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.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court in this matter are:

(a) Whether unsold inventory of built-up residential houses/flats held by the assessee as stock-in-trade can be taxed under the head "Income from House Property" by applying the notional annual letting value under Section 22 read with Section 23 of the Income Tax Act, 1961 (the Act), or whether such income should be assessed under "Profits and Gains of Business or Profession."

(b) Whether the amendment to Section 23(1)(c) of the Act, effective from 1 April 2002, which provides for annual letting value to be taken as nil in case of vacant properties that are let out but vacant for whole or part of the year, applies to properties held as stock-in-trade that were vacant throughout the year but were never actually let out.

(c) The correct interpretation and applicability of Section 23(1)(c) regarding vacancy allowance and the conditions under which it can be invoked.

(d) The impact of subsequent amendment by Finance Act, 2017 inserting Section 23(5), which provides relief for stock-in-trade properties not let out during the whole or part of the previous year, and whether such amendment applies retrospectively or prospectively.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Taxability of unsold inventory of built-up residential houses/flats as income from house property or business income

Relevant legal framework and precedents: The Court referred to Section 22 and Section 23 of the Income Tax Act, 1961, which govern income from house property and determination of annual value respectively. The ITAT had relied on a prior decision of the Delhi High Court dated 31.10.2012 in the assessee's own case, which held that properties held as stock-in-trade were taxable under the head "Income from House Property" by applying the notional annual letting value method.

Court's interpretation and reasoning: The Court noted that the assessee's claim that the flats were stock-in-trade and hence income should be assessed under business income was rejected by the ITAT and upheld by the Division Bench in the earlier judgment. The Court observed that the properties were held for sale to prospective buyers and were in self-possession till sale, and not held for letting out. The Court also referred to the Division Bench's rejection of reliance on the Supreme Court decision in Chennai Properties & Investments Limited, which was distinguishable on facts since the assessee's main object was not letting out properties but commercial activity involving sale.

Key evidence and findings: The ITAT found that the properties were held as stock-in-trade, self-occupied, and not let out. The Court accepted these factual findings.

Application of law to facts: Since the properties were not let out and were held for sale, the Court agreed with the ITAT that the income should be assessed under the head "Income from House Property" using the notional annual letting value prescribed under Section 23.

Treatment of competing arguments: The assessee argued that since the properties were business stock-in-trade, no notional letting value should be charged under Section 23. The Court rejected this, relying on prior binding precedents and factual findings.

Conclusion: Properties held as stock-in-trade and not let out are taxable under the head "Income from House Property" by applying the notional annual letting value under Section 23.

Issue (b): Applicability of Section 23(1)(c) regarding vacancy allowance to properties held as stock-in-trade

Relevant legal framework and precedents: Section 23(1)(c) was inserted by amendment effective 1 April 2002, providing that where a property is let and was vacant for whole or part of the previous year, and owing to such vacancy the actual rent received is less than the annual letting value, the actual rent received shall be taken as the annual value. The Court examined the ITAT decision in Premsudha Exports (Mumbai Bench), which interpreted "property is let" as requiring intention and efforts to let out the property, not mere past letting or actual letting.

The Court also considered the contrary view of the Andhra Pradesh High Court in Vivek Jain, which held that Section 23(1)(c) applies only where the property has been actually let out and was vacant for part or whole of the year, resulting in lower rent received.

Court's interpretation and reasoning: The Court analyzed the language of Section 23(1)(c) and legislative intent. It emphasized that the phrase "property is let" cannot be read as "property intended to be let" and that the provision applies only where the property was actually let out during the relevant period. The Court agreed with the Andhra Pradesh High Court's interpretation that the vacancy allowance under Section 23(1)(c) applies only if the property was let and was vacant for part or whole of the year, leading to reduced rent.

Key evidence and findings: The properties in question were never actually let out in any previous year. The assessee did not demonstrate any letting or efforts to let out the properties.

Application of law to facts: Since the properties were not let out, the conditions for applying Section 23(1)(c) were not met. The vacancy allowance under this clause could not be claimed by the assessee.

Treatment of competing arguments: The assessee relied on the Premsudha decision to argue that intention and efforts to let out were sufficient. The Court rejected this interpretation as reading words into the statute that do not exist and contrary to statutory language and strict construction principles applicable to tax statutes.

Conclusion: Section 23(1)(c) applies only where the property was actually let out and was vacant for part or whole of the year, resulting in reduced rent. Properties held as stock-in-trade that were never let out do not qualify for vacancy allowance under this clause.

Issue (c): Interpretation of Section 23(1)(c) and related provisions

Relevant legal framework and precedents: The Court examined the legislative history, including the Finance Act 2001 amendment and Departmental Circular No. 14 of 2001, which clarified the effect of the amendment to Section 23. The Court also referred to authoritative commentary in Sampath Iyengar's Law of Income Tax.

Court's interpretation and reasoning: The Court held that Section 23(1)(c) was inserted to provide relief where the property is let out but due to vacancy, actual rent is less than annual letting value. The provision does not apply to properties not let out at all. The Court emphasized that the words "property is let" must be understood in their natural and grammatical meaning, not expanded to include mere intention or past letting. The Court also noted that self-occupied properties are excluded from Section 23(1) by Section 23(2)(a) and (b), and that Section 23(1)(c) was not intended to cover self-occupied or unlet properties.

Key evidence and findings: The Court relied on statutory language, circulars, and judicial precedents to support its interpretation.

Application of law to facts: The Court found that the assessee's properties did not satisfy the conditions for Section 23(1)(c) and hence the vacancy allowance could not be invoked.

Treatment of competing arguments: The Court rejected the assessee's argument to read into the statute a broader meaning of "property is let" to include intention or efforts to let out, as inconsistent with statutory language and principle of strict construction of tax laws.

Conclusion: Section 23(1)(c) applies strictly to properties actually let out and vacant for part or whole of the year, and the vacancy allowance is not available for properties never let out.

Issue (d): Impact of Finance Act, 2017 amendment inserting Section 23(5)

Relevant legal framework: Section 23(5), inserted w.e.f. 1 April 2018, provides that where a property held as stock-in-trade is not let during whole or part of the previous year, the annual value shall be taken as nil for a period up to one year from the end of the financial year in which the certificate of completion is obtained.

Court's interpretation and reasoning: The Court observed that this provision was prospective and did not clarify or alter the legal position for assessment years prior to its insertion. The Court noted that the insertion of a separate sub-section indicates that the situation covered by Section 23(5) was not previously covered under Section 23(3).

Application of law to facts: Since the relevant assessment years were prior to 1 April 2018, Section 23(5) did not apply to the assessee's case. Therefore, the properties held as stock-in-trade were taxable on the basis of notional annual letting value under Section 23(1)(a).

Conclusion: The amendment under Section 23(5) is prospective and does not affect the taxability of properties held as stock-in-trade for the assessment years in question.

3. SIGNIFICANT HOLDINGS

"In order to attract Section 23(1)(c), the following requirements must be fulfilled (i) the property, or any thereof, must be let; and (ii) it should have been vacant during the whole or any part of the previous year; and (iii) owing to such vacancy the actual rent received or receivable by the owner in respect thereof should be less than the sum referred to in Clause (a). It is only if these three conditions are satisfied would Clause (c) of Section 23(1) apply in which event the amount received or receivable, in terms of Clause (c) of Section 23(1), shall be deemed to be the annual value of the property. Clause (c) does not apply to situations where the property has either not been let out at all during the previous year or, even if let out, was not vacant during the whole or any part of the previous year."

"The words 'property is let' cannot be read as 'property intended to be let'. Provisions of a tax statute must be strictly construed. The words of a statute must be understood in their natural, ordinary or popular sense and construed according to their grammatical meaning. The legislature may be safely presumed to have intended what the words plainly say."

"The vacancy allowance in Section 23(1)(c) is applicable where the property is let out and was vacant for the whole or any part of the previous year and owing to such vacancy, the actual rent received or receivable by the owner was lesser than the annual letting value in Section 23(1)(a)."

"The amendment by Finance Act, 2017 inserting Section 23(5) is prospective and applies only from 1 April 2018. It does not affect the taxability of properties held as stock-in-trade for earlier assessment years."

"The properties held as stock-in-trade and not let out are taxable under the head 'Income from House Property' by applying the notional annual letting value method prescribed under Section 23(1)(a)."

Final determination: The Court dismissed the appeals, holding that no substantial question of law arises. The properties held as stock-in-trade were correctly assessed under "Income from House Property" using the notional annual letting value. The vacancy allowance under Section 23(1)(c) does not apply as the properties were never let out. The amendment under Section 23(5) is prospective and does not apply to the relevant years.