2021 (1) TMI 360 - AT - Income Tax

Tax Tribunal: Unsold commercial properties' income as closing stock is business income, not house property.

ITO-2 (1) (1), Mubmai Versus M/s Arihant Estate Pvt. Ltd.

The ITAT ruled that income from unsold commercial properties held as closing stock should be assessed under 'Income from Business' rather than 'Income ... Assessment of rental income - ‘Income from House Property’ OR ‘Income from Business’ - notional annual letting value on unsold shops held as stock in trade by the assessee - HELD THAT:- As decided in own case [2018 (7) TMI 655 - ITAT MUMBAI] wherein hold that the unsold flats which are stock in trade when they were sold they are assessable under the head ‘income from business’ when they are sold and therefore the AO is not correct in bringing to tax notional annual letting value in respect of those unsold flats under the head ‘income from house property’. We direct the AO to delete the addition made under Section 23 of the Act as income from house property.” Admittedly in this case on hand the unsold property being shops were held as stock in trade. In the circumstances, respectfully following the above decision we uphold the order of the Ld.CIT(A) and reject the ground raised by the Revenue. Issues Involved:1. Taxability of income from unsold commercial properties held as closing stock.2. Applicability of Section 23 of the Income Tax Act regarding notional rent on unsold properties.3. Distinction between business assets and house property for tax purposes.Detailed Analysis:1. Taxability of Income from Unsold Commercial Properties Held as Closing Stock:The assessee, engaged in the business of construction and development, filed its return of income declaring Rs. 4,65,800/- for the assessment year 2014-15. The case was selected for scrutiny, and the Assessing Officer (AO) assessed the income from unsold commercial properties under the head 'Income from House Property'. The AO's rationale was based on the ownership and the right to sell or lease these properties, thereby making them liable for tax under the provisions of the Income Tax Act. However, the assessee contended that such income should be assessed under 'profits and gains of business or profession' as the properties were held as stock in trade.2. Applicability of Section 23 of the Income Tax Act Regarding Notional Rent on Unsold Properties:The AO argued that the unsold properties should be subjected to tax under Section 23, which deals with the annual value of property. The AO computed the notional rent for these properties and included it under 'Income from House Property'. The assessee, however, relied on the decision of the Hon'ble Apex Court in M/s. Chennai Properties & Investments Ltd. vs. CIT, asserting that since the properties were constructed for commercial exploitation, Section 23 should not apply.3. Distinction Between Business Assets and House Property for Tax Purposes:The CIT(A), following the decision of the ITAT in the assessee's own case for Assessment Year 2012-13, ruled in favor of the assessee, holding that the income from the unsold properties should be assessed under 'Income from Business'. The revenue, dissatisfied with this decision, appealed to the ITAT. The ITAT upheld the CIT(A)'s decision, referencing the case of M/s. Runwal Constructions v. ACIT, where it was held that properties held as stock in trade should be assessed under 'Income from Business' and not 'Income from House Property'.Conclusion:The ITAT concluded that the unsold properties, being held as stock in trade, should be assessed under 'Income from Business'. The AO's action of taxing the notional rent under 'Income from House Property' was deemed incorrect. The appeal filed by the revenue was dismissed, affirming that the income from the unsold commercial properties should be considered as business income. The decision was pronounced in the open court on 06.01.2021, dismissing the revenue's grounds and upholding the CIT(A)'s order.