2015 (5) TMI 1161 - AT - Income Tax

No rental income imputed on unsold flats under Sec 23; full Rs 1 crore allowed under Sec 54EC deduction

The ITAT Mumbai held that rental income could not be imputed under section 23 on three unsold flats held as stock-in-trade by the assessee engaged in ... Deduction u/s.54EC - Notional Income as Income from House Property in respect of the 3(three) unsold shops shown as Stock-in-trade - estimating rental income from the vacant flats - Held that:- Assessee is engaged in business of construction and development, which is main object of the assessee company. The three flats which could not be sold at the end of the year was shown as stock-in-trade. Estimating rental income by the AO for these three flats as income from house property was not justified insofar as these flats were neither given on rent nor the assessee has intention to earn rent by letting out the flats. The flats not sold was its stock-in-trade and income arising on its sale is liable to be taxed as business income. No justification in the order of AO for estimating rental income from these vacant flats u/s. 23 which is assessee’s stock in trade as at the end of the year. AO is directed to delete the addition made by estimating letting value of the flats u/s.23. Claim of deduction u/s 54EC - Held that:- The assessee is also aggrieved for restricting the claim of deduction u/s. 54EC to ₹ 50 lakhs as against ₹ 1 crore claimed by the assessee. From the record we found that the assessee has shown long term capital gain of ₹ 40,15,660/- on sale of equity shares of India Finance &. Construction Co. Pvt. Ltd. after availing deduction u/s. 54EC amounting to ₹ 1,00,00,000/-. The.AO noted that assessee company sold equity shares of India Finance & Construction Co. Pvt. Ltd on 31.03.2009 and earned long term capital gains of ₹ 1,40,15,680/- on which assessee has claimed deduction of ₹ 1,00,00,000/- u/s. 54EC and declared LTCG at ₹ 40,15,660/-. AO also noted that proviso to sub-section (1) of section 54EC wherein the Legislature has prescribed limit of ₹ 50 lakhs for the purpose of deduction under that section by the Finance Act, 2007 which is effective from 01.04.2007. The assessee had invested ₹ 50 lacs on 31.3.2009 and ₹ 50 lacs on 30.4.2009. However, the AO did not allow exemption in respect of ₹ 50 lakhs invested on 30-4-2009 on the plea that limits prescribed u/s. 54EC relates to transaction and not to the financial year. By the impugned order, the CIT(A) confirmed the action of the AO. The legislature has also removed the ambiguity by inserting second proviso to Section 54EC w.e.f.1-4-2015. The memorandum explaining the provisions in the Finance (No.2) Bill, 2014 also states that the same will be applicable from 1.4.2015 in relation to assessment year 2015-16 and the subsequent years. The intention of the legislature is to clarify that this amendment should be for the assessment year 2015-16 to avoid unwanted litigations of the previous years. Respectfully following the decision of CIT Vs. C. Jaichander & Sriram Indubal [2014 (11) TMI 54 - MADRAS HIGH COURT], we do not find any merit for disallowing claim of deduction u/s. 54EC. - Decided in favour of assessee Issues:1. Taxation of notional income from unsold shops as income from house property.2. Restriction of deduction u/s.54EC to &8377; 50 lakhs instead of &8377; 1 crore claimed by the assessee.Issue 1: Taxation of Notional Income from Unsold Shops:The assessee, engaged in construction and development business, had three unsold shops as stock-in-trade at year-end. The Assessing Officer (AO) treated the income from these shops as income from house property under section 23, despite the assessee's argument that the profit on sale should be taxed as business income. The CIT(A) directed the AO to determine the annual value based on relevant factors, citing precedents and emphasizing the need for a rational valuation method. The assessee referred to a Bombay Tribunal case supporting the treatment of business assets differently. The Department cited a Delhi High Court case to justify taxing unsold flats as house property income. The ITAT, considering recent Supreme Court precedent, ruled in favor of the assessee. It held that since the assessee's primary business was construction and development, the unsold shops, being stock-in-trade, should not be taxed as house property income. The AO was directed to delete the addition of notional rental income.Issue 2: Restriction of Deduction u/s.54EC:The assessee claimed a deduction of &8377; 1 crore u/s.54EC for long-term capital gains on the sale of equity shares, but the AO restricted it to &8377; 50 lakhs based on the proviso to section 54EC. The CIT(A) upheld this decision. The ITAT referenced a Madras High Court case clarifying that the time limit for investment under section 54EC is six months from the date of transfer, even if it spans two financial years. The court noted that the ambiguity was removed by the legislature, effective from 1.4.2015. Following this precedent, the ITAT allowed the assessee's appeal, stating that the restriction on investment in bonds to &8377; 50 lakhs should not be applied retrospectively. The deduction u/s.54EC was allowed for the full amount claimed by the assessee.In conclusion, the ITAT ruled in favor of the assessee on both issues, holding that the notional income from unsold shops should not be taxed as house property income and allowing the full deduction u/s.54EC as claimed. The judgment emphasized the importance of considering the nature of assets and relevant legal precedents in determining the tax treatment of income and deductions.