Issue for Consideration A businessman may hold flats as stock-in-trade at the year end. For example, on completion of construction of a building, a builder may be left with unsold houses or offices. Such houses or offices may not be let pending sale, and left vacant. Section 22 of the Income Tax Act requires the annual value of a property, consisting of buildings or land appurtenant thereto, of which the assessee is an owner, to be charged to tax under the head “Income from House Property”. The income under this head is chargeable to tax irrespective of the fact that such flats held in stock-in-trade are not let out and that no rent is received there from. Section 22 however excludes such portions of such property as is occupiedfor the purposes of business or profession carried on by him, the profits of which are chargeable to income tax.
A question that often arises in such circumstances is about the taxability of notional income under the head ‘Income from House Property’ in respect of the flats held as stock-intrade of business from which no rental income is received during the year. Whether the notional income in such cases is taxable at all and if yes, under the head “Income from business or profession” or “Income from house property”. Could it be said that even otherwise the notional income was not taxable on the ground that the unsold flats are occupied for the purposes of business. Further issue is whether rental income from such flats is taxable under the head ‘Income from House Property’ or ‘Profits and Gains of Business or Profession’. While the Delhi High Court has taken the view that notional income is to be taxed under the head “Income from House Property”, the Gujarat high court has held that the rental income in respect of the flats held as stock-in-trade should be taxed under the head ‘Profits and Gains of Business and Profession’ .
Ansal Housing Finance and Leasing Co’s case
The issue came up before the Delhi High Court in the case of CIT vs. Ansal Housing Finance and Leasing Co Ltd., 354 ITR 180. In this case, the assessee was engaged in the business of development of mini townships, construction of house property, commercial and shopping complexes, etc. It had certain unsold flats, out of the flats that it had constructed.
During the course of assessment proceedings, the assessing officer proposed to assess the annual letting value of flats which the assessee had constructed, but which were lying unsold, on notional basis u/s. 22, under the head “Income from House Property”. The assessee contended that the flats were its stock in trade, were lying vacant, and therefore the annual letting value of the flats could not be brought to tax under the head “Income from House Property”. The assessing officer did not accept the assessee’s stand, and added the notional letting value of the unsold flats to the total income of the assessee.
The Commissioner(Appeals) set aside the addition made by the assessing officer. The appeal to the Tribunal by the revenue was also dismissed.
Before the High Court, it was argued on behalf of the revenue that regardless of whether income was on from the vacant flats, the assessee in its capacity as owner, had to pay tax on the annual letting value. It was argued that tax incidence did not depend on whether the assessee actually rented out the premises or not, but on the mere fact of ownership. Reliance was placed on behalf of the revenue on the Calcutta High Court decision in the case of Azimganj Estate (P) Ltd 206 Taxman 308, where , the builder had flats which were let out, the Court held that the rental income was assessable not under the head of profits or income from business, but under the head income from house property. It was argued before the Delhi high court that so long as the assessee continued to be the owner of the vacant flats, it had to be assessed under the head of income from house property. Since there was no letting out, the basis of assessment had to be annual letting value, which was rational and scientific.
On behalf of the assessee, it was argued that unlike in the case before the Calcutta High Court, in the present case, the assessee did not actually let out the vacant flats. It was not even in the business of renting out its flats. Letting out vacant or other properties was not part of the business objectives of the assessee, and since it did not derive any income as a result of letting out, that judgment did not apply. It was argued that income tax was a levy on income received, and not only on an amount derived on notional calculations. In the alternative, it was argued that the flats could not be taxed on the basis of their notional annual letting value, because the owner was an occupant, and such occupation was in the course of and for the purpose of business as a builder. It was explained to the court that section 22 saved the case of flat occupied, for the purposes of business, from taxation.
The Delhi High Court held that the levy of income tax in the case of a person holding house property was premised not on whether the assessee carried on business as landlord, but on the ownership. The incidence of charge was because of the fact of ownership.
The High Court further observed that in every case, the Court had to discern the intention of the assessee, and that in the case before it, the intention of the assessee was to hold the properties till they were sold. According to the Court, the capacity of being an owner was not diminished one whit because the assessee carried on the business of developing, building and selling flats in housing estates. It negated the assessee’s argument that since income tax was levied not on the actual receipt but on a notional basis, i.e. Annual Letting Value, it was therefore not sanctioned by law. According to the Court, Annual Letting Value was a method to arrive at a figure on the basis of which the impost was to be effectuated. The existence of an artificial method itself would not mean that levy was impermissible. Parliament had resorted to several other presumptive methods, for the purpose of calculation of income and collection of tax. Application of Annual Letting Value to determine the tax was regardless of whether actual income was received; it was premised on what constituted a reasonable letting value, if the property were to be leased out in the marketplace.
Addressing the alternative argument that the assessee itself was the occupier, because it held the property till it was sold, the Court held that there was no merit in that submission. According to the Court, while there could be no quarrel with the proposition that ‘occupation’ could be synonymous with physical possession, in law, when Parliament intended a property occupied by one who was carrying on business, to be exempted from the levy of income tax was that such property should be used for the purpose of business. The intention of the lawmakers, in other words, was that occupation of one’s own property, in the course of business, and for the purpose of business, i.e., an active use of the property, (instead of mere passive possession) qualified as ‘own’ occupation for business purpose.
The Delhi High Court therefore held that the annual letting value of the unsold flats was taxable, as the income was taxable under the head “Income from House Property”.
Neha Builders’ case
The issue about the head of income came up for consideration before the Gujarat High Court in the case of CIT vs. Neha Builders (P) Ltd. 207 CTR 231.
The assessing officer was of the view that since the expenses on maintenance of the property were debited to the profit and loss account, and the building was also shown as stock in trade, the property would partake the character of stock. According to the assessing officer, any income derived from stock could not be taken to be income from property. the Commissioner(appeals) upheld the view of the assessing officer. The Tribunal allowed the assessee’s appeal, observing that any dividend received on shares held as stock-in-trade was taxable under the head ‘income from other sources’ by virtue of statutory provision, and therefore, any income derived as rent would be taxable under the head ‘income from house property’.
Before the Gujarat high Court, on behalf of the revenue, it was argued that if the property was used as a property, then any income therefrom would be an income from house property, but if the property was used as stock, than any income from such stock would not be an income from house property.
The Gujarat high Court noted that the case of the assessee was that the company was incorporated with the main objects of purchasing, taking on lease, acquiring by sale or letting out the buildings constructed by the company. development of land or property was also one of the businesses for which the company was incorporated.
The high Court noted that income derived from property would always be termed as income from the property, but if the property was used as stock in trade, then the property would partake the character of the stock, and any income derived from the stock would be income from the business, and not income from the property. The court observed that if the business of the assessee was to construct the property and sell it or to construct and let out the same, then that would be business, and the business stocks, which would include movable and immovable properties, would be taken to be stock in trade, and any income derived from such stocks could not be termed as income from property.
The high Court further held that , there was a distinction between “income from business” and “income from property” on one side, and “income from other sources” on the other. in the opinion of the Court, the tribunal was not justified in comparing rental income with dividend income on shares or interest income on deposits. The court observed that this comparison was not raised before the subordinate authorities, and the tribunal on its own supplied the said analogy.
The high Court noted that from the statement of the assessee, it was clear that it was treating the property as stock in trade. From the records, it was also clear that except for the ground floor, which had been let out by the assessee, all other portions of the property constructed had been sold out. That being the case, right from the beginning, the property was held as stock-in-trade.
The Gujarat high Court therefore held that the income from property held as stock-in-trade was to be assessed as business income.
Observations
There are three issues involved here; the taxation of notional income of unsold flats held as stock-in-trade, claim that such flats so held are occupied for the purposes of business and the head of income especially in cases where real income is received on letting of such flats. The related questions could be the allowability of the claims for vacancy allowance and that of the taxes and interest in full. A reasonable certainty that prevailed in relation to taxation of income under the head ‘income from house property,’ where the rental income is received on letting of such flats, is disturbed by the above referred decision of the Gujarat high court in the case of neha Builders. The court in this case held that the rental income of such flats, in the hands of a builder, can be taxed under the head ‘Profits and Gains of Business’, dismissing the claim of the assessee that the same should be taxed as ‘income from house property’. In that case, it was the income tax department that claimed that the income in question should be taxed as the business income. The reasoning of the court that income from flats held as stock-in-trade of a business, should be taxed as the business income, is appealing and is not to be dismissed summarily for the added reason that the court distinguished the decisions delivered in the context of dividend and interest income relating to the business under the head ‘Profits and Gains of Business’, to consciously hold that there was a difference between the two heads of income. With this, there at least arises the need for refreshing the debate on the issue.
The case of the unsold flats not let out and remaining vacant is otherwise also on a better pedestal. it is a case where no income whatsoever is received. there is no real income is received here, actual or otherwise. in the circumstances, no question should arise about deciding the head of income. The Gujarat high court decision can be applied here with the greater force to contend that the question of deciding the head, as is in the case of the business related dividend income, does not arise at all where there is no income. Independently, the rule that the income from ownership of the property shall always be taxed under the head ‘income from house property’ is not something that is written in stone; an exception is made by section 56(2)(iii) that provides for taxation of such income which is inseparable from letting of other assets. The case for not taxing the flats held as stock-in-trade is also supported by the fact that such flats are exempted from levy of the wealth tax under the Wealth tax act which in turn indicates the intention of the legislature to keep away such flats from the impost of taxation.
There is also a good case to hold that even the notional income is saved from taxation by the express provision of section 22 which excludes the income from the property occupied for the purposes of business. It is true that the delhi high court in the ansal housing finance’s case explained where a person could be said to be occupying the property for business purposes.With respect, it seems that a contrary view is not ruled out. A businessman holding an unsold flat for the purposes of sale can surely be said to have occupied such a flat for the purposes of his business which business is to keep such flat ready for sale and exhibit it to persons desirous of purchasing it . All this is a part of the business and is possible only where it is occupied by him.
There is also a good case for him in such a case to claim vacancy allowance u/s 23(1)(c) of the act. the deeming fiction of section 22 is to be applied by determination of annual Value as per section 23 of the act which provision requires due consideration of the fact that the property in question had remained vacant during the year.
It appears that the CBDT also has two conflicting views on the subject which has been evident by the fact that in the case before the Gujarat high court, it sought to contend that the income in question should be taxed under the head “Profits and Gains of Business”.
The history of the income tax act is replete with stories of cases revolving simply around the heads of taxation. the enormous litigation arises simply on account of the schedular system of taxation which requires the income to be pegged under a specific pigeon hole. This is most evident in the cases involving transactions in securities that has flooded the courts. It is high time that the parliament takes note of unwarranted litigation and does away with the system of head wise taxation, once for all.
