Deemed Let-Out Property: Contemporary Tax Treatment of Residential, Commercial and Stock-in-Trade Units After the Finance Act, 2024

 

A central feature of the scheme of taxation under the head “Income from House Property” is the principle that property capable of generating income should not escape taxation merely because the owner chooses not to exploit it. The statutory construct achieves this through the fiction of “deemed letting out,” contained primarily in Section 23(1)(a) of the Income-tax Act, 1961. This provision ensures that where a property is neither self-occupied nor actually let, the law imputes a reasonable rental value—termed the annual value—for taxation purposes.

 

Historically, this concept applied principally to residential properties beyond the one or two units permitted for self-occupation under the proviso to Section 23(2). Over time, however, the jurisprudence has extended the understanding of “house property” to commercial units and even to inventories held by real-estate developers as stock-in-trade. This expansion has been shaped through a combination of statutory amendments and judicial interpretations, culminating most recently in the Finance Act, 2024, which has introduced significant changes to the treatment of unsold properties held by builders.

 

1. The Statutory Framework of Deemed Let-Out

 

Section 22 charges tax on the annual value of property consisting of any buildings or lands appurtenant thereto. Section 23(1)(a) defines the annual value as the amount for which such property might reasonably be expected to let from year to year. This creates a notional standard against which vacant properties are evaluated. The fiction applies automatically where the property does not fall within the self-occupation exemption and is neither actually let nor covered by vacancy relief under Section 23(1)(c).

 

Judicial decisions have consistently held that the intention of the owner not to let the property, or the property remaining vacant, is immaterial for purposes of Section 23(1)(a). The Delhi High Court’s ruling in Ansal Housing Finance & Leasing Co. Ltd. is a leading authority affirming that even properties held as stock-in-trade may attract deemed rental taxation if they remain vacant. This established an important line of reasoning: classification as business inventory does not, by itself, alter the charging section where the property is otherwise capable of yielding rental income.

 

2. Legislative Intervention for Stock-in-Trade: Section 23(5)

 

In light of the practical difficulties faced by the real-estate sector—especially during periods of economic slowdown—the Finance Act, 2017 introduced Section 23(5) to provide temporary relaxation to developers. Under this provision, the annual value of property held as stock-in-trade, and remaining unsold after completion of construction, shall be taken as NIL for a specified period from the end of the financial year in which the completion certificate is obtained.

 

Originally introduced with a one-year exemption, the period was later extended to two years. Recognising persistent inventory cycles and the commercial realities of delayed sales, the Finance Act, 2024 has now extended this exemption to three years. The amended provision thus grants a three-year buffer during which no notional rent is imputed on unsold units held as stock-in-trade.

 

Importantly, the statute applies to “any property” held as stock. Consequently, both residential flats and commercial units qualify for the three-year NIL annual value treatment. The exemption is not confined to residential dwelling units, nor is it linked to the usage character of the property. What matters is that the property is part of the developer’s trading inventory and remains unsold.

 

3. Post-Exemption Taxability: Reversion to General Principles

 

Once the three-year period expires, Section 23(5) ceases to apply and the determination of annual value reverts to the general mechanism under Section 23(1). Thus, unsold residential or commercial units held beyond the three-year window become deemed let out properties. Their annual value is computed based on the higher of municipal valuation, fair rent or standard rent, subject to statutory adjustments.

 

Crucially, even though such properties continue to be carried in the developer’s books as stock-in-trade, the head of income does not shift to “Profits and Gains of Business or Profession.” The Supreme Court’s ruling in Chennai Properties & Investments Ltd.—which allows business-head treatment where the assessee’s dominant business is letting of property—has limited application here. Real-estate developers are engaged in the business of construction and sale, not exploitation of property by renting. Therefore, the charging provision under Section 22 continues to apply with full effect after the exemption period.

 

4. Methodology of Determining Annual Value

 

Once Section 23(5) ceases to protect the property, the annual value must be determined strictly in accordance with Section 23(1). The process ordinarily involves three stages: first, estimating the reasonable expected rent (RER) based on municipal valuation, market comparables and rent control legislation, where applicable; second, allowing vacancy relief only where the property was actually let and remained vacant during part of the year; and third, computing the net annual value after deducting municipal taxes actually paid. Deductions under Section 24—30% standard deduction and interest on borrowed capital—then apply.

 

While developers often capitalise interest into the cost of inventory, they may claim deductions under Section 24(b) where interest is not otherwise capitalised. Courts have recognised that the computation under the house-property head operates independently of accounting classifications, subject to the statutory framework.

 

Conclusion

The post-2024 regime governing deemed let-out property has achieved a clearer and more rational alignment between economic practice and statutory design. Residential and commercial properties held as stock-in-trade enjoy a uniform three-year exemption from notional rent once completion is certified. Thereafter, all unsold units are brought fully within the fold of the house-property charging provisions. This ensures both fairness and predictability: developers receive reasonable time to market their inventory, while the tax administration maintains the principle that the capacity of property to generate income cannot remain indefinitely outside the tax net.

 

Disclaimer:

This article is intended solely for academic and professional analysis. It does not constitute legal advice. Readers should refer to the statutory text, relevant circulars and judicial decisions or seek professional assistance before acting on the matters discussed.