Unsold flats to be considered for deemed rent under Income from House Property from date of CC… but Municipal Value to be considered as Annual Letting Value

It is now reasonably settled that rental income received from unsold portion of the property constructed by the Assessee Real Estate Developer is assessable as income from house property. However, the question is that whether the Annual Letting Value should be considered immediately after receipt of the CC or should there be a cooling period. Section 23(5) of Income Tax Act was amended vide Finance Act 2017 and provides that where any flat 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 up to two years 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 law is also amended to recognise that it is not possible for real estate developer who wants to sell its unsold stock also to let it out since the let-out property cannot be sold by the developer. Further, it is not possible for the builder to let out the property immediately after the project is complete or to sell the same as soon as the occupation certificate is obtained.

However, it is a cardinal principle of the interpretation that the normal presumption with respect to an amendment is that is applicable prospectively unless and until specifically stated otherwise. The logic behind such as interpretation is that the law should govern current activities, i.e., to say “lex prospicit non respicit”, which means that “The Law looks forward and not backward.” Hence, the amendment in Section 23(5) of Income Tax Act was also considered not applicable for period earlier to AY 18-19 as held in the case of DIMPLE ENTERPRISES VERSUS DCIT, CENTRAL CIRCLE 4 (2) , MUMBAI - 2023 (9) TMI 426 - ITAT MUMBAI.

One silver lining for the assessee in the matter is that the estimated income @8.5% of ALV would be considered on the Municipal Value and not the investment / construction cost.