The Finance Bill 2017 seeks to amend section 23 of the Income Tax Act w.e.f. 1st April, 2018 which lays down the determination of annual value in case of house property for the purpose of calculating the Income under the head "House Property" income particularly in case of deemed let out property.

The legislature has proposed to insert a new sub-section (5) in section 23 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."

The Explanatory Memorandum released by the Finance Ministry for explaining the purpose of proposal is as under:

Considering the business exigencies in case of real estate developers, it is proposed to amend the said section so as to provide that where the house property consisting of any building and 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 upto 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.

This amendment will take effect from 1st April, 2018 and will, accordingly apply in relation to assessment year 2018-19 and subsequent years.

It appears the decision of the Delhi High Court in the case of CIT v. Ansal Housing Finance & Leasing Co. Ltd.¹ has triggered the above proposed amendment. In the said decision the Delhi High Court has after considering the various income tax provisions held that under section 23 of the Act notional rental income is to be determined even in respect of unsold flats held by the builder/developer as stock in trade by treating the same as "deemed let out property". Consequently, the developer / builder is liable for tax under the head "House Property" on such deemed rental value of unsold stock.

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 19/09/2016².

From a wording of the amendment proposed by insertion of sub section (5) to section 23 as reproduced earlier, it appears that the legislature is treating the chargeability of notional rental income on unsold stock as fait accompli. Accordingly, the said amendment as proposed is being termed as relief granting provision. In the authors opinion the Legislature has presupposed the tax even when the matter is still pending at the door of highest judiciary and hence such an amendment would only create more litigation and confusion rather than sort the same.

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. The charging provision is section 22 â€“ which reads as under :

"The annual value of property consisting of any building 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'."

Now, Section 22 itself indicates that merely because a person is the owner of the property it does not follow that the income therefrom should be assessed under the heading "Income from house property". Section 22 specifically excludes from its scope portions or the entire property :

Both these conditions must be fulfilled and then only the house property is taken out of the operation of section 22 as held by Addl. CIT v. Hindustan Machine Tools Ltd.³.

Even the Hon'ble Supreme Court in the case of Chennai Properties & Investments Ltd. v. CIT⁴, vide judgment dated 9-4-2015 i.e. subsequent to the decision of Ansal's case by Delhi High Court has held that where assessee company is engaged in the activity of letting out properties and the rental income received was shown as business income, the action of AO treating the "rental income" as "income from house property" in place of "income from business" shown by the assessee was held to be not justified. The hon'ble Supreme Court held that since the assessee company's main object, is to acquire and held properties and to let out these properties, the income earned by letting out these properties is main objective of the company, therefore, rent received from the letting out of the properties is assessable as "income from business".

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.

The pending adjudication by the SC in Ansal's case in light of SC decision in Chennai Properties & Investments Ltd's. case (supra) creates an anomalous situation. If tomorrow the apex court decides to overrule the Ansal case, the proposed amendment in section 23 would become otiose in absence of any amendment in section 22 which is the charging section. Moreover, until then the assessing officers would start levying tax on notional rental income citing the proposed amendment to section 23 if and when it finds its place in statute books.

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.