vat asco "Be Chapter 5 9 EEXSUE Oy Waasfiessa eR Ata lind sere ott at nile ate ‘uo: INCOME FROM PROPERTY.) | [Section 15)” nai 7 yonur adobe veld 2s) Hoitien’) AM patiwuiesa to 4 The rent received or receivableby'a person for'a' tax ‘year'ig ‘thé Second’ Source of income and is chargeable under. the head, income from: property, other than'the rent which is exempt from tax. RE onal HUE Explanation Property means constructed building or land. Hone Building means block of brick stone work 1g ‘overed by roi porary huts of for storing Land means vacant Plot uséd for erecti ‘0 thaterials, 2B OF tvs 7 eet st aah, Rent means any amount re ble by. the owner of land or ‘a building for its use of the right to use its occupation, The,amount of rent shall not be less than the fair market rent, 19) It.means that where the land-or ‘building ‘is iet-on reht-and the’ actual amount of rent received,or receivable-is less than ‘the: fair:market rent then fair market rent shall, be taken as. the. amountiof rent: ‘The ‘above: shall not apply where the fair market rent is included in the-income of the lessee’ (tenant) chargeable to tax under the head salary Fair market rent means the Amount. of rent determined on the basis ofa imilar, property-:in, the same Or similar‘locality at that aril bins boviaoat eeu ti soit ai qesee ri Procedure for Computing the Ainoiint Of Rent’ °°" For income tax purposes rent means and includes the following I... The amount received or receivable by the owner of land or a “building for its usé or the: right to use its, occupation,, is the {amount of rent. it Ie ila ine eat - tah oT GOO. 2.” Any forfeited deposit paid under a contract for the sale of land ores building is also included in the amount ofrrent. 3 "Any obligatiortof the ovine. Paid by the tenant, © 1+ 4. One tenth (1/1 0") of the advance not adjustable against rent.138 INCOME TAX. Se a te % Mr. Aslam is the owner of the building which is let out to Mr. Bashir for Rs. 18,000 per month‘on 1" July 2019. During the year he contracted with Mr. Bashir for the sale of building for Rs. 100,000 and received Rs. 100,000 as token money and agreed to pay the balance amount at the end of the year. Before the date of maturity, Mr. Bashir breaches the contract and as er terms of agreement token money paid is forfeited by Mr. Aslam. Calculate the income from property of Mr. Aslam for the year ended 30 June 2020. Solution a Amount of rent received (Rs. 18,000x12) Rs.. 216,000 Amount of token money received & 100,000 Total amount of rent chargeable to tax. 316,000 Note: For income tax purposes forfeited amount becomes a part of the rent and is chargeable to tax under the head income from Property. ° Unadjusted Advance Received by the Owner + [Section 16] ‘The unadjustable advance received by the owner is chargeable under the head income from property according to the following procedure: 1. Where the owner of a building receives from his tenant an advance amount which is not adjustable against the rent payable by the tenant, such advance amount shall be treated as rent and is chargeable to tax under the head “income from propérty” for the tax year in which it was received and the following nine tax years in equal proportion. [Section 16(1)]} CES Mr. Saleem rented out his property to Mr. Akram for Rs. 7,500 per month on 1* July 2017. He also received unadjustable advance amount to Rs. 90,000 from Mr. Akram. The rental value of the property was determined as Rs. 100,000by the tax authorities. Calculate the income from pro} of Mr. Saleem for the year ended * 30" June 2018. — aINCOME FROMPROPERTY =, 139 Solution a Rent value of property Rs.. 100,000 th of unadjustable advance cel 7 29,000 under section 16(1) (90,000 x 75) Total amount of rent chargeable to tax : 109,000 Note: Rs. 9,000 will be added to the rental value of property for ten con- + tenuous tax years unless the amount of advance js refunded back. 2. Where an.amount is refunded by the owner to the ténant on termination of the tenancy before the expiry: of ten years, no portion of the amount shall be allocated to the tax-year in which it is refunded or to any tax year thereafter, In Illustration. 2 above, Mr. Akram vacated the property on’ 30% June 2019 and the ‘amount of advance Rs. 90,000 was refunded to him by +* Mr. Saleem. The rental.value-of the property was determined as Rs. 120,000 by the tax authorities. What will be the income. from Meee ae the year. ended.on 30" June 20197 lu foe 2 Solution : Income from property for the tax year 2019 will be Rs. 120,000 because as explained above one tenth advance will not be added in the income during the tax year it is refunded or after that. However, it must be” noted that no credit il be aes for'Rs. 18,000 ‘ateedt during: the jest two years, * 3. ° Where after vacation of property by one tenant, it is let out to another tenant and after returning the advance to the previous tenant, another similar advance is taken from the succeeding tenant, the amount of ‘succeeding advance: as reduced by the amount of previous advance charged to tax, shall be deemed to be the income of the taxpayer under the head “income from property”. This amount will be charged to tax during the tax year. ILLUSTRATION 4 . ‘ sor opt * Suppose in Illustration 3 above, Mr. Saleem again rents out the property on 1% July 2019 to Mr. Ali for Rs. 12,000 per month and’ receives unadjustable advance amounting to Rs. 120,000. Calculate the income from «property for the tax year ended on 30" June 2020.140 INCOME TAX. Solution 5 Rental income from property (Rs. 12,000 x 12) Rs. 144,000 ‘W of (new advance - portion of : old advance already charged to tax) : 10,200 ~ Total rent chargeable to tax : 154,200 4. Any burden of the owner (i.e., municipal taxes and other local taxes) paid by the tenant. Se Where the property is let out and tenants bear the cost of repairs in that case the amount of repairs becomes the part af the rent and. is chargeable to tax. Liability in Case of Co-Owner [Section 66] Where any property to which section 15 applies-is owned by two or more persons and their respective shares are definite and ascertainable, such person shall not be assessed as an association of persons. In this case, the- share of each such person is the income from property and shall be included * in his individual total income. Income from Property not Taxable under Section 15 : Rental income from the following properties are not taxable under section 15 rather treated under section 39 as “income from other sources”: 1. Ground rent. 2. Rental income from building kept on lease together with plant and machinery. Rental income derived by subletting a building or land by a tenant. 4. Mining right and royalty. 5. Provision of amenities, utilities or any other service connected with renting of building. Income from Property Exempt from Tax 15a Rental income from the following property is exempt from tax: 3. Income from agricultural building. Income from property held under Trust. . Rental value of owner's occupied residential property. Rental value of owner’s occupied business property. peINCOME FROM PROPERTY . 141 Taxation of Income from Property . [Section 15] After the fair market value of a property is calculated the amount will be reduced by certain: statutory deductions. The allowable deductions and other relating rules are as follows: “ ‘ DEDUCTIONS [Section 1SA(1)]} The following deductions are allowed from property income * + \ Repairs Alowance ‘ ae | [Section 1SA(1)(a)] A deduction of one fifth of rent chargeable to tax for the year will be allowed as repairs allowance. This amount will be calculated before ‘any deduction is made. It is a fixed amount irrespective of actual expenditure on repairs which may be more or less. Insurance Premium 7 _ [Section 1SA(1)(5)] The amount of any premium paid or payable by the company in the year to insure the building against the risk of damage or destruction will be allowed. Municipal Taxes and Other Local Taxes [Section 1SACIXC)] Any local rate, tax, charge, or cess in respect of the property or let out property paid or payable to any local authority or government in the year, not being a tax payable under the Income Tax Ordinance, 2001. Ground Rent . [Section 1SA(1)(«A)] Where the property is subjected to a ground rent, the amount paid or payable by the company jin the year on account of such ground rent is allowable deduction, Ground rent means where the person is a lessee in respect of the site on which the building is erected, any rent which is due whether paid or not for that year is called ground rent. Where the building site belongs to the company, no liability on account of ground rent can arise in that case. Profit Puid or Payable on Borrowed Money [Section 15A(I)(e)} Any profit paid or payable by the person in the year on money bor- rowed for the purchase, construction, renovation, extension or reconstruction of the property can be deducted.142 INCOME TAX Share of Rental Income Paid to Financial Institution [Section 15A(1)()}"‘** Where the property has been~ purchased,’ constructed, renovated, extended or reconstructed by the person with capital contributed by the House Building Finance Corporation or a scheduled bank, the amount of any’ share of rental income paid on such capital and share towards appreciation in the — value of property (excluding the return of capital, if any). EHO TIES Profit Paid or Payable on Mortgage [Section 15A(1)(g)} Where the property is subject to mortgage or other capital charge, the amount of profit paid or payable on such mortgage or charge. Administration and Collection Charges [Section 1SA(1\A)] Any sum paid or payable by the company- on account of administration and collection charges to collecting the rent or 4% of the rent chargeable to tax before allowing any other deduction, whichever is‘less, is deductible from the rent chargeable to-tax. W.e.f. tax year 2021 the maximum collection «* charges will be 4 % of rent chargeable to tax., Rs. , Rs: Rent chargeable to tax(tax year 2021) 72,000 Administration and Collection charges! ‘ " wee" 1,000. Solution - 3 Rent chargeable to tax (RCT) 1 72,000 Less Repair charges 4 of RCT 14,400 =. (Rs. 72,000 x 4) : _ Administration and Collection charges Actual expenditure (Rs. 1,000) or 4% of RCT (Rs. 2,880), whichever is less, ie, deducted 1.000 15,400 Taxable property income 5 36,600 In this case; the amount actually spent on collection charges: is Rs. 1,000 which is allowable deduction. If collection charges exceed 4% of the rent chargeable to tax then it is restricted upto 4% and if the collection charges are less than 4% of the RCT then actual amount spent is allowed. Saree : Rs. Rs. Rent chargeable to tax (tax year 2021) 72,000INCOME FROMPROPERTY = « * » 143 Administration and Collection: Charges). -» s s 5 «5,000 Solution - 3 i Rent chargeable to tax (RCT)" heel 72,000 Less Repair charges 1" of RCT __ 14,400 (Rs. 72,000 x +) Administration and Collection charges... Actual expenditure (Rs. 5,000) or 4% of RCT Rs. 2880) #) Whichever is less will be deducted ae wee! “2880 ; Total Deductions, a 17.280 Taxable property income (72,000 - 17,280). : 54,7220 Legal Expenses . ,. -[Section.15A(1)(9] _ , Any amount paid or payable in the tax year for legal services acquired to defend the person’s title of the property or any suit connected with this matter in,a court of law can also be deducted fromthe rent chargeable to tax. Unrealized Rent 1 [Section ISAC] < If the rent payable by a'tenant cannot be recovered by the owner of the Property, such .unrealized. rent is deductible subject to the following conditions: 1. The tenancy is bona fi fie. : ee 2. The defaulting tenant has: vacated or steps have been taken to | * =~ compel him to vacate ‘the property. 3. The defaulting tenant is not in occupation af any other property of the companys 91? £84 GSE 8 ‘The company has'takeri all reasonable steps to institute: legal " Proceedings for the recovery of the unpaid rent. Recovery of Unpaid Rent 7 “~~ ‘[Section 15A(2)] Where an unpaid rent allowed as a deduction and subsequently during any tax year the company has recovered wholly or partly of such rent, the amount so recovered shall be chargeable to tax in the tax year in which it is recovered. “*144 INCOME TAX. Deduction Allowed but not Paid within 3 Years [Section 15A(3)} Where a company has been allowed a deduction under section 15(A) and the same has not ‘been paid within 3 years of the end of the tax year in which the deduction was allowed, the unpaid amount of deduction shall be chargeable to tax in the tax year immediately after the end of the three years. Deduction Allowed and Paid in the Subsequent 3 Years {Section 15A(4)] The unpaid amount of deduction which was chargeable to tax in the subsequent three years, shall be allowed as deduction inthe tax year in which the payment is made. Deduction Allowed under Section 15 Not Deducted under any Other Head . JSection 15A(5)] The allowances and deductions under section 15(A) shall not be allowed as deduction for the Purpose of, computing income of the company under any other head. Deductions not Allowed ~ [Section 15A(6)] The provision of section 21 shall apply in determining the deductions allowed to a person under this section in the same manner as they apply to the allowances. and deductions in respect of income chargeable u under the head “income from business”. TAXATION PROCEDURE OF COMPANY FOR TAX YEAR 2021 After the above deductions are made the remaining amount will be included in the total income of a company , and will be taxed at the rate applicable for the tax year 2021 @ 20%. A change has been introduced by the Finance Act, 2021, now all the taxpayers (including individuals and Association of Persons) will be entitled for the above deductions w.e.f. tax year 2022. ADVANCE TAX ON RENT PAID TO A COMPANY. Irrespective of the property taxation under the above mentioned procedure,.the person making the payment of rent to a company should deduct advance tax at the rate of 15 % of the gross amount of rent.