2018 (1) TMI 805 - HC - Income Tax

Income from house property - unsold inventory of built- up residential houses/flats were subject to the provisions of Section 22 read with Section 23 - notional annual letting value was taxable in the hands of the Assessee under the heads Income from House Property - as per assessee in view of the amendment to Section 23 of the Act with effect from 1st April 2002 in the assessee s case, the annual letting value of the properties held as stock in trade was to be considered as Nil - Held that - There is no dispute that the effect of the amendment, inserting Section 23(1)(c), would not be to change the incidence of taxability of the properties held as stock in trade. Therefore, this Court s finding that such properties were to be assessed as income from house property and not income from business or profession , in its judgement dated 31.10.2012, would be good law, even in view of the insertion of Section 23(1)(c). As in the assessee s case, the properties held as stock in trade will be taxable under the notional annual letting value method prescribed u/s 23(1)(a), since in view of the decision in Vivek Jain (2011 (1) TMI 897 - Andhra Pradesh High Court), the assessee cannot claim the benefit of Section 23(1)(c) having never actually let out the properties held as stock in trade. Thus sub- section (5) would be squarely applicable, but for the fact that sub- section (5) has been inserted w.e.f. 1 April 2018. Moreover, sub-section (5) does not use language which would indicate that it has been inserted as a clarification (which would make clear that it was always the legal position) or by way of abundant caution. The amendment therefore clearly applies prospectively and since a separate sub-section was inserted in Section 23, it is clear that the legislative intent is that the peculiar situation in sub-section (5) was not already covered by sub-section (3). That being the case, for the relevant assessment years, the properties held as stock in trade would be taxable on the basis of notional annual letting value under Section 23. - Decided against assessee.

Issues Involved:
1. Applicability of Section 22 read with Section 23 of the Income Tax Act, 1961 on unsold inventory of built-up residential houses/flats.
2. Interpretation of Section 23(1)(c) concerning annual letting value.
3. Impact of the Finance Act, 2017 amendment inserting sub-section (5) in Section 23.

Detailed Analysis:

1. Applicability of Section 22 read with Section 23 of the Income Tax Act, 1961 on unsold inventory of built-up residential houses/flats:
The primary issue was whether the unsold inventory of built-up residential houses/flats should be subject to the provisions of Section 22 read with Section 23 of the Income Tax Act, 1961. The ITAT held that the notional annual letting value of these properties was taxable under "Income from House Property." The assessee contended that since these properties were held for business purposes, their income should be chargeable under "profits and gains of business and profession." However, this argument was rejected based on prior decisions, including a judgment dated 31.10.2012 in the assessee's own case, which had already determined that such properties were not to be assessed as business income but as income from house property.

2. Interpretation of Section 23(1)(c) concerning annual letting value:
The assessee argued that per the amendment to Section 23 effective from 1st April 2002, the annual letting value of properties held as stock-in-trade should be considered "Nil" if they were vacant for the entire previous year. The assessee relied on the ITAT Mumbai's decision in Premsudha Exports (P.) Ltd. However, the court found that the properties were neither intended to be let out nor were efforts made to let them out. Thus, even under Premsudha Exports' interpretation, the assessee's case would not qualify for the benefit under Section 23(1)(c). Furthermore, the court agreed with the Andhra Pradesh High Court's decision in Vivek Jain, which clarified that Section 23(1)(c) applies only if the property was actually let out in the relevant or any previous year. Since the properties in question were never let out, Section 23(1)(c) could not be invoked.

3. Impact of the Finance Act, 2017 amendment inserting sub-section (5) in Section 23:
The Finance Act, 2017 introduced sub-section (5) to Section 23, effective from 1 April 2018, which states that the annual value of property held as stock-in-trade and not let during the whole or any part of the previous year shall be taken as nil for up to one year from the end of the financial year in which the completion certificate is obtained. The court noted that this amendment did not apply retrospectively and was not intended as a clarification of existing law. Therefore, for the assessment years in question, the properties held as stock-in-trade would still be taxable based on their notional annual letting value under Section 23.

Conclusion:
The court dismissed the appeals, concluding that the properties held as stock-in-trade were taxable under the notional annual letting value method prescribed under Section 23(1)(a), as the conditions for applying Section 23(1)(c) were not met. The court also noted that the amendment inserting sub-section (5) into Section 23 applied prospectively and did not affect the taxability of the properties for the relevant assessment years. No substantial question of law arose in these appeals, leading to their dismissal.

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