Section 23(5) – Deemed Taxability of unsold stock of house property after 1 year of lying vacant – Non-applicability of restriction contained in section 71(3A)
The Finance Act 2017 inserted sub-section (5) in existing section 23 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. The same is being done considering the business exigencies in case of real estate developers and would provide much needed relief to such assessees.
Another related amendment has been made in section 71 by insertion of sub-section (3A) so as to provide that set-off of loss under the head “Income from house property” against any other head of income shall be restricted to two lakh rupees for any assessment year. Now an issue has arisen in case of assessees engaged in the business of real estate sector. Normally, the interest which the builder assessee pays on borrowings which were taken for construction purpose is allowable under section 36(1)(iii) as his income is assessable under the head business and profession. However, on a combined reading of provisions as contained in section 23(5) and 71(3A), i.e., if the notional income is to be treated as “Nil” during the period of one year and thereafter, as income from house property, it appears that the interest deduction would be available under section 24 and consequently, the restriction contained in section 71(3A) would apply. This would create genuine difficulty, since the businesses were so far eligible for deduction of entire interest under section 36(1)(iii). Therefore, the restriction contained in section 71(3A) should not be applicable in the case of interest deduction in respect of income from house property held as stock-in-trade.
Thus, on one hand, the insertion of sub-section (5) to section 23 of the Act deems the annual value of house property held as stock-in trade, as Nil, if the same is not let out; on the other hand, the amendment to section 71(3A) restricts the claim of set off of loss from house property (arising mainly on account of interest deduction) against income from any other head. This would curtail the benefit of entire interest deduction so far available under section 36(1)(iii).
Considering the interest deduction so far available under section 36(1)(iii) in respect of loan borrowed for construction of houses held as stock-in-trade, it is suggested that the restriction as per section 71(3A) may not be made applicable in the case of interest deduction in respect of income from house property held as stock-in-trade. This would go a long way in avoiding any negative impact on the real estate sector.
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