

Scope of Deductions and Related Issues

It is important to delineate the scope of deductions under Section 24. These deductions are specific to income computed under the head "Income from House Property." If an assessee provides services to tenants that go beyond the basic amenities expected from a property owner (e.g., utilities, security, maintenance services for which a composite rent is charged), the portion of the income attributable to such services, and the expenses related thereto, might need to be assessed under "Income from Other Sources" or "Profits and Gains of Business or Profession." The Calcutta High Court in Commissioner Of Income-Tax v. Jyotsna Rani Saha (1998 SCC ONLINE CAL 616) observed that if rent is composite, a part forming income from house property and another part being income from other sources (for services like electricity), then restrictions on deductions under Section 24 would not apply to the portion assessed as income from other sources.

Procedural Considerations

The claim for deductions under Section 24 must be made in the return of income. However, the power of appellate authorities to entertain claims for deductions not made in the original return has been a subject of judicial scrutiny. In The Commissioner Of Income Tax, Chennai v. M/S. Abhinitha Foundation Pvt. Ltd. (2017 SCC ONLINE MAD 1978), the Madras High Court, while dealing with a deduction under Section 80IB(10), upheld the ITAT's power to consider a claim made during assessment proceedings, provided requisite material is on record. This principle underscores the plenary powers of appellate authorities and could be relevant for claims under Section 24 if similar circumstances arise.

Conclusion

Section 24 of the Income Tax Act, 1961, plays a crucial role in determining the net taxable income from house property. The introduction of a standard deduction under Section 24(a) has simplified computations for general upkeep and repairs. However, the deduction for interest on borrowed capital under Section 24(b) remains a complex area, necessitating careful consideration of the purpose of the loan, the timing of borrowing, and specific conditions related to self-occupied properties. Judicial pronouncements have been instrumental in clarifying the scope of "ownership," the distinction between house property income and business income, and the interpretation of various conditions attached to deductions. While the specific deduction for "annual charge" has been omitted, the jurisprudence it generated continues to offer insights into statutory interpretation. A thorough understanding of Section 24, supported by relevant case law, is essential for both taxpayers and revenue authorities to ensure accurate computation of income from house property.