ITAT rules no deemed rental income on unsold properties held as stock in trade under section 23(1)

The ITAT Mumbai ruled in favor of the assessee regarding deemed rental income on properties held as stock in trade. The AO had treated unsold property as deemed let out under section 23(1) and added 10% of property value as rental income. The tribunal, relying on Pegasus Properties Pvt. Ltd. precedent, held that no deemed rental income addition can be made for unsold stock held as stock in trade up to AY 2017-18. Since the assessment year was 2014-15, the tribunal directed deletion of the addition and allowed the assessee's appeal.

---

---

Issues Involved:
1. Deemed or Notional Rental Income for properties held as Stock in Trade.
2. Estimate addition for Property No. 1 under the head Income from House Property.
3. Addition at 8.5% of Annual Value of Property No. 2 and Property No. 3 under the head Income from House Property.

Summary:

Issue 1: Deemed or Notional Rental Income for properties held as Stock in Trade
The assessee argued that properties held as stock in trade should not attract deemed rental income. The amendment to Section 23(5) applicable from A.Y. 2018-19 supports this, as it provides a moratorium period of two years for unsold stock. The Tribunal agreed, noting that prior to A.Y. 2018-19, there was no provision to tax deemed rental income on unsold stock of properties held as stock in trade. The Tribunal cited the case of Pegasus Properties (P.) Ltd. v. DCIT, which held that no addition on account of deemed rental income could be made for unsold stock held as stock in trade up to A.Y. 2017-18. Therefore, the deemed rental income determined by the Assessing Officer for A.Y. 2014-15 was not proper and was directed to be deleted.

Issue 2: Estimate addition for Property No. 1 under the head Income from House Property
The assessee contended that the estimate addition of Rs. 60,000/- for Property No. 1 lacked basis and should be deleted. The Tribunal noted that the property was shown as inventory and referenced the case of Sunil Kumar vs. ACIT, which held that estimation of annual letting value not based on reasonable working should be deleted. The Tribunal directed the deletion of the estimated addition for deemed rental income for Property No. 1.

Issue 3: Addition at 8.5% of Annual Value of Property No. 2 and Property No. 3 under the head Income from House Property
The assessee argued that Property No. 2 and Property No. 3 were shown as inventories and should not attract deemed rental income. Additionally, Property No. 3 had not received an occupancy certificate, making it legally non-occupiable. The Tribunal referenced several cases, including the Karnataka High Court in Brigade Enterprises Ltd. vs. Addl. CIT, which held that no notional income should be assessed for properties without an occupancy certificate. The Tribunal also noted that the CIT(A)'s reliance on ITO vs. Chem Mech Pvt. Ltd. was not applicable as the facts differed significantly. Consequently, the Tribunal directed the deletion of the addition at 8.5% of the property value for both properties.

Conclusion:
The Tribunal allowed the appeal filed by the assessee, directing the deletion of additions made on account of deemed rental income for properties held as stock in trade for A.Y. 2014-15. The Tribunal emphasized that no addition could be made for deemed rental income on unsold stock of flats held as stock in trade up to A.Y. 2017-18.

---