2019 (3) TMI 1892 - AT - Income Tax

Tribunal rules unsold flats as business income, not house property income.

The Tribunal ruled in favor of the assessee, holding that the addition of Rs. 39,75,545 made by the AO under the head 'Income from House Property' was ... Income from house property - deemed income from unsold unit/flats which was the closing stock of the assessee under the year of consideration in view of the provisions u/s 22 & 23 - charging notional income considering Annual Letting Value of unsold flats which is closing stock of the appellant - HELD THAT:- We noticed that the factual position of the present case is quite similar to the factual position of decision of the Hon’ble ITAT in the case of Ferani Hotels Pvt. Ltd [2018 (12) TMI 1870 - ITAT MUMBAI] wherein held 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 stockin- 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. Accordingly, we do not find any 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. Accordingly, the AO is directed to delete the addition made by estimating letting value of the flats u/s.23. Since the case of the assessee has duly been covered by the decision of Ferani Hotels Pvt. Ltd, therefore, in the said circumstances by honoring the said decision, we deleted the addition raised by AO on account of notional income of the vacant flats. Accordingly, these issues are decided in favour of the assessee against the revenue. Issues Involved:1. Charging notional income considering Annual Letting Value of unsold flats as 'Income from House Property'.2. Non-compliance with jurisdictional ITAT decision in the case of M/s. C.R. Developments Pvt. Ltd. V/s. JCIT.Issue-wise Detailed Analysis:1. Charging notional income considering Annual Letting Value of unsold flats as 'Income from House Property':The assessee filed its return of income for the A.Y. 2013-14, declaring a total income of Rs. 9,72,43,120/-. During scrutiny, the Assessing Officer (AO) assessed the notional income of unsold flats, which were part of the closing stock, under the head 'Income from House Property' and made an addition of Rs. 39,75,545/-. The CIT(A) confirmed this addition. The assessee argued that the unsold units, being part of the business stock, should not be assessed under the head 'Income from House Property' but rather as business income. The assessee cited the decision in Ferani Hotels Pvt. Ltd. Vs. ACIT, where it was held that unsold flats held as stock-in-trade should be assessed under the head 'business income' and not 'house property'.The Tribunal analyzed the facts and relevant case laws, including the decisions in Runwal Construction Vs. ACIT and C.R. Developments Vs. JCIT, which supported the assessee's contention that income from unsold flats held as stock-in-trade should be assessed as business income. The Tribunal noted that in the business of construction and development, unsold flats are part of the stock-in-trade, and any income derived from such stock should be treated as business income. The Tribunal found that the AO's action of assessing notional income under the head 'Income from House Property' was incorrect.2. Non-compliance with jurisdictional ITAT decision in the case of M/s. C.R. Developments Pvt. Ltd. V/s. JCIT:The assessee contended that the CIT(A) failed to follow the jurisdictional ITAT decision in the case of M/s. C.R. Developments Pvt. Ltd. V/s. JCIT, where it was held that unsold flats held as stock-in-trade should not be assessed under the head 'Income from House Property'. The Tribunal agreed with the assessee, noting that the facts of the present case were similar to those in the cited decision. The Tribunal emphasized that the CIT(A)'s failure to follow the jurisdictional precedent was a significant error.Conclusion:The Tribunal concluded that the addition of Rs. 39,75,545/- made by the AO under the head 'Income from House Property' was incorrect. The Tribunal held that the unsold flats, being part of the business stock, should be assessed under the head 'business income'. The Tribunal deleted the addition and allowed the appeal in favor of the assessee.Order:The appeal of the assessee was allowed, and the addition made by the AO was deleted. The order was pronounced in the open court on 13.03.2019.