I have a doubt regarding charging section 22 for income from HP. Where HP is used for the purposes of own business then it will not be taxed under sec 22.
What does used for business mean? Does it mean as cost reduction apparatus like used a storage etc or a profit making apparatus like let out on lease? Does it mean a passive use like held idle as stock in trade or an active use? Due to many decisions taken by the courts I need clarity on the interpretation.
11 April 2018
There is an amendment in Finance Act 2017 saying that HP held as stock in trade upto 1 yr from date of completion the annual value will be NIL. My doubt is the moment a HP becomes stock in trade it is used for the business then charging section 22 is inapplicable. Then why is HP held as stock in trade taxed under sec 22?
30 July 2024
Your query pertains to the application of Section 22 of the Income Tax Act, 1961, in India, specifically concerning properties held as stock-in-trade versus properties used for business purposes.
### Understanding Section 22
**Section 22** of the Income Tax Act deals with the taxation of income from property. According to this section, the annual value of property (which is not used for the purposes of business or profession) is chargeable to tax under the head "Income from House Property."
### Key Points to Consider
1. **Used for Business Purposes:** - If a property is used for the purposes of the owner’s business, it is not subjected to tax under Section 22. Instead, it is considered part of the business assets, and any income derived from it is taxed under the head "Profits and Gains of Business or Profession."
- **Purpose of Use:** The term “used for business purposes” generally means the property is employed actively in the business. For example, if the property is used as a part of the operational infrastructure of a business, such as office space or factory premises, it falls under this category. It can also include properties that are let out on lease as part of the business activity.
2. **Stock-in-Trade vs. Investment Property:** - When property is held as stock-in-trade, it is considered an asset of the business. For the first year from the date of completion, the annual value of such property is not assessed under Section 22, as per the amendment in the Finance Act, 2017.
- **Stock-in-Trade:** If a property is held as stock-in-trade, it is not directly subjected to Section 22, but rather, it forms part of the business's inventory. Any income from the sale or lease of such property is taxable under the head "Profits and Gains of Business or Profession."
- **Transition:** The critical point here is the transition period. The Finance Act amendment stipulates that the annual value of the property held as stock-in-trade is not chargeable to tax under Section 22 for up to one year from the date of completion. Beyond this period, if the property remains as stock-in-trade, it is still not taxed under Section 22, but if it is let out or used otherwise, it could attract taxation under the appropriate head.
### Practical Implications
- **Active Business Use:** If the property is actively used in the business, such as being an office or a factory, then Section 22 does not apply. The income or loss from such property would be reflected in the business’s profit and loss statement.
- **Passive Holding:** If the property is held passively and is not used in the business (e.g., idle, for future sale, etc.), it may still be classified under the head "Income from House Property," especially if it’s not used for business or held as stock-in-trade.
- **Transition Period:** During the transition period when the property is held as stock-in-trade, the income is not charged under Section 22, but once the period elapses, if it continues to be held in the same capacity without any business activity, Section 22 may apply depending on the usage of the property.
### Conclusion
The interpretation hinges on the active versus passive use of the property and its treatment as stock-in-trade. If the property is actively used in business, it will not be taxed under Section 22. If it's held as stock-in-trade, the special provision applies for the first year, and thereafter, if it’s not actively used or sold, it may become subject to taxation under Section 22 based on its usage.
For complex scenarios or specific cases, consulting with a tax professional or legal advisor is always recommended to ensure accurate interpretation and compliance.
30 July 2024
Your query pertains to the application of Section 22 of the Income Tax Act, 1961, in India, specifically concerning properties held as stock-in-trade versus properties used for business purposes.
### Understanding Section 22
**Section 22** of the Income Tax Act deals with the taxation of income from property. According to this section, the annual value of property (which is not used for the purposes of business or profession) is chargeable to tax under the head "Income from House Property."
### Key Points to Consider
1. **Used for Business Purposes:** - If a property is used for the purposes of the owner’s business, it is not subjected to tax under Section 22. Instead, it is considered part of the business assets, and any income derived from it is taxed under the head "Profits and Gains of Business or Profession."
- **Purpose of Use:** The term “used for business purposes” generally means the property is employed actively in the business. For example, if the property is used as a part of the operational infrastructure of a business, such as office space or factory premises, it falls under this category. It can also include properties that are let out on lease as part of the business activity.
2. **Stock-in-Trade vs. Investment Property:** - When property is held as stock-in-trade, it is considered an asset of the business. For the first year from the date of completion, the annual value of such property is not assessed under Section 22, as per the amendment in the Finance Act, 2017.
- **Stock-in-Trade:** If a property is held as stock-in-trade, it is not directly subjected to Section 22, but rather, it forms part of the business's inventory. Any income from the sale or lease of such property is taxable under the head "Profits and Gains of Business or Profession."
- **Transition:** The critical point here is the transition period. The Finance Act amendment stipulates that the annual value of the property held as stock-in-trade is not chargeable to tax under Section 22 for up to one year from the date of completion. Beyond this period, if the property remains as stock-in-trade, it is still not taxed under Section 22, but if it is let out or used otherwise, it could attract taxation under the appropriate head.
### Practical Implications
- **Active Business Use:** If the property is actively used in the business, such as being an office or a factory, then Section 22 does not apply. The income or loss from such property would be reflected in the business’s profit and loss statement.
- **Passive Holding:** If the property is held passively and is not used in the business (e.g., idle, for future sale, etc.), it may still be classified under the head "Income from House Property," especially if it’s not used for business or held as stock-in-trade.
- **Transition Period:** During the transition period when the property is held as stock-in-trade, the income is not charged under Section 22, but once the period elapses, if it continues to be held in the same capacity without any business activity, Section 22 may apply depending on the usage of the property.
### Conclusion
The interpretation hinges on the active versus passive use of the property and its treatment as stock-in-trade. If the property is actively used in business, it will not be taxed under Section 22. If it's held as stock-in-trade, the special provision applies for the first year, and thereafter, if it’s not actively used or sold, it may become subject to taxation under Section 22 based on its usage.
For complex scenarios or specific cases, consulting with a tax professional or legal advisor is always recommended to ensure accurate interpretation and compliance.
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