2020 (11) TMI 218 - AT - Income Tax

Tribunal Rules Unsold Flats as Stock-in-Trade Not Taxable Under 'House Property'; Rental Income Seen as Business Income.

M/s Osho Developers OSHO Versus ACIT-32, Mumbai

The Tribunal ruled that the Annual Lettable Value (ALV) of unsold flats held as stock-in-trade by the assessee, a real estate developer, could not be ... Income from house property - ALV Determination - Addition on notional basis as deemed rental income applying 8% of value of the unsold flats - unsold flats held as stock in trade - HELD THAT:- Preferring the view taken in CIT vs. Neha Builders Pvt. Ltd. [2006 (8) TMI 105 - GUJARAT HIGH COURT] as per which the ALV of the unsold property held by an assessee as stock-in-trade could not be determined and brought to tax under the head ‘house property’, we herein conclude that the ALV of flats held by the assessee as part of the stock-in-trade of its business as that of a builder and developer could not have been determined and therein brought to tax under the head ‘house property’. As the said statutory provision i.e Sec. 23(5) is applicable prospectively i.e w.e.f A.Y 2018-19, the same, thus, would have no bearing on the year under consideration in the case of the present assessee before us - We direct the A.O to delete the addition made by him towards the ALV of the flats held by the assessee as stock-in-trade of its business as that of a builder and developer. - Decided in favour of assessee Issues Involved:1. Addition of deemed rental income from unsold flats held as stock-in-trade.2. Applicability of Section 23(1) of the Income Tax Act, 1961, to properties held as stock-in-trade.3. Determination of Annual Lettable Value (ALV) for unsold flats.4. Relevance of judicial precedents and conflicting High Court judgments.5. Prospective applicability of Section 23(5) of the Income Tax Act, 1961.Issue-wise Detailed Analysis:1. Addition of Deemed Rental Income from Unsold Flats Held as Stock-in-Trade:The primary contention was whether the unsold flats held by the assessee, a real estate developer, as stock-in-trade should be subjected to tax as deemed rental income. The Assessing Officer (AO) added Rs. 43,15,097/- for A.Y. 2014-15 and Rs. 49,17,907/- for A.Y. 2015-16 as deemed rental income by applying 8% of the value of unsold flats as income from house property. The CIT(A) upheld this addition, relying on the judgment of the Hon’ble High Court of Bombay in CIT Vs. Gundecha Builders, which held that rental income from property held as stock-in-trade is taxable under the head 'house property'.2. Applicability of Section 23(1) of the Income Tax Act, 1961, to Properties Held as Stock-in-Trade:The assessee argued that the flats were held as stock-in-trade and not as an investment, and therefore, the ALV of the same could not be determined and brought to tax under the head 'house property'. The AO, however, relied on the judgment of the Hon’ble High Court of Delhi in CIT Vs. Ansal Housing Finance and Leasing Company Ltd., which held that the incidence of tax under the head 'house property' is based on ownership, not on whether the property is let out.3. Determination of Annual Lettable Value (ALV) for Unsold Flats:The AO computed the ALV at 8% of the cost of the property in the absence of any reasonable ALV provided by the assessee. The CIT(A) supported this computation, relying on the judgment of the Hon’ble High Court of Bombay in CIT Vs. Gundecha Builders. However, the assessee contended that the lower authorities erred in determining the gross ALV on an ad hoc basis.4. Relevance of Judicial Precedents and Conflicting High Court Judgments:The assessee cited the judgment of the Hon’ble High Court of Gujarat in CIT vs. Neha Builders, which held that rental income derived from property treated as stock-in-trade is assessable as business income and not under the head 'house property'. The Tribunal noted the conflict between the judgments of the Hon’ble High Courts of Delhi and Gujarat. Following the principle laid down by the Hon’ble High Court of Bombay in K. Subramanian and Anr. Vs. Siemens India Ltd. and Anr, the Tribunal preferred the view favorable to the assessee, as held by the Hon’ble High Court of Gujarat.5. Prospective Applicability of Section 23(5) of the Income Tax Act, 1961:The Tribunal observed that Section 23(5), inserted by the Finance Act, 2017 w.e.f. 01.04.2018, provides that the annual value of property held as stock-in-trade shall be taken as nil for a period up to one year (extended to two years by the Finance Act, 2019) from the end of the financial year in which the certificate of completion is obtained. This provision is applicable prospectively and does not affect the years under consideration.Conclusion:The Tribunal concluded that the ALV of the flats held by the assessee as stock-in-trade could not be determined and brought to tax under the head 'house property'. The Tribunal set aside the orders of the CIT(A) and directed the AO to delete the additions made towards the ALV of the flats. The appeals for both A.Y. 2014-15 and A.Y. 2015-16 were allowed in favor of the assessee. The grounds of appeal regarding the notional income were rendered academic and dismissed as not pressed.