Tribunal rules in favor of assessee, reclassifying income from unsold flats as Business Income

The Tribunal ruled in favor of the assessee, directing the deletion of the addition of Rs. 8,52,902 made under the head "Income from House Property" for the assessment year 2015-16. It held that income from unsold flats held as stock-in-trade should be categorized as "Business Income" rather than "Income from House Property," in accordance with the specific computational mechanism governing taxation. The Tribunal emphasized that the Finance Act, 2017 amendment introducing the inclusion of annual value of unsold properties under "Income from House Property" was not applicable for the relevant assessment year.

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Issues:
Confirmation of addition of deemed rent on unsold vacant flats and shops held as stock-in-trade.

Analysis:
The appeal pertains to the confirmation of the addition of deemed rent on unsold vacant flats and shops held as stock-in-trade by the assessee for the assessment year 2015-16. The Assessing Officer (AO) computed the monthly rental income for the vacant units based on the rent received from other properties. Subsequently, an amount of Rs. 8,52,902 was added to the assessee's total income under the head "Income from House Property." The CIT(A) upheld this addition as "Business Income" based on certain Tribunal orders, directing the inclusion of deemed annual value as business income. However, the Tribunal noted that prior to the relevant amendment, income from unsold flats held as stock-in-trade was not to be taxed under "Income from House Property" but under "Profits and Gains from business or profession." The Tribunal observed that the computational mechanism governing a specific head should apply for taxation. Consequently, the Tribunal concluded that the addition made by the AO and sustained by the CIT(A) was unwarranted, leading to its deletion.

The Tribunal highlighted that the Finance Act, 2017 amendment introducing sub-section (5) to section 23, which considers the annual value of unsold properties for inclusion under "Income from House Property," was not applicable for the assessment year in question. The Tribunal referenced previous cases, including Cosmospolis Construction vs. ITO, where it was established that income from unsold flats held as stock-in-trade should be categorized as "Business Income" rather than "Income from House Property." The Tribunal emphasized that the income from unsold flats should be taxed under the appropriate head, and since no provision deems rental income from such properties as "Business Income," the addition made by the AO and CIT(A) was deemed unnecessary and directed to be deleted.

In conclusion, the Tribunal allowed the appeal, ruling in favor of the assessee by directing the deletion of the addition of Rs. 8,52,902 made under the head "Income from House Property." The judgment was pronounced in the Open Court on 18th January 2022.

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