S. Murlidharan

My tenant has to pay me Rs 10,000 per month according to the lease agreement. He was in occupation of the property from January 1, 2005, and paid rent only for three months. He continued to occupy my property till December 31, 2005, when he vacated without clearing the dues to me despite several reminders. I have proceeded against him in an appropriate judicial forum to recover the outstanding rent. Try as I did, I couldn't find a suitable tenant till April 15, 2006. What would be the tax consequence for me for 2005-2006?

O.S. Pakkirisami, Chennai

As you have taken legal steps to recover the outstanding rent and otherwise fulfil rule 4, the unrealised rent would not be included in the annual value. And for the last quarter of the financial year, nothing can be included in the annual value because during this period the property was vacant. In the event, the annual value would be nil. You can deduct interest if any payable for buying, constructing or renovating this property thus resulting in a loss from this house. But should you win the case initiated by you or otherwise recover the unrealised rent in future, it would be taxable as income from house property, irrespective of whether you still own it or not.

My building, my office

I am a partner in a firm, which is using my house as its office. Will this house be liable to tax?

Shreeshant Ruia, Ahmedabad

A building used by the assessee for his business or profession is not taxable under section 22. There are several judgments to support the contention that in the case of firms, the occupation of a building owned by one of the partners is sufficient to give him immunity from tax liability.

Build before...

I sold my house in Chennai in March 2006 and had earlier in November occupied a flat in Hyderabad. The cost of the Hyderabad house is Rs 30 lakh and the long-term capital gain from the Chennai house is Rs 10 lakh. Can I get exemption under section 54?

S. Sridhar, Hyderabad

You had two options — purchase or construction. When a house is built using the advance paid by the buyer from time to time on self-finance basis, the presumption is that it was constructed and not purchased. And this precisely is the problem for you. While purchase of the replacement house can precede the sale of the original house by as much as one full year, construction must be completed within three years from the date of such sale. In other words, construction must follow sale. You therefore seem to have jumped the gun.

You ought to have sold the Chennai house before the Hyderabad house was constructed. Of course, the law is irrational when it allows purchase of replacement house to be anterior to the sale of the original house without allowing the same leeway in the case of construction.

But then one cannot quarrel with the law unless one is prepared to challenge it in an appropriate judicial forum. But you don't have to despair. You can invest the capital gains under an alternative tax shelter — section 54EC — within six months in one of the prescribed infrastructure bonds with a lock-in period of three years.

The author is a Delhi-based chartered accountant.

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