2025 (5) TMI 1090 - AT - Income Tax

Addition under the head Income from house property - determination of ALV u/s. 23(1)(a) - notional income from unsold units held as stock-in-trade - whether addition could be made on the notional income from unsold units held as stock-in-trade for the year under consideration and if so whether the same has to be determined as per the Municipal Rentable Value. Also whether the amendment brought to the provisions of Section 23(5) would be applicable for impugned year or prospectively from A.Y. 2018-19 onwards What should be the rental value that the ld. AO will have to apply for determination of the notional rent? - HELD THAT - We place reliance on the decision of Tip Top Typography 2014 (8) TMI 356 - BOMBAY HIGH COURT which has relied on the full bench decision of Moni Kumar Subba 2011 (3) TMI 497 - DELHI HIGH COURT where it has been reiterated that for determination of ALV u/s. 23(1)(a) of the Act the same has to be in accordance with the municipal laws after duly considering the inflated or deflated rent based on extraneous circumstances if any which in any case cannot exceed the standard rent as per the Rent Control Legislation applicable to the said property. It has also specified various methods of valuation for arriving at the hypothetical rent. As in the case of Inorbit Malls 2022 (10) TMI 1150 - ITAT MUMBAI has also relied on the decision Tip Top Typography (supra) for determining the ALV for computing the notional rent. By respectfully following the proposition laid down supra we direct the ld. AO to determine the notional rent in accordance with the principles emphasized in the said decision.

The core legal questions considered by the Tribunal in this appeal pertain to the tax treatment of notional rental income from unsold flats held as stock-in-trade by an individual engaged in the business of construction and development. Specifically, the issues are:

(a) Whether an addition to income can be made on the basis of notional rent from unsold units held as stock-in-trade for the relevant assessment year;

(b) If such addition is permissible, whether the notional rent must be determined as per the Municipal Rentable Value;

(c) Whether the amendment introduced by Finance Act, 2017, inserting Section 23(5) of the Income Tax Act, 1961, applies retrospectively to the impugned assessment year or only prospectively from AY 2018-19 onwards.

Issue-wise detailed analysis:

1. Addition of Notional Rent on Unsold Flats Held as Stock-in-Trade

The relevant legal framework involves Section 23 of the Income Tax Act, 1961, which governs the determination of annual value of house property for the purpose of taxation under the head 'Income from house property'. Section 23(1)(a) mandates that annual value be taken as the actual rent received or receivable, or the reasonable expected rent if the property is let out. Section 23(4)(b) provides for deemed rent where the property is held as stock-in-trade and is not let out, allowing the Assessing Officer (AO) to determine the annual value as if the property had been let out.

Prior to the insertion of Section 23(5) by Finance Act, 2017 (effective 01.04.2018), the law did not explicitly exempt notional rent on unsold flats held as stock-in-trade from taxation. The AO, relying on Section 23(4)(b), made an addition of Rs. 3,82,200/- on the notional rent of unsold flats. The first appellate authority upheld this addition, relying on a coordinate bench decision in Dimple Enterprises, which in turn relied on the Hon'ble Gujarat High Court's ruling in CIT vs. Neha Builders Private Limited and a coordinate bench decision in DCIT vs. Inorbit Malls Pvt. Ltd.

The assessee contested this addition, citing several Tribunal decisions (e.g., Pegasus Properties, K.D. Construction Unit, Kumar Properties, Shivsagar Builders, Runwal Constructions, Haware Construction, and others) wherein additions on account of deemed rental income on unsold stock held as stock-in-trade were deleted.

The Tribunal examined the conflicting precedents, particularly the Hon'ble Delhi High Court's decision in CIT vs. Ansal Housing Finance and Leasing Co. Ltd., which upheld the validity of taxing notional rent on properties held as stock-in-trade even if vacant. The Court noted that this principle was reiterated in subsequent years and that the insertion of Section 23(5) was not clarificatory but prospective, intended to provide relief by exempting notional rent for one year (later two years) from the date of completion certificate.

Therefore, the Tribunal concluded that for assessment years prior to AY 2018-19, notional rent on unsold flats held as stock-in-trade is taxable under Section 23(1)(a) read with Section 23(4)(b), as held by the Hon'ble Delhi High Court and consistent with the legal position before the amendment.

2. Applicability and Effect of Section 23(5) of the Income Tax Act

Section 23(5), inserted by Finance Act, 2017, provides that where the property held as stock-in-trade is not let during the whole or any part of the previous year, the annual value for up to one year (later extended to two years) from the end of the financial year in which the completion certificate is obtained shall be taken as nil.

The Tribunal analyzed whether this provision applies retrospectively to AY 2015-16. It was held that the insertion is prospective, effective from AY 2018-19 onwards, and does not clarify the earlier position. The legislative intent was to provide relief for newly constructed properties lying vacant for a limited period, not to alter the tax incidence retrospectively.

The Tribunal relied on the decision in Inorbit Malls Pvt. Ltd., where the Tribunal held that while Section 23(5) applies prospectively, the AO's computation of annual letting value (ALV) on notional rent for prior years was valid, following the Delhi High Court's decision in Ansal Housing Finance.

3. Determination of Notional Rent as per Municipal Rentable Value

The Tribunal addressed the method for determining the notional rent to be added to income. It was noted that the rental value must be computed in accordance with municipal laws and rent control legislation, taking into account inflated or deflated rents based on extraneous circumstances but not exceeding the standard rent prescribed under applicable rent control laws.

The Tribunal relied on the Hon'ble Jurisdictional High Court's decision in CIT vs. Tip Top Typography, which emphasized that the ALV under Section 23(1)(a) must be determined as per municipal valuation and consistent with rent control statutes. The Tribunal also referred to the Inorbit Malls decision, which followed the same principle.

Consequently, the AO was directed to determine the notional rent in accordance with these principles, ensuring that the rental value reflects municipal valuation and applicable rent control limits rather than arbitrary or inflated figures.

Treatment of Competing Arguments

The assessee argued against the addition on the basis of various Tribunal decisions deleting similar additions and contended that Section 23(5) should apply retrospectively to exempt the notional rent for the impugned year. The Tribunal rejected these contentions, holding that the amendment is prospective and that the legal position prior to the amendment, as upheld by the Delhi High Court, supports the addition.

The Revenue relied on coordinate bench decisions and High Court rulings supporting the addition of notional rent under Section 23(4)(b), which the Tribunal accepted as the correct legal position for the relevant year.

Conclusions

The Tribunal held that:

(i) Notional rent on unsold flats held as stock-in-trade is taxable under the head 'Income from house property' for AY 2015-16, as per Section 23(1)(a) read with Section 23(4)(b) of the Income Tax Act;

(ii) The amendment by Finance Act, 2017 inserting Section 23(5) applies prospectively from AY 2018-19 and does not exempt notional rent for prior years;

(iii) The notional rent must be determined based on Municipal Rentable Value, in accordance with municipal laws and rent control legislation, as clarified in CIT vs. Tip Top Typography;

(iv) The AO is directed to determine the notional rent following the principles laid down by the Hon'ble Jurisdictional High Court.

Significant holdings and core principles established include the following verbatim excerpts and determinations:

"Therefore, it is clear that in the assessee's factual situation, 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."

"... the properties held as stock-in-trade are to be assessed under the head 'Income from house property' on notional rent irrespective of the fact that the same was lying vacant during the year under consideration."

"For determination of ALV u/s. 23(1)(a) of the Act, the same has to be in accordance with the municipal laws after duly considering the inflated or deflated rent based on extraneous circumstances, if any, which in any case cannot exceed the standard rent as per the Rent Control Legislation applicable to the said property."

In sum, the Tribunal partly allowed the appeal by confirming the addition of notional rent on unsold flats held as stock-in-trade under the head 'Income from house property' for AY 2015-16, directing the AO to compute the annual value in accordance with municipal valuation principles, and clarifying that the exemption under Section 23(5) applies only prospectively from AY 2018-19 onwards.

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