Tribunal rules unsold shops as stock-in-trade for estate development, deems rental income addition unjustified.

The Tribunal ruled in favor of the assessee, holding that the unsold shops should be treated as stock-in-trade due to the primary business being estate development. The Tribunal referenced relevant case law to support its decision and emphasized that the applicable amendment to the Income Tax Act did not pertain to the assessment year in question. Consequently, the addition of deemed rental income was deemed unjustified, and the AO was directed to delete the addition. The appeal was allowed, and the order was pronounced on 13/10/2020.

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Issues Involved:
1. Taxation of deemed rent on unsold shops.
2. Consideration of unsold shops used for business purposes.
3. Applicability of amendment to section 23(5) of the Income Tax Act, 1961, effective from AY 2018-19.

Detailed Analysis:

1. Taxation of Deemed Rent on Unsold Shops:
The primary issue revolves around whether the deemed rental income on unsold shops should be taxed. The Assessing Officer (AO) observed that the assessee society, engaged in the development and maintenance of estates, had unsold shops in its balance sheet but did not declare any rental or business income from these properties. The AO estimated the rental income of Rs. 13,20,000/- for 55 shops at Rs. 24,000/- per annum each, based on the notion that it is impractical for shops in a commercial complex to remain vacant or unused. The AO added this estimated rental income to the total income of the assessee society.

2. Consideration of Unsold Shops Used for Business Purposes:
The assessee contended that the unsold shops were used as warehouses for storing construction materials and were not fit for renting due to lack of utilities like electricity and water. It was also argued that the unsold shops should be treated as stock-in-trade since the main business of the society is development and maintenance of estate projects. The assessee highlighted that this treatment had been consistently accepted in previous assessments. The CIT(A) partially upheld the AO's addition, reducing the deemed rental income to Rs. 11,12,720/- after accounting for already declared rental income of Rs. 2,07,280/-.

3. Applicability of Amendment to Section 23(5) Effective from AY 2018-19:
The assessee argued that the amendment to section 23(5) of the Income Tax Act, effective from AY 2018-19, which provides that the annual value of property held as stock-in-trade shall be taken as nil for up to two years from the end of the financial year in which the completion certificate is obtained, should apply. However, the Tribunal noted that this amendment does not apply to the assessment year 2013-14 under consideration.

Tribunal's Findings:
The Tribunal concluded that the unsold shops should be treated as stock-in-trade, aligning with the assessee's primary business of estate development and maintenance. The Tribunal referenced the Gujarat High Court's decision in Neha Builders (P) Ltd. vs. Commissioner of Income Tax, which held that income derived from stock-in-trade should be treated as business income, not as income from house property. Additionally, the Tribunal cited the ITAT Mumbai's decision in M/s. Runwal Constructions vs. ACIT, which reinforced that unsold properties held as stock-in-trade should not be taxed under the head 'Income from House Property'.

The Tribunal emphasized that the newly inserted sub-section (5) of section 23, effective from 1-4-2018, does not apply to the assessment year 2013-14. Therefore, the AO's addition of deemed rental income was not justified. The Tribunal directed the AO to delete the addition, recognizing the unsold shops as stock-in-trade.

Conclusion:
The appeal filed by the assessee was allowed. The Tribunal ruled that the unsold shops should be treated as stock-in-trade, and any income derived from them should be considered business income. The addition of deemed rental income under section 23 of the Income Tax Act was deleted. The order was pronounced on 13/10/2020.

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