Tribunal rules unsold flats not taxable as house property income. AO directed to delete addition. Assessee appeal allowed.

The Tribunal held that the notional rental value of unsold flats held as stock-in-trade should not be taxed as income from house property. The AO was directed to delete the addition of Rs. 23,71,200 towards annual letting value of the unsold flats. As a result, the appeal of the assessee was allowed, and the statutory deduction issue became irrelevant. The order was pronounced on 13/03/2019.

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Issues Involved:

1. Whether the Ld. CIT(A) was justified in confirming the action of the Ld. AO for computing deemed rental income in respect of certain unsold flats.
2. Whether the Ld. CIT(A) was justified in not allowing statutory deduction u/s. 24(a) of the Income Tax Act at 30% of gross annual value computed.

Detailed Analysis:

1. Deemed Rental Income on Unsold Flats:

The primary issue in this appeal is the computation of deemed rental income on unsold flats held by the assessee as stock-in-trade. The assessee, engaged in the business of construction and real estate development, had unsold flats at Jolly Bhavan and Aurovilla. The Ld. AO assessed the annual letting value of these flats as income from house property, citing Section 22 of the Income Tax Act. The AO relied on the Delhi High Court's decision in Ansal Housing Finance and Leasing Company Ltd., which supported the notion of assessing deemed rental income for unsold flats.

However, the assessee contended that these properties were held as stock-in-trade and not for rental purposes, arguing that any income derived should be classified as business income. The Ld. CIT(A) upheld the AO's decision, distinguishing the case from Chennai Properties and Investments Ltd., where the Supreme Court ruled in favor of treating rental income as business income due to the nature of the business.

2. Statutory Deduction u/s. 24(a):

The Ld. AO did not grant the statutory deduction of 30% of the gross annual value under Section 24(a) while computing the deemed rental income. The Ld. CIT(A) supported this stance, maintaining that the properties in question were not intended for rental income and thus did not qualify for the deduction.

Tribunal's Findings:

The Tribunal examined the rival submissions and placed significant reliance on the Gujarat High Court's decision in CIT vs. Neha Builders Pvt. Ltd., which held that properties held as stock-in-trade should be treated as business assets, and any income derived therefrom should be classified as business income, not income from house property. It was noted that the unsold flats were occupied by the assessee for business purposes, and no rental income was derived from them.

The Tribunal acknowledged the conflicting decisions between the Gujarat High Court and the Delhi High Court on this matter. In such cases, the Tribunal preferred the interpretation favorable to the assessee, as supported by the Supreme Court's ruling in CIT vs. Vegetable Products.

The Tribunal also referred to its own previous decisions, including the case of Chamber Construction Pvt. Ltd. vs. DCIT, where it was held that the notional rental value of unsold flats held as stock-in-trade should not be taxed under the head "Income from house property."

Conclusion:

The Tribunal concluded that the lower authorities erred in assessing the notional rental value of the unsold flats as income from house property. It directed the AO to delete the addition of Rs. 23,71,200 towards annual letting value of the unsold flats. Consequently, the appeal of the assessee was allowed, and the statutory deduction issue became moot.

Order Pronounced:

The appeal of the assessee was allowed, and the order was pronounced in court on 13/03/2019.

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