NOTIONAL RENT OF HOUSE PROPERTY HELD AS STOCK-IN-TRADE IS NOT TAXABLE UNDER HEAD ‘income from house property’ – discussion in view of recent and some earlier judgments. This will not be taxable even in view of clause (5) in section 23 w.e.f. 01.04.2018- a point of view

[DEV KUMAR KOTHARI]

This will not be taxable even in view of clause (5) in section 23 w.e.f. 01.04.2018- a point of view

Recent judgment of ITAT

ASSISTANT COMMISSIONER OF INCOME-TAX, CENTRAL CIRCLE-1 (4) , AHMEDABAD VERSUS M/S. SHOPPERS BUILDCON PRIVATE LTD. [2022 (5) TMI 459 - ITAT AHMEDABAD]

Various judgments referred to therein including inter alia:

COMMISSIONEROF INCOME-TAX VERSUS NEHA BUILDERS PVT LTD [2006 (8) TMI 105 - GUJARAT HIGH COURT]

Business income or Income from House property – Assessee-company engaged in development, construction sale and lease of immovable property and properties treated as stock–in-trade – Held that income derived from the stock would be treated as ‘Income from business’

M/S PERFECT SCALE COMPANY PVT. LTD VERSUS DEPUTY COMMISSIONER OF INCOME-TAX [2013 (12) TMI 128 - ITAT MUMBAI], wherein it was held that in respect of assets held as business, income from the same is not assessable u/s.23(1) of the IT Act.

M/S CHENNAI PROPERTIES & INVESTMENTS LTD VERSUS THE COMMISSIONER OF INCOME TAX [2015 (5) TMI 46 - SUPREME COURT]

Referred (contrary view) :

COMMISSIONER OF INCOME TAX VERSUS M/S ANSAL HOUSING FINANCE AND LEASING CO LTD & OTHERS [2012 (11) TMI 323 - DELHI HIGH COURT] in support of the proposition that even in respect of unsold flats by the developer is liable to be taxed as income from house property.

Earlier articles:

In earlier article on same and similar issue by the author has discussed  in detail that property held as stock-in-trade for selling out as stock-in-trade is occupied and held for business, therefore, notional rental income cannot be taxed under head ‘income from house property’

Courts, including the Supreme Court and many High Courts have taken  view that when income from such property is taxable under head income from business or profession, then it cannot be taxed under head ‘income from house property’

However, in these judgments the concept of ‘occupied for business’ by holding as stock-in-trade, itself was not discussed and / or decided.

In earlier articles learned author has emphasized that in view of provisions of S.22 itself , annual value of house property held as stock-in-trade cannot be included in income under income from house property because such property is  occupied for the purposes of any business or profession carried on by him the profits of which are chargeable to income-tax.

Section 22 at present also reads as follows:

Income from house property.

22.   The annual value of property consisting of any buildings or lands appurtenant thereto of which the assessee is the owner, other than such portions of such property as he may occupy for the purposes of any business or profession carried on by him the profits of which are chargeable to income-tax, shall be chargeable to income-tax under the head Income from house property.

However, there is an inconsistent provision introduced in S.23 vide THE FINANCE ACT, 2017 w.e.f. 1st day of April, 2018. The said amendment and its effective part reads as follows:

¹[Annual value how determined.

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

²[(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 ⁶[two years] 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. ]

According to this clause (5) for a period of two years annual value shall be nil in case of stock –in-trade of house property. That means if it is not sold within two year, then for period post two years, annual value will not be nil consequently annual value will have to be determined and will be taxable under head ‘income from house property’.

This amendment was referred in case of Shoppers Buildcon (supra.) and the Tribunal noted that the amendment is from AY 2018-19 and is not applicable for AY 2016-17.

Therefore, in this recent judgment also the exception provided in S.22 that is

“… other than such portions of such property as he may occupy for the purposes of any business or profession carried on by him ..’ has not been discussed.

A vacant property held as stock-in-trade is held and  occupied for business because:

1. It is exclusively held by him for selling for which the property need to be maintained in sellable condition,
2. It must be available for showing to prospective customers for the purpose of selling,
3. When it is vacant it can be , and is usually used for some business purposes  though on temporary and casual basis because vacant possession will have to be given when it is sold.
4. If it is let out rental income will be taxable under head business and profession so annual value cannot be included under head ‘income from house property’,
5. If it is sold, income will be computed under head income from business.

There is no amendment in S.22  to  provide an exception for property occupied for business purposes.

Therefore, in view of author, even after amendment of S.23 by insertion of clause (5) notional annual value of a property held as stock-in-trade cannot be included in income under head income from house property even for period after two years.

The amendment in section 23 leads to inconsistency with S.22 and also concept of taxability of ‘real income’, and computation of business income as per method of accounting regularly followed. Therefore, a view consistent with  both is to be considered and according to the same annual value of vacant stock-in-trade of  building / house property  cannot be considered under head ‘income from house property’.

Even if notional rent is included, then deduction on account of vacancy period and / or rent that is not realizable / could not be realized will have to be deducted so net income will still be zero.

Earlier article on same and similar issue by the author:

Time to re-think in changed times: Business head for activity of letting out properties to tax real income is most appropriate.

HOUSE PROPERTY HELD AS STOCK-IN-TRADE IS OCCUPIED BY OWNER FOR BUSINESS PURPOSES – ANNUAL VALUE SHOULD NOT BE TAXABLE- A point of view 

Budget 2017 – Clause 12 -Property held as stock-in-trade - anomalies in proposed amendment with some suggestions.