2023 (9) TMI 426 - AT - Income Tax

Tribunal upholds notional rent assessment on unsold stock; directs AO to recalculate based on Municipal rentable value.

The Tribunal dismissed the assessee's appeal, affirming the assessment of notional rent on unsold stock-in-trade under 'Income from house property.' The ... Notional income from house property - annual letting value (ALV) - stock-in-trade versus income from house property - prospective application of amendment to section 23(5) - municipal ratable value for computing notional rentNotional income from house property - stock-in-trade versus income from house property - prospective application of amendment to section 23(5) - Whether notional income on unsold completed units held as stock-in-trade for A.Y. 2016-17 is taxable under the head 'Income from house property'. - HELD THAT: - The Tribunal followed the coordinate-bench and the decision of the Hon'ble Delhi High Court in Ansal Housing (as applied by the co ordinate bench) and held that ownership gives rise to chargeability under the head 'Income from house property' even if the flats are held as stock-in-trade and not actually let out. The Tribunal distinguished authorities relied upon by the assessee and noted that the legislative amendment in section 23(5) (providing a nil ALV for a limited period) is prospective with effect from AY 2018-19 and cannot be applied retrospectively to AY 2016-17. Consequently, in the absence of a retrospective statutory provision, notional ALV could be computed for the year under appeal and the Assessing Officer's levy of notional rent was held to be legally sustainable subject to the riders given by the coordinate bench. [Paras 6]Assessing Officer was correct in treating notional income on unsold completed units as chargeable under 'Income from house property' for A.Y. 2016-17; amendment to section 23(5) is prospective and does not assist the assessee for the year under appeal.Annual letting value (ALV) - municipal ratable value for computing notional rent - Whether the ALV may be computed at 8.5% of cost of construction or whether municipal ratable value must be ascertained for computation of notional rent. - HELD THAT: - The Tribunal observed that an ad hoc computation of ALV at 8.5% of investment is unsustainable in view of the binding jurisdictional precedent which requires reference to municipal ratable value for determining rental value. The Tribunal therefore directed the Assessing Officer to ascertain and adopt the municipal ratable value (obtained from competent departmental or government sources where necessary) when recomputing the notional rent, and identified exceptions where notional rent should not be charged (e.g., units with advances where possession not delivered, or units shown as work in progress). [Paras 7]The method of applying 8.5% of cost is not justified; AO is directed to recompute notional rent by ascertaining municipal ratable value and to observe the identified exceptions.Final Conclusion: Appeal dismissed; the Tribunal upheld the levy of notional income from unsold completed units for A.Y. 2016-17 but directed recomputation of ALV based on municipal ratable value and observed specified exceptions where notional rent should not be charged. Issues Involved:1. Assessment of notional income under section 22 of the Income-tax Act, 1961.2. Head of income assessment for stock-in-trade.3. Computation of Annual Letting Value (ALV) for unsold stock-in-trade.4. Consideration of judicial precedents by the CIT(A).Summary:Issue 1: Assessment of Notional IncomeThe primary issue is whether the notional income of Rs. 63,58,756/- on the unsold stock-in-trade should be assessed under the head 'Income from house property' as per section 22 of the Income-tax Act, 1961. The assessee argued that the unsold stock should not be taxed as house property income since it was held as inventory. The Assessing Officer (AO) relied on the decision of the Hon'ble Delhi High Court in CIT vs Ansal Housing Finance & Lease Co. Ltd, which supported the assessment of notional rent on unsold stock.Issue 2: Head of Income AssessmentThe assessee contended that any income arising from the stock-in-trade should be assessed under 'Profits and Gains of Business or Profession' rather than 'Income from house property.' The AO, supported by the CIT(A), upheld the assessment under the head 'Income from house property,' citing relevant judicial precedents.Issue 3: Computation of ALVThe AO computed the ALV of the unsold stock by applying 8.5% on the cost of construction. The assessee argued that the Municipal Rateable Value should be considered for determining the ALV. The Tribunal, following the decision in the case of Inorbit Malls Pvt Ltd, directed the AO to ascertain the Municipal rentable value for computing the notional rent, rejecting the 8.5% estimation as unsustainable.Issue 4: Consideration of Judicial PrecedentsThe assessee claimed that the CIT(A) erred by not considering various judicial decisions favorable to its case. The Tribunal noted that the decision of the Hon'ble Gujarat High Court in CIT vs Neha Builders was not applicable to the facts of the case, as it dealt with actual rental income rather than notional rent. The Tribunal upheld the AO's reliance on the Delhi High Court's decision in Ansal Housing Finance & Leasing Co. Ltd, which supported the levy of notional rent on unsold stock.Conclusion:The Tribunal dismissed the assessee's appeal, holding that the AO correctly charged notional rent on the unsold flats held as stock-in-trade. However, it directed the AO to recompute the notional rent based on the Municipal rentable value rather than the 8.5% investment estimation. The amendment to section 23(5), which considers the ALV of unsold stock as nil for two years from the end of the financial year in which the occupation certificate is received, was deemed prospective and not applicable to the assessment year in question.