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 construction business, as there was no intention to let them out. The flats were correctly treated as business assets, and income on their sale is taxable as business income. The AO's addition estimating notional rent was deleted. Regarding deduction under section 54EC, the AO restricted the claim to Rs. 50 lakhs citing the statutory limit, disallowing the additional Rs. 50 lakhs invested after 31.03.2009. The CIT(A) upheld this, but the ITAT allowed the full Rs. 1 crore deduction, following Mad HC precedent, noting the legislative intent and subsequent amendment clarifying the limit applies per financial year. The appeal was allowed in favor of the assessee.

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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.

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