Deduction of house property tax if not paid by assessee.

Computation of Annual value – The assessment year 2001-02 –

Total House property tax	Rs 3,50,000/-
Tax paid by the assessee	Rs 3,00,000/-
Tax paid by the purchaser	Rs 50,000/-

Whether Deduction of house tax paid Rs 50,000/- is allowable to assessee?

 

Analysis of facts:

The assessee who owned certain property sold the same to one ‘S’. While computing the income under the head ‘Income from house property, the assessee claimed deduction of Rs. 3.5 lakhs on account of property tax. Out of Rs. 3.5 lakhs, Rs. 3 lakhs was paid by the assessee and Rs. 50,000 was paid by ‘S’ who purchased that property. The Assessing Officer disallowed Rs. 50,000 on the ground that same was not paid by the owner of the house.

Under the head ‘Income from house property,’ the assessee claimed payment of Rs. 3,50,000 as a deduction on account of property tax against rent from the property being ½ portion of 35-B, Pusa Road, New Delhi. The assessee declared a rental income of Rs. 4,84,500. The amount of Rs. 3 lakhs was found paid by the assessee and hence allowed as such. However, another sum of Rs. 50,000 was paid by Smt. Sunita Oberoi/Shri Sunil Oberoi have purchased this property. These amounts were not paid by the assessee but by the aforesaid two purchasers. It was contended by the assessee that since the property was agreed to be sold by the assessee and till the date of sale the liability of property tax rests with the assessee, the amount was claimed as expenses against property income. The Assessing Officer held that such contention is not borne out from records. The amount is not paid by the assessee and hence not allowable under section 23 of the Act. Ld. Commissioner of Income-tax (Appeals) held that property tax is payable to the seller till the date of sale and since the claim relates to the period which is agreed up to the date of sale is allowable as such.

 

Law relating to deduction of property tax under income tax act:

While computing annual value under section 23, the tax levied by local authorities in respect of the property is to be deducted. However, the same is deductible, provided the same is paid by the owner thereof. The relevant portion of the law is reproduced below:

Section 23(1) …..

Provided that the taxes levied by any local authority in respect of the property shall be deducted (irrespective of the previous year in which the liability to pay such taxes was incurred by the owner according to the method of accounting regularly employed by him) in determining the annual value of the property of that previous year in which such taxes are actually paid by him.

Thus, principles arise relating to deduction of property taxes in computing “Income under the head house property” is summarized below:

1. Deduction of such taxes is allowed from “Gross Annual value” to calculate “Net Annual Value”.
2. Taxes relating to the local authority or municipal taxes shall be inclusive services taxes and/or GST etc also
3. These taxes must be borne by the assessee
4. Taxes must be paid by the assessee during the previous year irrespective of the previous year in which liability to pay such taxes arises.

Conversely, municipal taxes levied by the local authority but not paid by the assessee during the previous year, are not deductible.

Further, if the property is situated in a foreign country, municipal taxes levied by the foreign local authority are deductible if such taxes are paid by the owner.

However, the amount paid by the owner assessee to a municipality for regularization of unauthorized construction is not deductible.

Moreover, in case house property tax is paid by some other person other than assessee and evidence on record suggests that the assessee has reimbursed the said amount to the person paying the same. In such case also, municipal taxes shall be deductible to the assessee in the previous year in which the assessee reimbursed the said taxes irrespective of the fact that such taxes paid by other people to authorities later on.

In nutshell, an amount of municipal tax is deductible on a payment basis and not on a due or accrual basis. Hence, it should be ensured that municipal taxes are actually paid during the previous year if the assessee wants to claim a deduction of the same in the assessment year.

Since the owner of the property had not paid the property tax. There was no material on record to suggest that the assessee had subsequently paid the amount to the buyer of the property. Accordingly, the Assessing Officer was justified in disallowing the sum in question. The Commissioner was, therefore, in error in deleting the disallowance. The disallowance was restored.