prpri Deemed Taxability of unsold stock of house property after 1 year of lying vacant 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)

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.

Source-  ICAI Pre-Budget Memorandum–2018 (Direct Taxes and International Tax)
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  1. Himanshu Kothari says:

    I have a property of building which had obtain Completion in FY 13-14 , and total unit was 28 flat amoung that only 9 has been sold , so whether the balance 19 will be liable for let off rent , and not a signal flat from 19 has been given on rented till yet . Pls help me with some article so that I can Finalise my return . Thanks You

  2. vswami says:

    The Finance Bill 2017, has since been passed, and as proposed, come into force wef AY 2018-19. However, the proposals wrt which the observations/suggestions were made in the write-up are seen to have been NOT taken a conscious note of, or due care of, but been obstinately bypassed.
    In one’s conviction, the referred enactment (s) has the inherent potential to give rise to inevitable disputes and litigation; and, the possible grounds of contention are, in brief :
    1. In deeming that ‘unsold stock of house property’ could give rise to taxable income in the hands of the realtor, and continue to be so, until sold, is patently misconceived.
    A) According to the scheme of things as embodied in the special law (s) governing construction and sale of ‘UNITS’ in a housing complex, any /all such units, remaining unsold at any given point in time, will continue to be ‘stock-in-trade’, as ever before ; that is, could not but be regarded only as ‘asset’ held for the promoter’s business of construction and sale. Differently put, it makes no sense, legally or legitimately, to treat the asset as ‘house property’ within the contemplation of the income-tax law, so as to attract tax on any notional income therefrom. Further, if were strictly construed, and accordingly challenged, promoter might have no right or option to let out the unsold units, until sold. This is an aspect which appears to be quite implicit in, and readily infer-able from, the referred governing special law (s).
    Aide: For an understanding and appreciation, in proper light, of the referred aspect, suggest to mindfully go through the several provisions of the spl. law of state (s)- e.g. MAOA or kAOA and the Rules framed thereunder, and in force.
    Incidentally, this is an aspect not so specifically – but been covered implicitly, – in the RERA Code, except in the spl. law of state; as such, the above referred spl. law provisions should be taken to continue to apply and be considered and applied.
    On such a premise, the other amendments simultaneously made, of the scheme of provisions governing taxation of ‘capital gains’ –
    (for MORE- refer the write-up displayed on the professional websites ; so also on FB)
    if were taken on and disputed, rightly so, are most likely to be struck down as without merits or substance in jurisprudence / being against and ultra vires the constitutional principles.

    OVER to the law EXPERTS, at large, and in field practice, – both lawyers and CAs having a significant and positive role to play, alike -for minding to and sharing thoughts / viewpoints, even if any different, for a true enlightenment of the clientele / stakeholders!

    TAIL Note: May have more to share, as regards the implications of the amendment of sec 71 and the writer’s apprehensions / suggestion , but with a different stroke!

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August 2021