Tribunal: Stock in Trade Not Deemed Rental Income

The Tribunal held that properties held as stock in trade should not be subject to deemed rental income under the head "house property." The appeal of the assessee was allowed, directing the Assessing Officer to delete the addition made towards the annual letting value.

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Issues Involved:
1. Deemed rental income on properties held as stock in trade under section 23 of the Income Tax Act, 1961.

Detailed Analysis:

1. Deemed Rental Income on Properties Held as Stock in Trade:

The core issue raised by the assessee is that the Learned Commissioner of Income Tax (Appeals) [Ld. CIT(A)] erred in confirming the addition of Rs. 13,33,640 as deemed rental income under section 23 of the Income Tax Act, 1961, concerning properties held as stock in trade.

Facts and Arguments:
- The assessee, a private limited company engaged in real estate development, showed unsold properties worth Rs. 2,38,15,000 as stock in trade.
- The Assessing Officer (AO) deemed these properties liable for rental income under section 23, calculating the Annual Letting Value (ALV) at 8% of the closing stock value, resulting in Rs. 19,05,200.
- After allowing a 30% deduction for repairs and maintenance under section 24, the AO added Rs. 13,33,640 to the assessee's total income under the head "house property."

Assessee's Contentions:
- The assessee argued that the properties were consistently shown as stock in trade, accepted by the Revenue in previous years without any deemed rental income addition.
- Citing the Supreme Court decision in Radhasoami Satsang (193 ITR 321), the assessee emphasized the principle of consistency.
- The assessee contended that the AO should reject the books under section 145(3) to compute deemed rental income, which was not done.
- The properties were not in a condition to be let out, lacking essential amenities, thus the ALV should be nil.
- The proposed ALV rate of 12% was irrational, with the market yield being less than 7%.
- If deemed rental income is computed, proportionate interest expenses should be deductible.
- The closing stock value should be reduced from business income if deemed rental income is considered.

CIT(A)'s Observations:
- The Ld. CIT(A) upheld the AO's decision, stating the assessee, as the property owner, is subject to tax on a deemed rental basis under section 23.
- The BU permission indicated the properties were fit for use.
- The Ld. CIT(A) cited the Delhi High Court judgment in CIT Vs. Ansal Housing Finance and Leasing Company Ltd (389 ITR 373), supporting the AO's stance.
- The Ld. CIT(A) rejected the argument that the closing stock value should be reduced from business income and denied the deduction of interest expenses, as they were already claimed under business income.

Tribunal's Findings:
- The Tribunal referred to the Gujarat High Court judgment in CIT Vs. Neha Builders Pvt. Ltd (296 ITR 661), which held that income from properties held as stock in trade should be treated as business income, not house property income.
- The Tribunal noted the absence of provisions under "income from business and profession" for computing deemed rental income for properties held as stock in trade.
- The Tribunal cited the ITAT Mumbai decision in Saranga Estates Pvt. Ltd. Vs. DCIT (ITA 4420/Mum/2017), which favored the assessee, aligning with the Gujarat High Court's view over the Delhi High Court's conflicting judgment.
- The Tribunal emphasized the principle from the Supreme Court in CIT Vs. Vegetable Products (1973) 88 ITR 192, favoring the taxpayer when two reasonable constructions of a taxing provision exist.

Conclusion:
- The Tribunal concluded that properties held as stock in trade should not be subject to deemed rental income under the head "house property."
- The appeal of the assessee was allowed, directing the AO to delete the addition made towards the annual letting value.

Order Pronouncement:
- The order was pronounced in the Court on 19/07/2019 at Ahmedabad, allowing the appeal of the assessee.

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