Tribunal rules on rental income and development rights taxation, favoring assessee

The Tribunal ruled in favor of the assessee regarding the taxation of rental income from the property, determining that the income should be credited towards work-in-progress as it was linked to the business of property development. On the issue of taxation of income from the assignment of development rights, the Tribunal remitted the matter to the AO for verification, considering the absence of construction activity and approval of the project plan during the relevant year. The Tribunal's decision partially favored the assessee, with the order pronounced on 16/07/2018.

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Issues Involved:
1. Taxation of rental income from Datar Block property.
2. Taxation of income from the assignment of Development Rights of Chaudhary Plot at Thane.

Issue-wise Detailed Analysis:

1. Taxation of Rental Income from Datar Block Property:

The primary contention revolves around whether the rental income received from tenants in Datar Block should be taxed under "Income from House Property" or as "Business Income." The Assessing Officer (AO) treated the rental income as "Income from House Property," citing that no construction or development activities were shown, and computed the income accordingly after allowing a deduction under Section 24(a).

The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, emphasizing that the property was not used for business purposes but was rented out. The CIT(A) referenced Section 22 of the Income Tax Act, which charges the annual value of property to tax under "Income from House Property" unless occupied for business purposes. The CIT(A) also dismissed the appellant's claim for interest expenditure under Section 24(b) since the interest was charged to work-in-progress as business expenditure.

Upon appeal, the Tribunal noted that the assessee is a builder and developer, and the rental income was received from tenants in a property intended for development. The Tribunal found that the rent received is inextricably linked with the business of property development. It concluded that the rental income should not be treated as "Income from House Property" but credited towards work-in-progress, supporting the assessee's treatment. The Tribunal referenced case laws, including the Hon'ble Bombay High Court's decision in Lokholdings, which supported the assessee's stance. Consequently, the Tribunal set aside the orders of the authorities below and decided in favor of the assessee.

2. Taxation of Income from Assignment of Development Rights of Chaudhary Plot at Thane:

The issue concerns whether the income from the assignment of development rights should be taxed in the year of the agreement or when the actual constructed area is received. The AO observed that the assessee entered into an agreement with M/s Shree Sachidanand Developers for developing the Chaudhary Plot, receiving a monetary consideration of Rs. 25 lakhs and a constructed area equivalent to 10,500 sq.ft. The AO taxed the monetary consideration and the estimated value of the constructed area in the year of the agreement, calculating the income from the plot accordingly.

The CIT(A) confirmed the AO's decision, stating that the agreement involved transferring all rights in the property for Rs. 25 lakhs and 10,500 sq.ft. of constructed area. The CIT(A) noted that the possession of the property was given to the developer, and an irrevocable power of attorney was executed. The CIT(A) applied Section 2(47)(v) of the Income Tax Act, which considers such transactions as "Transfer," and held that the income should be taxed in the year of the agreement. The CIT(A) also justified the AO's estimation of the sale consideration at Rs. 2,500 per sq.ft., noting that the assessee later agreed to receive Rs. 300 lakhs in lieu of the constructed area.

Upon appeal, the Tribunal considered the assessee's arguments that the project plan was not approved, and no construction had started during the year, implying no income accrual. The Tribunal noted that the agreement related to the assessee's stock-in-trade, and as per accounting standards, stock-in-trade should be valued at cost or net realizable value. The Tribunal found merit in the assessee's claim that no profit could be taxed in the year under consideration if no construction activity had commenced. The Tribunal remitted the issue to the AO to verify if the project plan was not approved and no construction had started, directing that if the claim is true, no income should be taxed for that year.

Conclusion:

The Tribunal allowed the appeal partly, deciding in favor of the assessee on the rental income issue and remitting the development rights issue to the AO for verification. The order was pronounced on 16/07/2018.

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