Shahrukh Khan must pay tax on notional rent from Dubai villa, rules ITAT

MUMBAI: Actor Shah Rukh Khan has to include notional rent from his Dubai villa in his income-tax return filed in India, the Income-tax Appellate Tribunal (ITAT) has ruled.

Khan had submitted to the ITAT that under the India-UAE tax treaty, income from immovable property in Dubai would be liable to tax in the UAE and, therefore, he had not offered it to be taxed in India.

The ITAT rejected his contention. However, the two member ITAT (Mumbai) bench of Amit Shukla and G S Pannu added: "Credit for taxes paid in the UAE, if any, would be allowed as per the law."

The ITAT directed the I-T officer to rework the final liability, which would arise in the hands of the actor, under the head "Income from house property".

This decision will have wide ramifications for taxpayers having a second home overseas, especially those who fall under the jurisdiction of the Mumbai bench of the ITAT.

"In many instances, I-T authorities have been holding that rental income from overseas residential property (or deemed rental income, if the house is not let out) would be taxable in India. This ITAT decision will strengthen their argument," said Shuddhasattwa Ghosh, partner, people advisory services, at EY India.

Under the I-T Act, if a person has two residential properties, only one can be treated as "self-occupied" and exempt from I-T. The other is taxed under the head "income from house property" based on the annual value (in general terms deemed rental value or notional rent). Certain deductions are allowed to arrive at the taxable income from the house property, such as a 30% standard deduction and also municipal taxes paid on such property.

The Bollywood actor had been gifted a villa in Dubai and he obtained possession of it on June 18, 2008. For the financial year 2008-09, the I-T officer estimated the deemed rental value to be Rs 96 lakh. After allowing for a 30% standard deduction, he sought to tax Rs 67.2 lakh in the hands of Khan

The Commissioner of I-T (Appeals) also upheld this action, after taking into consideration a clarificatory notification issued by the Central Board of Direct Taxes. The notification dated August 28, 2008, which was issued consequent to an amendment in the I-T Act, says when a tax treaty entered into by India states that income of a tax resident of India "may be taxed" in the other country, such income shall first be included in his taxable income in India. Subsequently, relief will be granted for taxes if any paid overseas. This led to Khan filing an appeal with the ITAT, but his appeal was rejected.

Besides Dubai, the UK, US, and Canada are popular destinations for investment in house property by rich Indian taxpayers. According to Ghosh, tax treaties entered into with these countries contain similar wordings as the India-UAE tax treaty. "Thus, tax-payers in India, who own a second home in these countries, should be doubly careful and must include the rental income in the I-T return they file in India. They can claim a credit for taxes paid in such other country, as per the provisions of the relevant tax treaty," Ghosh added.