Facts of the Case

The assessee, engaged in the business of construction and sale of residential and commercial properties, retained certain flats as unsold inventory (stock-in-trade). These properties remained in its possession pending sale.

The Revenue sought to tax the notional rental income arising from such unsold properties by invoking Sections 22 and 23 of the Income Tax Act under the head “Income from House Property.”

The assessee challenged this treatment, contending that since the properties constituted stock-in-trade and formed part of business assets, no notional income could be brought to tax. The ITAT rejected the contention, relying on earlier judgments in the assessee’s own case.

 Issues Involved

  1. Whether unsold flats held as stock-in-trade are taxable under the head “Income from House Property”?
  2. Whether Section 23(1)(c) applies where the property was never actually let out but remained vacant?
  3. Whether the amendment introducing Section 23(5) has retrospective or prospective application?

 Petitioner’s Arguments (Assessee’s Contentions)

The assessee argued that:

  • The unsold flats constituted stock-in-trade and formed part of its business assets; therefore, income arising therefrom should fall under business income and not house property income.
  • By virtue of Section 23(1)(c), where the property remains vacant during the relevant previous year, its annual value should be taken as NIL.
  • Reliance was placed on the Mumbai ITAT decision in Premsudha Exports (P.) Ltd. v. ACIT, where it was held that intention to let out coupled with vacancy may entitle the assessee to vacancy allowance.

 Respondent’s Arguments (Revenue’s Contentions)

The Revenue contended that:

  • Mere classification of property as stock-in-trade does not alter the taxability under Sections 22 and 23.
  • Section 23(1)(c) is applicable only where the property was actually let out and subsequently remained vacant.
  • Since the properties were never let out at any point, vacancy allowance under Section 23(1)(c) was not available.
  • The newly inserted Section 23(5) applies prospectively and cannot govern earlier assessment years.

 Court Findings / Court Order

The Delhi High Court dismissed the appeals and upheld the Revenue’s stand.

The Court held:

1. Unsold stock-in-trade is taxable under House Property provisions

The Court reaffirmed that unsold flats held by a builder are subject to taxation on notional Annual Letting Value under Section 23(1)(a), notwithstanding their classification as stock-in-trade.

2. Section 23(1)(c) requires actual letting

The Court clarified that vacancy allowance can be claimed only if:

  • the property was actually let, and
  • it remained vacant for part or whole of the previous year.

Since the properties in question were never let out, Section 23(1)(c) had no application.

3. Section 23(5) is prospective

The Court held that Section 23(5), inserted by the Finance Act, 2017, applies prospectively from 01.04.2018 and cannot be applied retrospectively.

Accordingly, for the relevant assessment years, unsold stock-in-trade remained taxable on notional ALV basis.

 Important Clarification

This judgment clarifies that:

  • Mere holding of property as stock-in-trade does not exempt it from house property taxation.
  • Vacancy allowance under Section 23(1)(c) is not available unless the property has actually been let out.
  • Relief for unsold stock-in-trade under Section 23(5) is available only prospectively from AY 2018–19 onwards.

 Sections Involved

  • Section 22 – Income from House Property
  • Section 23(1)(a) – Annual Letting Value (ALV)
  • Section 23(1)(c) – Vacancy Allowance
  • Section 23(5) – Unsold Stock-in-Trade (Inserted by Finance Act, 2017)
  • Section 260A – Appeal before High Court

Link to download the order - https://delhihighcourt.nic.in/app/case_number_pdf/2017:DHC:6651-DB/SRB03112017ITA9312017.pdf

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