The system of taxation in India has been in the country since ancient times. Manu Smriti and Kautilya’s Arthashastra are two of the major sources which aid us in understanding the taxation mechanism of ancient India. According to Manu, the king was supposed to levy taxes upon his subjects in such a manner that his subjects would “not feel the pinch of paying taxes”. The rate of tax, according to Manu Smriti, depended on the type of work the subjects were engaged in. For example, the rate of tax for traders and artisans were 1/5th of their income/profits in silver and/or gold (as it was the prevailing currency system of that period). Agriculturalists/farmers, however, were liable to pay tax at the rate ranging from 1/6thto 1/10thdepending on the type of crop and the amount of rain during the year.
Kautilya’s Arthashastra, was, on the other hand, more planned and well-structured document on the taxation system in ancient India, which was written somewhere around 300 B.C. Financial matters, as well as financial administration formed a major part of the Arthashastra. The Mauryan Empire used to collect a part of the agricultural produce, which would usually be 16th of the total produce. Additionally, the Mauryan Empire collected taxes for water, octroi, tolls, etc. The concept of Salt Tax was important as it was a source of revenue which was collected at the place of its extraction.
Kautilya’s aim to give importance to public finance and taxation system was primarily for the welfare of the public and development of the country. Kautilya believed that “the power of the government depended upon the strength of its treasury”. This notion of Kautilya is still followed in India, the basic objective of the government being development of the country and welfare of the public.
Trade and commerce with foreign countries formed a vital source of revenue during the reign of the Mauryan Empire. Goods imported from foreign countries were known as Vartanam, while the tax levied to the concerned businessman of the said trade was known as Dvarodaya. Income tax was collected as it constituted a major part of the revenue of the State. Not only sales tax was levied on sales, but tax was also levied on the sale and purchase of buildings. Even gambling was subject to the payment of taxes.The said revenues, which have been collected, were spent on services such as laying of roads, setting up of educational institutions and/or any other activities, which would be beneficial to the whole community.
Kautilya’s Arthashastra ensured that each tax was specific so that the chances of any arbitrariness would be lessened, a concept of taxation which is prevailing in India. Thus, it can be said that the Arthashastra was the only authoritative text of the said era, which dealt with public finance, administration and fiscal laws of India. It was Kautilya, who had first introduced the concept of taxation in an organized manner, by categorizing the heads of taxation.
The history of Income Tax in modern India dates back to 1860 when the first Income Tax Act was introduced by James Wilson, the Finance Member of British Dominion in India.The first Income Tax Act came into force on July 24, 1860.
The Income Tax Act of 1860 was divided into four Schedules, which were taxed separately, being:-
• Income from landed property;
• Income from profession and trade;
• Income from Securities;
• Income from salaries and pensions.
The said Act lapsed in 1865 and was brought into effect again on 1867.
Income Tax in India has gone through several modifications and amendments since its introduction.
It is pertinent to note here that the concept of levying tax on landed property began since long. However, under the Income Tax Act of 1886, no such provision was made for any tax on property. The Income Tax Act of 1886 was divided into four Schedules, which were taxed separately, being:-
• Income from salaries, pensions or gratuities;
• Income from net profits of companies;
• Income from interests on the securities of the Government of India;
• Other sources of income.
The Income Tax Act of 1918 was the third legislation, which came into force in India,thus, revoking the former Act, namely, the Income Tax Act of 1886. However, the Income Tax of 1918 was soon replaced by the Income Tax of 1922, which came into force from April 01, 1922 and continued to be in force until March 31, 1961. According to the provisions of Section 6 of the Income Tax Act of 1922, the following were the heads of income that was chargeable to income tax, namely: –
• Interest on securities;
• Income from property substituted by Section 7 of the Indian Income Tax (Amendment) Act, 1939;
• Profits and gains of business, profession or vocationsubstituted by Section 7 of the Indian Income Tax (Amendment) Act, 1939;
• Income from other sourcessubstituted by Section 7 of the Indian Income Tax (Amendment) Act, 1939;
• Capital gains Inserted by Section 5 of the Income Tax Act and E.P.T. (Amendment) Act, 1947.
With several developments in the economic system in the country, the Income Tax Act of 1922 became very complicated, because of the numerous amendments made in the said Act. Accordingly, the Income Tax Act of 1922 was finally replaced by the present Income Tax Act of 1961, which came into force from April 01, 1962.
Taxation Law in India is classified into two categories, namely, Indirect Taxand Direct Tax.
Indirect Tax is the tax, which is levied by the Government on goods and services, but not on income, profit or revenue of the individual. Indirect Tax can be shifted from one person to another. Prior to July 2017, Indirect Tax included Value Added Tax, Sales Tax and Service Tax. In this tax regime, the taxpayer has to pay more than the actual price of any product bought or any service acquired by an individual. After July 2017, Goods and Service Tax, more popularly known as GST, was a tax regime which was earlier proposed by the then Prime Minister of India Atal Bihari Vajpayee in the year 1999. However, it came into effect only on July 01, 2017.
Direct Tax, on the other hand, is the tax, which is imposed on a taxpayer, such tax being paid to the Government;out of which Income Tax is the most familiar type of Direct Tax.
The term ‘stock-in-trade’ has not been defined in the Income Tax Act of 1961. However, the term can be used to mean and include the goods and/or assets of a company and/or business which is/are held by the said company and/or business for future transaction(s). The term, nonetheless, is not limited to the notion that the said goods and/or assets of the company and/or business are held by the company purposely. For example, in a situation where any developer and/or real estate company has completed the construction of a project, there might be a situation where some of the flats remain unsold. In such cases, the developer and/or real estate company can keep the said flats for futuretransactions.
Chapter IV of the Income Tax Act of 1961 deals with computation of total income. Section 23 of the Act deals with how the annual value is determined. According to the provisions of Section 22 of the Income Tax Act of 1961, the annual value of a property shall be chargeable to income tax under the head “Income from house property”, which consists of a building or land, which is attached to the said building or land, of which the assessee is the owner. Any property or part of such property of which is occupied for the purpose of business or profession shall be excluded from the head “Income from house property”.
Accordingly, some had the opinion that residential property, which are being held by the assessees as “Stock-in-Trade” cannot be deemed to be let out and be subject to tax on an estimated basis. It is pertinent to mention here that the Hon’ble High Court of Gujrat in the case of Commissioner of Income Tax vs. Neha Builders (P) Ltd.(2008) 296 ITR 661 (Guj), had held the following opinion: “If the business of the assessee is to construct the property and sell it or to construct and let out the same, then that would be the ‘business’ and the business stocks, which may include movable and immovable, would be taken to be ‘stock-in-trade’, and any income derived from such stocks cannot be termed as ‘income from property'”.
Subsequently, the Hon’ble High Court of Delhi in the case of Commissioner of Income Tax vs. Ansal Housing Construction (2016) 389 ITR 373 (Delhi), had held that the provisions of Section 22 and Section 23 of the Income Tax Act of 1961 were applicable to even those assessees who are engaged in the business of construction of house properties, and as such, were liable to pay tax on the annual letting value of the unsold flats as ‘income from house property’. Consequently, a Special Leave Petition has been filed by the assessee against the decision of the Delhi High Court, which was accepted by the Hon’ble Supreme Court.
Now, as per Section 12 of the Finance Act of 2017, a new sub-section, being sub-section (5) has been inserted after sub-section (4) of Section 23. The said sub-section came into effect on and from April 01, 2018.According to the provisions of Section 23(5) of the Income Tax Act of 1961, “Where the property consisting of any building or 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 up to 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.”
Illustration :In a residential complex consisting of two buildings having 100 apartments each, 75 apartments have been sold. The rest of the apartments have been kept as “Stock-in-Trade” as on March 2015 by the Real Estate Developer. The Completion Certificate was received on April 2015. As the Completion Certificate was received on April 2015.
Here: Financial Year was 2015-16 and Assessment Year 2016-17.
Now, as per Section 23(5) of the Income Tax Act, 1961 the tax liability on the assessee being the Real Estate Developer, will be in the following manner:
The assessee will be required to compute the income under the head “Income from house property” for the unsold flats for Assessment Year 2018-19.
In respect of unsold flats, the assessee can treat the rateable value of unsold flats at Nil for a period of one year from the end of the financial year in which the certificate of completion of the property had been obtained. Since, the certificate of completion has been received on April 2015 hence the assessee will be liable to compute the income for Assessment Year 2018-19. This is the notional income, which will be chargeable to tax.