Vide Finance Act, 2017, sub-section (5) has been inserted in section 23 of the Income-tax Act, which reads as under:

“(5) Where the property consisting of any building or land appurtenant thereto is held as stock-in-trade and the property or any part of the property is not let during the whole or any part of the previous year, the annual value of such property or part of the property, for the period up to one year from the end of the financial year in which the certificate of completion of construction of the property is obtained from the competent authority, shall be taken to be nil.”

Section 22 of the Income-tax Act provides for chargeability of income from house property. It provides that annual value of the property owned by an assessee, other than the property occupied for the purpose of any business or profession carried on by the assessee, is chargeable to income-tax under the head “Income from House Property”.

Section 23 of the Income-tax Act provides the determination of annual value of the property which is chargeable as income from house property. Sub-section (1) of section 23 reads as under:

“23. (1) For the purposes of section 22, the annual value of any property shall be deemed to be:

(a) the sum for which the property might reasonably be expected to let from year-to-year; or

(b) where the property or any part of the property is let and the actual rent received or receivable by the owner in respect thereof is in excess of the sum referred to in clause (a), the amount so received or receivable; or

(c) where the property or any part of the property is let and was vacant during the whole or any part of the previous year and owing to such vacancy the actual rent received or receivable by the owner in respect thereof is less than the sum referred to in clause (a), the amount so received or receivable”

As a general rule clause (a) of sub-section (1) provides that annual value of the property shall be the same for which the property might reasonably be occupied to let from year-to-year. Clauses (b) and (c) provide for modification in the amount of annual value determined in terms of clause (a). Clause (b) provides that where the actual rent received or receivable is higher, same will be determined to be annual value. Clause (c) provides for where property remains vacant and for that reason the amount of rent received is less than the sum referred in clause (a), such lower amount will be determined to be annual value. There are also certain provisions contained in proviso and explanation to sub-section (1) and also in sub-section (2), (3) and (4) which provide for certain exemption, etc. in determination of annual value in terms of sub-section (1). Same, however, are not relevant for the issue under consideration and, therefore, are not being discussed herein.

As stated hereinabove vide Finance Act, 2017, sub-section (5) has been inserted in section 23 to provide that for a period of one year from end of the financial year in which completion certificate has been obtained, the annual value of the property, which is held as stock-in-trade shall be determined to be nil. Provisions of sub-section (5) as inserted in the section, envisage that annual value in respect of property held by a builder as stock-in-trade, is subject to taxability on notional basis in terms of sub-section (1) of section 23 of Income-tax Act. Till the stage of completion of a property, income is not chargeable to tax for the reason that the property can neither be occupied nor can be let out and, therefore, even on notional basis income from there is not chargeable under the head “Income from House Property”. As and when the property is ready for occupation and completion certificate has been obtained, income becomes chargeable to tax in terms of section 23 of Income-tax Act. In case of builders, however, the property is constructed / developed by them for the purpose of sale. The property is held as stock in trade. The property is sold by the builders either before completion of property or after completion of property as and when the buyers are available for the property. Income from the business of building construction is chargeable under the head “Profit from Business or Profession”. Since the builder does not have an intention to let out the property and its purpose of holding the property is to sell the same, it has never been considered, even by the department that income from the property held by a builder as stock-in-trade is chargeable to tax on notional basis in terms of section 23 of Income-tax Act. In case the property held by a builder, may be in the nature of stock in trade, has actually been let out, the issue has been for consideration whether such actual income derived by a builder on letting out the property is chargeable to tax under the head “Income from house property”, or under the head “Profits of business or Profession”. The courts from time-to-time have taken a view in one way or other. This, however, has not been an issue generally that income is chargeable on notional basis. The issue regarding chargeability of income on notional basis had come up for consideration before High Court of Delhi in the case of Commissioner of Income-tax v. Ansal Housing Finance and Leasing Co. Ltd. and Ors (2013) 354 ITR 180. The facts in the aforesaid case have been that the assessee company was engaged in the business of development of Mini Township, construction of house property, commercial and shop complexes, etc. The Assessing Officer while passing the order of assessment for the relevant year assessed the annual letting value of the flats which the assessee had constructed, but were lying unsold under the head “Income from House Property”. The assessee had contended that such flats were its stock-in-trade and, therefore, the annual letting value of the flats could not be brought to tax under the head “income from house property”. CIT(A) deleted the addition. Tribunal also confirmed the order of CIT(A) in appeal filed by the Revenue. In appeal filed by the department before the Hon’ble Delhi High Court, the Hon’ble Court uphold the taxability of income on notional basis after discussing the case law in regard to taxability of income from house property whether chargeable under the head “Income from House Property” or as “Business Income”. During the course of arguments the contentions were raised before the Hon’ble Court that since flats were held as part of inventory and same were not meant for let out, no income was chargeable on notional basis. It was also contended that the property should be deemed to have been occupied for the purpose of business and, therefore, same is not chargeable under the head “Income from House Property”. It was also contended that under the Act income cannot be held to be chargeable on notional basis since income tax is leviable on actual income and the method of determination of annual value is only to arrive at a figure on which the income is chargeable. The Hon’ble Court, however, did not agree with the contentions and held that income in this case, like several other cases is chargeable on presumptive basis and annual letting value is taxable regardless of whether actual income is received or not. The Hon’ble Court also did not accept the alternate argument that properties were occupied for the purpose of business. Against the aforesaid decision of Hon’ble Delhi High Court, SLP was file before the Hon’ble Supreme Court. Hon’ble Supreme Court has granted leave and presently the appeal (CA No.727/2013) is pending for adjudication.

In view of aforesaid decision of Delhi High Court holding that income is chargeable in terms of section 23 of the Income-tax Act on notional basis in case of property held by a builder as stock-in-trade, the Government has taken a view that the income is chargeable in such cases in terms of sub-section (c) of section 23 of the Income-tax Act. Since as per the general rule income will be chargeable on notional basis from the date on which completion certificate has been obtained by the builder, with a view to provide relief to the builder for a period of one year, sub-section (5) has been inserted, which provides that for a period of one year from end of the financial year in which completion certificate has been obtained annual value on notional basis in terms of sub-section (1) shall be taken to be nil.

Now the question for consideration is that whether in view of aforesaid decision of Hon’ble Delhi High Court and the implied assumption by the Government that income is chargeable on notional basis in case of builders, the builders have to declare income on notional basis in terms of sub-section (1) of section 23 of the Income-tax Act in respect of all the properties which are held by them as stock-in-trade and meant for sale but have not been actually sold after the expiry of period of one year from the year in which completion certificate is obtained. There are certain issues for consideration in this regard, which are as under:

1. Always in the past, prior to the decision of Hon’ble Delhi High Court in the aforesaid case of Ansal Housing (supra), it was the understanding of the assessees as well as of the Department that income on notional basis is not chargeable in the case of builders in respect of property held by them as stock-in-trade. In the facts of Ansal Housing also, addition made by the Assessing Officer was deleted by CIT(A) and ITAT in view of aforesaid understanding of legal position. Though the Hon’ble Delhi High Court has taken a view that income is chargeable on notional basis matter is still pending for decision before the Hon’ble Supreme Court. Therefore, at present, it cannot be said with certainty that income in case of builders in respect of such properties is chargeable on notional basis in terms of sub-section (1) of section 23 of Income-tax Act and all the builders should include the income on this basis in their returns of income.

2. Though, the Hon’ble Delhi High Court has not accepted the contentions of the assessee in the case of Ansal Housing that income is not chargeable in case of a builder since the property is not meant for letting out and same is held for sale, clause (a) of sub-section (1) of section 23 of Income-tax Act envisages that the property should be in a position to let out and, therefore, it has been provided that annual value is to be taken equivalent to the sum for which the property might reasonably be expected to be let out. The use of the words “expected to be let out” would mean that the property should be meant for let out or it can be let out. In case of a builder, the property is not meant for let out and since his intention is to sell the property he cannot let out the property otherwise it will be difficult for him to sell the property for which he had constructed the same. Therefore, it cannot be said that such case is covered in clause (a) of sub-section (1) of section 23 of the Act. In case clause (a) is not applicable, income will not be chargeable to tax on notional basis.

3. As per clause (c) of sub-section (1) of section 23 of Income-tax Act in a case where property is let out or meant for let out but same remains vacant, the rental value on notional basis is not to be considered as income for the period during which the property had remained vacant. In view of above clause it can be contended that if it is said that property can be let out by the builder since the property remains vacant, no income should be chargeable to tax for the reason that property has remained vacant and, therefore, no income will be chargeable in terms of clause (c) of sub-section (1) of section 23 of the Act.

4. Again it is stated that though the Hon’ble Delhi High Court has not accepted the contentions of the assessee in the case of Ansal Housing and has held that income of builders can be taken on notional basis, it is stated that as per the scheme of Income-tax Act, what is chargeable to tax is the income. Notional basis has been provided for in the Act only with a view to determine actual income on a presumptive basis. In case the property held by a builder as stock-in-trade, there is no question of rental income since the property is meant for sale and profit earned by the builder on sale of the property is chargeable under the head “Profit for Business”. Further, even in the cases where the property has actually been let out by the builder, the only issue has been for consideration before the courts whether actual income earned by the builder is chargeable under the head “Income from House Property” or under the head “Profits or Gains from business or Profession”. It has never been an issue that income is chargeable in case of builder in respect of such properties on notional basis in terms of section 23(1) of the Income-tax Act.

5. Lastly, the issue is also for consideration whether a builder should include the income on notional basis in the return of income to be filed for Assessment Year 2018-19 since the provisions of sub-section (5) have been inserted vide Finance Act, 2017 w.e.f. 1-4-2018. In this regard, it is stated that sub-section (5) only provides for exemption from chargeability of the income in respect of property for a period of one year from end of financial year in which completion certificate has been obtained. Since there is no amendment in sub-section (1) of section 23 of the Act, the legal position continues to be same as has been prior to A.Y. 2018-19. Therefore, it cannot be said that in view of the amendment a builder has become liable to disclose income on notional basis in the return of income to be filed for A.Y. 2018-19. In case the income is taxable on notional basis it has been taxable in all the years even prior to A.Y. 2018-19. Since Department has not taken such view in most of the cases while completing the assessment for earlier years and there is no specific amendment in sub-section (1) of section 23 of Income-tax Act, income is not chargeable on notional basis, even in respect of A.Y. 2018-19. Hence, income is not required to be included in the return on notional basis by a builder in respect of such properties and same contentions as were available for non-taxability of income on notional basis will continue to be available even in respect of A.Y. 2018-19 onwards.

In view of above legal position, with due respect to decision of Hon’ble Delhi High Court in the case of Ansal Housing, it appears that income in case of builders is not chargeable to tax on notional basis in respect of properties held as stock-in-trade which is meant for sale and has not actually been let out by the builders. This position, however, is subject to decision of Hon’ble Supreme Court in the case of Ansal Housing, which is pending in appeal. In case Hon’ble Supreme Court also upheld the decision of Hon’ble Delhi High Court, it will amount to enunciation of legal position which has all along been existing and in that case all such assessees will be liable to tax on notional basis in respect of properties held by them even as stock-in- trade in all assessment years even prior to A.Y. 2018-19.

V. P. Gupta
Advocate

 

 

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