Unsold Flats Cannot Be Taxed on Notional Rent Before They Become Legally Occupiable
Bombay High Court upholds relief to a builder: No annual letting value can be assessed for a period when the property lacked an occupancy certificate
Can a builder be asked to pay income tax on notional rent from unsold flats even when the flats are not legally occupiable? Can the Income Tax Department revise an assessment under Section 263 merely because the annual letting value of unsold inventory was not brought to tax under the head “Income from House Property”? The Bombay High Court examined these questions in Pr. Commissioner of Income Tax-27 v. 3NN Corporation, Income Tax Appeal No. 129 of 2020, concerning AY 2013-14. The judgment, dated 30 September 2026, upheld the view that notional rental income could not be taxed for the period during which the property was not legally occupiable because an occupancy certificate had not been obtained.
The facts: Unsold flats in a builder’s inventory
The assessee was a builder and developer having unsold flats and shops in a residential project at Bhiwandi, Thane. The Revenue sought to invoke Section 263 of the Income-tax Act, 1961, contending that the annual letting value of the unsold units forming part of the assessee’s closing stock should have been assessed as income from house property. The revisionary authority proposed to bring notional rental income to tax for the period following the issuance of the completion certificate. The relevant dates were important:
Completion certificate: 25 October 2012.
Occupancy certificate: 25 May 2016. The controversy concerned the period from 25 October 2012 to 31 March 2013, falling within AY 2013-14. Although the project had received its completion certificate, the occupancy certificate had not yet been issued. The Revenue’s position was that the annual letting value of the unsold flats could nevertheless be assessed to tax.
The central issue
The principal question was whether notional rental income under Section 23(1)(a) could be assessed for a period during which the property was not legally occupiable. A related issue was whether the assessment order could be revised under Section 263 on the ground that the Assessing Officer had failed to bring the annual letting value of the unsold units to tax. The distinction between a completion certificate and an occupancy certificate assumed significance. Completion of construction did not, by itself, establish that the flats could lawfully be occupied.
What did the Tribunal hold?
The Tribunal held that the property was not legally occupiable until the occupancy certificate was obtained. Where a property cannot legally be occupied and no real rental income is earned, notional rental income under Section 23(1)(a) cannot be brought to tax for that period. Consequently, the proposed addition of notional rent for the relevant period was held to be unjustified. The Tribunal also found the revisionary approach under Section 263 unsustainable. The assessee’s appeal was allowed and the revision order was set aside. The Tribunal’s reasoning was consistent with the principle considered in Sharan Hospitality (P.) Ltd., which was relevant to the issue of taxing notional rent on properties that were not legally occupiable.
Bombay High Court dismisses the Revenue’s appeal
The Bombay High Court upheld the Tribunal’s view and dismissed the Revenue’s appeal. The decision reinforces the importance of determining whether a property was legally capable of occupation during the relevant period before seeking to tax notional rental income. The mere fact that a building’s construction has been completed does not necessarily mean that the property can immediately be treated as a legally occupiable residential or commercial unit for income-tax purposes.
Why does this ruling matter to builders and developers?
Builders frequently hold completed but unsold flats and shops as part of their closing stock. Questions arise when the construction is complete but regulatory approvals necessary for occupation are still pending. The ruling provides useful guidance in cases where the Revenue seeks to tax notional rent for a period during which the units could not legally be occupied. The important consideration is not merely whether the construction was completed, but whether the property was legally occupiable during the relevant period. Builders and developers should therefore preserve relevant records, including:
Completion certificates and occupancy certificates.
Applications for occupancy approval and correspondence with local authorities.
Records identifying unsold units held as inventory.
Evidence showing when the units became legally available for occupation. These documents may be material in determining the tax treatment of unsold properties for the relevant assessment year.
Section 263: Every alleged omission does not justify revision
The case also highlights the significance of Section 263. The Revenue had sought to revise the assessment on the footing that notional rental income from the unsold units ought to have been assessed as income from house property. However, where the proposed addition itself is not legally sustainable for the relevant period, the alleged failure to make that addition cannot automatically justify revision. The decision demonstrates why the legal basis for the proposed tax adjustment must be examined before invoking revisional jurisdiction.
Conclusion
The Bombay High Court’s decision in Pr. Commissioner of Income Tax-27 v. 3NN Corporation is a significant ruling for builders and developers holding unsold flats or shops. It supports the position that notional rent cannot be taxed for a period during which the property was not legally occupiable for want of the required occupancy certificate. For developers, the lesson is straightforward: completion of construction and legal occupiability are not necessarily the same thing. And for the Income Tax Department, the decision is a reminder that notional income must have a sustainable legal foundation before it can be brought to tax.
The copy of the order is as under:
