Tribunal overturns addition of notional rent on unsold flats as business income, deeming it unjustified

The Tribunal allowed the appeal, ruling that the addition of Rs.14,52,000 as 'Business income' for notional rent on unsold flats held as 'stock-in-trade' for assessment year 2013-14 was unjustified and should be deleted. The Tribunal held that the unsold units' annual value could not be assessed under 'Income from house property' and that taxing hypothetical rental income without specific provision was unwarranted. Therefore, the classification of income as 'Business income' was overturned, and the addition was directed to be deleted.

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Issues:
1. Addition of Rs.14,52,000 as 'Business income' for notional rent on unsold flats held as 'stock-in-trade' for assessment year 2013-14.

Analysis:
The appeal before the Appellate Tribunal ITAT Pune was against the order passed by the CIT(A)-8, Pune regarding the addition of Rs.14,52,000 as 'Business income' for notional rent on unsold flats held as 'stock-in-trade' for the assessment year 2013-14. The Assessing Officer (AO) calculated the gross annual value of the unsold flats at Rs.14.52 lakhs based on fair market rent of Rs.11,000 per month per flat, and after deductions, made an addition of Rs.10,16,400. The CIT(A) upheld the addition but classified it as 'Business income'. The main question was whether the annual value of unsold units could be assessed in the hands of the assessee under 'Income from house property' or 'Business income'.

The Finance Act, 2017 introduced a provision stating that if a property held as stock-in-trade is not let out during the year, the annual value for up to one year (later amended to two years) from the end of the financial year in which the construction completion certificate is obtained shall be considered nil. However, this amendment was prospective from 01.04.2018 and applicable from assessment year 2018-19 onwards. Since the assessment year in question was 2013-14, this amendment did not apply. Consequently, no rental income could be said to have accrued to the assessee from unsold flats under 'Income from house property', vacating the AO's viewpoint.

Regarding the classification of income as 'Business income', the Tribunal noted that the Finance Act, 2017 intended such income to fall under 'Income from house property' rather than 'Business income'. Additionally, there was no provision under Chapter IV-D of the Income-tax Act, 1961 to tax hypothetical rental income not covered by any specific provision. As the assessee did not earn actual rental income from the unsold units, taxing hypothetical income was deemed unjustified. Therefore, the Tribunal set aside the CIT(A)'s decision to tax Rs.14.52 lakhs as 'Business income' and directed the deletion of the addition.

In conclusion, the Tribunal allowed the appeal, emphasizing that the addition of Rs.14,52,000 as 'Business income' for notional rent on unsold flats held as 'stock-in-trade' for the assessment year 2013-14 was not justified and should be deleted.

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