Who Pays Tax on Disputed Property? A Complete Guidance
In taxation, ownership of property is a crucial determinant for assessing income under the head “Income from House Property.” But what happens when the ownership of a property is under dispute? The Income Tax Act, 1961, addresses this scenario to ensure that taxation is not evaded due to unclear ownership status. This blog explores how disputed ownership impacts taxation under this head.
What Is Disputed Ownership?
Disputed ownership arises when the title or ownership of a property is challenged or unclear due to legal proceedings, conflicts between parties, or inheritance claims.
Common Scenarios of Disputed Ownership
- Family Disputes: Conflicts over inherited property among family members.
- Legal Claims: Ongoing court cases regarding rightful ownership.
- Fraudulent Transactions: Disputes arising from forged property sale agreements.
Taxation Rules for Disputed Ownership
The Income Tax Act ensures that the income from house property is not exempted due to ownership disputes. The following rules govern such cases:
1. Taxable in the Hands of Possessor
Until the dispute is resolved, the person who enjoys possession of the property or derives income from it is deemed the owner for tax purposes.
For example:
- If a person rents out a property under dispute and earns rental income, they will be taxed under the head “Income from House Property” until ownership is legally transferred.
2. Final Court Decision Supersedes Dispute
Once the court decides the rightful ownership, the taxable income is transferred to the declared owner.
- Any tax paid during the dispute by the interim possessor cannot be reclaimed unless explicitly ruled by the court.
3. Income from the Property Remains Taxable
Regardless of the ownership status, the annual value or rental income of the property is taxable. This ensures that the property’s income does not escape taxation.
Key Judicial Precedents
- Re, Keshardeo Chamaria (1937)
The Calcutta High Court held that until the dispute over property ownership is resolved, the Income Tax Department considers the interim possessor as the owner. - Estate of Ambalal Sarabhai v CIT (2000)
The court ruled that if life interest in a property is contested, the legatee (the person receiving income from the property) is liable to pay taxes on the property income.
How Is Income Computed During Ownership Disputes?
1. Let-Out Property
If the disputed property is rented out, the rental income is taxed in the hands of the possessor under Section 22.
- Gross Annual Value: The higher of actual rent or reasonable expected rent is considered.
2. Self-Occupied Property
If the property is self-occupied by one of the disputing parties, the annual value is considered nil, provided they meet the conditions of a self-occupied property under Section 23.
3. Vacant Property
If the property remains vacant during the dispute, notional income based on the property’s potential rental value is taxable.
Steps to Avoid Tax Complications During Disputes
- Maintain Proper Documentation: Ensure all property-related documents (ownership deeds, rental agreements) are updated.
- Declare Income: Report any income derived from the disputed property to avoid penalties for tax evasion.
- Seek Legal Advice: Consult a legal expert for clarity on ownership status and tax implications.
Frequently Asked Questions
1. Who is taxed when ownership is disputed?
The person in possession of the property or earning income from it is taxed until the dispute is resolved.
2. Can income from disputed property be exempted?
No, income from disputed property cannot be exempted. It is taxable in the hands of the possessor.
3. How is tax liability transferred after a court judgment?
Once the court declares ownership, the tax liability is transferred to the rightful owner for subsequent years.
4. What happens if the property is vacant during the dispute?
Notional income based on the potential rental value is taxable even if the property is vacant.
5. Can tax paid during the dispute be recovered?
No, tax already paid by the possessor cannot be reclaimed unless specified in the court ruling.
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