Facts of the Case

The assessee, engaged in the business of real estate development and construction, had completed certain residential and commercial units which remained unsold and continued to be reflected as stock-in-trade.

The Revenue assessed notional rental income on these unsold properties under the head “Income from House Property.” The assessee argued that such properties formed part of business inventory and therefore no notional rent could be taxed.

The ITAT rejected the assessee’s contention and upheld the Revenue’s stand relying upon earlier judgments in the assessee’s own cases. Aggrieved, the assessee approached the Delhi High Court under Section 260A.

 Issues Involved

  1. Whether unsold flats held as stock-in-trade by a builder are taxable under the head “Income from House Property”?
  2. Whether Section 23(1)(c) can be invoked where such unsold flats were never actually let out?
  3. Whether notional Annual Letting Value (ALV) can be assessed on such unsold inventory?
  4. Whether Section 23(5), inserted by Finance Act, 2017, applies retrospectively?

 Petitioner’s Arguments (Assessee’s Contentions)

  • The assessee argued that the unsold flats constituted business stock-in-trade and therefore income therefrom should fall under business income.
  • It was submitted that after amendment to Section 23 w.e.f. 01.04.2002, the annual value of vacant properties should be taken as nil under Section 23(1)(c).
  • The assessee relied on Premsudha Exports Pvt. Ltd. v. ACIT (Mumbai ITAT) and contended that even if the property remained vacant throughout the year, ALV should be nil.
  • It was argued that intention to let out should be sufficient for claiming vacancy allowance.

 Respondent’s Arguments (Revenue’s Contentions)

  • The Revenue argued that ownership of property attracts Section 22 irrespective of the fact that it is stock-in-trade.
  • Section 23(1)(c) applies only where the property was actually let and remained vacant subsequently.
  • Since the assessee never let out the unsold units, vacancy allowance could not be claimed.
  • Notional ALV under Section 23(1)(a) was rightly assessable.

 Court Findings / Court Order

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

Key Findings:

1. Unsold Stock-in-Trade is Taxable under House Property

The Court held that merely because flats were held as stock-in-trade would not exempt them from taxation under Sections 22 and 23. Ownership remains the basis of taxation.

2. Section 23(1)(c) Requires Actual Letting

The Court clarified that vacancy allowance under Section 23(1)(c) applies only when:

  • Property is actually let;
  • Property remains vacant wholly or partly; and
  • Due to vacancy, rent received is lower than ALV.

Since the flats were never let, Section 23(1)(c) was inapplicable.

3. Intention to Let is Not Sufficient

The Court rejected the proposition that mere intention to let out property is enough for claiming vacancy allowance.

4. Section 23(5) is Prospective

The Court held that Section 23(5), introduced by Finance Act, 2017 granting relief for unsold stock-in-trade, applies prospectively from 01.04.2018 and not retrospectively.

 Important Clarification

The judgment makes it clear that before insertion of Section 23(5), builders holding completed unsold inventory were liable to tax on notional rental income under Section 23(1)(a).

Vacancy allowance under Section 23(1)(c) cannot be claimed unless there was actual letting in the relevant or earlier year.

Section 23(5) created a new legal benefit and was not clarificatory in nature.

 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 to High Court

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

Disclaimer

This content is shared strictly for general information and knowledge purposes only. Readers should independently verify the information from reliable sources. It is not intended to provide legal, professional, or advisory guidance. The author and the organisation disclaim all liability arising from the use of this content. The material has been prepared with the assistance of AI tools.