Section 23 of the Income Tax Act
Income-tax Act, 2025: s.21
Section 23 of the Income-tax Act, 1961 corresponds to section 21 (Determination of annual value) of the Income-tax Act, 2025.
Read section 21 of the 2025 Act
Correspondence checked against the ICAI tabular mapping of the two Acts and the BharatTax.co section commentary.
The decision most relied on for Section 23 is Chennai Properties & Investments Ltd. v. CIT (373 ITR 673), cited in 381 of the 564 judgments on BharatTax that turn on this section.
Leading authorities on Section 23
Income from immovable property, such as unsold flats or shops, held by an assessee as stock-in-trade in their business of acquiring and holding properties is taxable as 'business income' and not 'income from house property'. Consequently, notional annual letting value under Section 23 cannot be attributed to such stock-in-trade.
Annual Letting Value (ALV) of unsold stock-in-trade flats/shops held by a real estate developer can be assessed under Section 22 of the Income Tax Act, 1961, as income from house property. This approach was followed by the Assessing Officer (AO) based on this decision.
For computing income from house property, the Annual Letting Value (ALV) cannot be arbitrarily estimated by the Assessing Officer, but must be determined based on the Municipal ratable value of the property.
Income from unsold flats held as stock-in-trade by a builder or developer is assessable as business income, not income from house property, for assessment years prior to the insertion of Section 23(5) of the Income-tax Act.
Interest expenditure on borrowed funds, especially when used for making advances, should generally be allowed under Section 36(1)(iii) if its nature and business expediency remain consistent with previous assessment years. The character of an outstanding amount at the start of an accounting year is considered the same as at the end of the prior year, reinforcing the rule of consistency.
The Legislature abolished terminal depreciation under section 32(1)(iii) and the taxing of balancing charge under section 41(2), replacing these provisions with the requirement to reduce sale proceeds of depreciable assets from the block of assets.
Disallowance under Section 14A for interest expenditure is not justified if an assessee uses its own interest-free funds for investments generating exempt income, and borrowed funds are entirely utilized for business purposes, without evidence of diversion to earn tax-free income.
Notional interest on an interest-free security deposit cannot be considered as actual or deemed rent under Section 23(1) of the Act. For determining Annual Letting Value (ALV) under Section 23(1)(a), it must be in accordance with municipal laws, considering extraneous circumstances, but not exceeding the standard rent as per rent control legislation.
For capital gains exemption under Section 54F, the new residential house is not required to be purchased exclusively in the assessee's own name; acquisition in joint names or in the name of a spouse qualifies for the exemption. This principle also applies to Section 54 due to their pari materia nature.
Property held as stock-in-trade is not assessable under the head 'Income from House Property' (Section 23). An Assessing Officer's decision not to tax such income, when supported by inquiry, typically cannot be considered erroneous and prejudicial under Section 263.
