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I-T - If properties are held as stock-in-trade and not for purpose of letting out, 'vacancy allowance' provided u/s 23(1)(c) cannot be claimed: HC

By TIOL News Service

NEW DELHI, JAN 12, 2018: THE issue is - Whether if properties are held as stock-in-trade and not for the purpose of letting out, 'vacancy allowance' provided u/s 23(1)(c) can still be claimed. NO is the verdict.

Facts of the case

The Assessee- a property developer, had filed its reurn for the relevant AYs. In the course of the assessment proceeding, the AO noted that the Assessee had claimed that since the flats held as stock-in-trade were vacant during the whole of the previous year, the annual letting value of the property would be taken as "Nil". However, the AO observed that the Assessee had sold commercial and residential flats and spaces to prospective buyers as its stock- in-trade for business purposes. Accordingly, the AO refused the Assessee's claim and thereby, the assessment was completed u/s 143(3). Being aggrieved by the assessment order passed by the AO, the Assessee's filed an appeal before the CIT(A) however, the matter again rolled out before the Tribunal.

On appeal, the Tribunal noticed that the Assessee had held commercial and residential flats and spaces for being sold to prospective buyers as its stock- in-trade for business purposes and were in self-possession till their sale. Accordingly, the Tribunal accepted the Revenue's appeal and held that the unsold inventory of built-up residential houses/flats were subject to the provisions of Section 22 r/w Section 23 and accordingly the notional annual letting value (ALV) was taxable in Assessee's hands under the heads 'Income from House Property'. Further, relying on the decision of this Court dated 31.10.2012 in the Assessee's own case titled as M/s Ansal Housing Fin. Leasing Limited and other connected appeals. The Tribunal also noticed that the Assessee's claim that its property was stock- in-trade under the head 'Income from Business', was decided against it. Therefore, the Tribunal concluded that only when the property was held for letting out and efforts were made to let it out, Section 23(1)(c) would apply, to assist an Assessee.

On appeal, the High Court held that,

++ it is clear that neither the properties held as stock-in-trade were for the purpose of letting out, nor were efforts made to let them out and hence even going by the ratio in the case of Premsudha, the Assessee's case would not be covered u/s 23(1)(c). More importantly however, this Court notices that the Tribunal's decision in the case of Premsudha goes against the decision of the Andhra Pradesh High Court in the matter of Vivek Jain wherein, the Andhra Pradesh High Court, faced with the task of interpreting Section 23(1)(c) and held that the 'vacancy allowance' u/s 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 ALV in Section 23(1)(a);

++ the decision in the case of Vivek Jain is clear on the point that in a case where the property has been let out for more than one year, if in one of those years, owing to vacancy for the entire year, the rent received or receivable is lower than the ALV, then the Assessee would be entitled to take the benefit of Section 23(1)(c). In the present case however, the properties held as stock-in-trade were not let out for any previous years either, and hence there would be no question of availing the vacancy allowance given in Section 23(1)(c). This Court is in agreement with the views of the Andhra Pradesh High Court, that actual letting out of the properties in the concerned year, or any of the previous years, is essential for application of Section 23(1)(c). Since none of the properties held as stock-in-trade were actually ever let out, Section 23(1)(c) cannot come to the Assessee's aid;

++ 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). That being the position, in the Assessee's case, the properties held as stock-in-trade will be taxable under the notional ALV method prescribed u/s 23(1)(a), since in view of the decision in Vivek Jain's case, the Assessee cannot claim the benefit of Section 23(1)(c) having never actually let out the properties held as stock-in-trade;

++ 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 AYs, the properties held as stock-in-trade would be taxable on the basis of notional ALV u/s 23.

(See 2018-TIOL-68-HC-DEL-IT)