Decision cited :

In the case of M/s. Ansal Housing Finance & Leasing Co. Ltd. (2013) 354 ITR 180 (Delhi), the hon’ble court held that the assessee builder was liable to pay income tax on annual letting value of unsold flats owned by it under the head “income from house property”.  

In the case of Chennai Properties & Investments Ltd. v. CIT (2015) 373 ITR 673 (SC), the hon’ble Apex Court held that letting of the properties is the business of the assessee. The assessee therefore, rightly disclosed the income under the head “Income from Business”. It cannot be treated as “income from the house property”. 

In the case of M/s. C. R. Development Pvt. Ltd. v. JCIT bearing ITA no. 4277/Mum/2012, order dated 13/05/2015 after considering the decision of hon’ble Delhi High court in the case of M/s. Ansal Housing Finance & Leasing Co. Ltd. (2013) 354 ITR 180 and Supreme Court in the case of Chennai Properties & Investments Ltd. v. CIT (2015) 373 ITR 673, the hon’ble ITAT held that in the case of property held as “stock in trade” the income should be assessable under the head “income from business” and no income shall be brought to tax as notional annual letting value under the head “income from house property”.

In the case of M/s. Runwal Constructions v. ACIT bearing ITA no. 5408 & 5409/Mum/2016, order dated 22/02/2018 after considering the decision of hon’ble Delhi High court in the case of M/s. Ansal Housing Finance & Leasing Co. Ltd. (2013) 354 ITR 180, the hon’ble ITAT held that unsold flats which are “stock in trade” when they were sold they were assessable under the head “income from business” and therefore, AO is not correct in bringing to tax notional annual letting value.

In the case of M/s. Prefect Scale Company Pvt.  Ltd. bearing ITA no. 3228 to 3234/Mum/2013, order dated 06/09/2013, the hon’ble ITAT held that in respect of assets held as business, income from the same is not assessable u/s. 23(1) of the Act.

In the case of CIT v. Neha Builders Pvt. Ltd. (2008) 296 ITR 661 (Guj.), the hon’ble high court held that if a property is used as “stock in trade” then such property would become or partake the character of stock and any income derived from such “stock in trade” would be “income from business” and not “income from house property”.

Facts of the case :

The assessee was a builder who had constructed a building for sale of units. It was in possession of unsold shops held as “stock in trade”.  

 Issue before ITAT :

Whether notional annual letting value on unsold shops held as “stock in trade” by the assessee should be calculated u/s. 23 of the Act and taxed under the head “income from house property”.

 ITAT’s verdict :

The ITAT considered the decisions of Delhi High Court in the case of M/s. Ansal Housing Finance & Leasing Co. Ltd. (supra) and co-ordinated bench decision in the case of M/s. Runwal Constructions (supra) to hold that the unsold property being shops were held as “stock in trade” by the assessee. Hence, no notional letting value can be calculated u/s. 23 of the Act.

 Acelegal Analysis :

The above decision is based on provision of section 23 of the Act as it existed in AY 2012-13 i.e. prior to amendment to section 23 w.e.f. 1st April, 2018 wherein a new sub-section (5) has been inserted, 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 out during the whole of 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."

It appears that the decision of the Delhi High Court in the case of CIT v. Ansal Housing Finance & Leasing Co. Ltd. (Supra) has triggered the above proposed amendment. The decision of the Delhi High Court is pending judicial review by the highest judiciary since the assessee has already preferred a Special Leave Petition before the Supreme Court which has been admitted vide order dated 19/09/2016.

Section 23 is not a charging provision. It's a provision which provides for determination of one component of calculation of the house property income i.e. annual value of house property. Section 22 being “income from house property” specifically excludes from its scope portions or the entire property :

On the very same analogy, it can be stated that where an assessee is engaged in business of construction and development, which is main object of the assessee company, the flats which could not be sold at the end of the year are treated as stock-in-trade i.e. business assets. Estimating rental income for these flats as "income from house property" is not justified insofar as these flats were neither given on rent nor the assessee has intention to earn rent by letting out the flats. The flats not sold are its stock-in-trade and income arising on its sale is liable to be taxed as business income.

It would have been prudent if the legislature had waited for final outcome in the case of Ansal Housing Finance & Leasing Co. Ltd. (supra), the decision of Supreme Court would have been law of land and no amendment would have been necessary. Alternatively, if the legislature wants to bring into tax the unsold stock in the manner as decided by Delhi High Court in Ansal's case then an amendment to section 22 is also needed. The answer to this dilemma lies in the womb of future.