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

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 taxed under the head 'house property'. It set aside the CIT(A)'s orders and directed the AO to delete the ALV additions for A.Y. 2014-15 and A.Y. 2015-16. The Tribunal favored the precedent set by the Gujarat High Court, which treats rental income from stock-in-trade as business income. Consequently, the appeals were allowed in favor of the assessee, and the issue of notional income was dismissed as academic.

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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.

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