Income tax laws are quite well-defined when it comes to taxation of income from housing property. Any income earned on a let-out or rented property is taxed as income for an individual while giving deductions for the municipal taxes paid, standard deduction (at 30 per cent) and interest repayment for home loans.
Relevant provisions under the Income Tax Act, 1961 (I-T Act), also provide that where a house owned by an individual is used by him, then the annual value of the property (self-occupied) shall be taken as nil or zero for the purpose of computation of income. Similarly, if any individual (owner) cannot or does not occupy his own house on account of his employment, business or profession being carried on at any other place/city and resides in a house that is not his own, then the owned property is deemed to qualify as a self-occupied property even when not occupied. Consequently, the annual value for such properties is also considered as nil for tax purposes.
Past judicial decisions have held that the relevant tax provisions discussed above make it clear that the benefit of relief with respect to self-occupied properties is available only to individual taxpayers and no other category of taxpayers. Judicial rulings have held that the usage of words ‘his own residence’ in the provisions of the I-T Act, unmistakably show that the owner of the property must be a person or individuals. Consequently, partnership firms or companies being not able to ‘physically reside’ in a property are fictional entities and not allowed to claim the benefits as discussed above.
In one of the recent cases that was referred to the Gujarat High Court, the taxpayer being a Hindu Undivided Family (HUF) had sought to claim relief for one of its properties to be claimed as a self-occupied one. The taxpayer was an HUF deriving income from housing properties. During assessment proceedings, the I-T officer denied the referred benefit to the taxpayer (HUF).
At the first appellate level, the authority held that such benefits were available only to an individual and not to an HUF. However, the I-T Appellate Tribunal, at the second appeal level, allowed the benefit to the HUF as well.
Can HUF claim the benefit?
The tax department relied on several judicial decisions, including the one in relation to the benefits denied to partnership firms. It further argued that the benefit was available only to an individual human being and not ‘fictional entities’ including HUF. References were drawn to a similar provision under the Wealth Tax Act, 1957, which provides exemption from wealth tax with respect of a house belonging to the taxpayer and exclusively used by him for residential purposes.
In one of the earlier cases that came up under the Wealth Tax Act, the Gujarat High Court had ruled that as an HUF can own property and reside in such a house, it is also allowed to claim the exemption under the Wealth Tax Act.
Based on this ruling, the Gujarat High Court held that it is not correct to state that an HUF is a ‘fictional entity’. HUF is nothing but a group of individuals related to each other by blood relations or in some manner. An HUF can be seen as a family or a group of ‘natural persons’. It cannot be disputed that the such a family can reside in the house, which belongs to them (an HUF).
HUF is group of family members
A family cannot consist of ‘artificial persons’. Further reference was drawn to the relevant section under the General Clauses Act, which clarifies that words referred to in any statutes in masculine gender (like him/his/he) shall be taken to include females and words in singular shall include plural and vice versa.
Taking a cue from the same, the honourable High Court held that the word ‘owner’ and ‘his own’ as referred to in the relevant provisions of the Act would include words ‘owners’ and ‘their own’, respectively. Thus, there is nothing contrary in the provisions to exclude its application to HUF, which is nothing but a group of individuals related to each other.
In support of the above, the honourable High Court held that an HUF too, is entitled to claim the benefit of a self-occupied property under the relevant provisions of the I-T Act if its members are using the property for residing in it. This judgement will help provide relief to many families who have their ancestral homes devolved in the names of their HUFs or for those who prefer to acquire properties in HUF names for tax planning purposes. With this ruling being in favour of the taxpayer, the ambiguities surrounding HUFs got clarified.
Relatives’ gifts to HUF
Special attention is invited to the provisions of the Finance Bill, 2012 in relation to the amendment of the definition of ‘relatives’ for the purpose of taxation of gifts received from them.
From the time of its introduction, there was ambiguity with respect of gifts received by an HUF, as the section was silent on the explanation of the term ‘relative’ for an HUF. The Bill has amended the term to interpret members of the HUF as its relatives, thereby meaning that any money, movable or immovable property (within the limits defined in the provision) received by an HUF from its members could be tax exempt. The recent clarifications in interpretations are definitely helpful for taxpayers who have an HUFs.