Real estate units held as stock-in-trade assessed under business income, not house property u/s 22

ITAT Ahmedabad allowed the assessee's appeal against CIT's revision u/s 263 regarding income classification. The case involved a real estate business with unsold completed units as stock-in-trade. CIT held these units should attract deemed annual letting value u/s 22 as income from house property. However, ITAT ruled that income from constructed units held as stock-in-trade is assessable under business income, not house property, following Gujarat HC precedent in Neha Builders case. AO's original assessment was correct in not invoking section 22 provisions for stock-in-trade units.

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Issues:
1. Jurisdiction of revision under section 263 of the Income Tax Act, 1961.
2. Taxability of notional rent from stock-in-trade under "Income from House Property."
3. Allowance of vacancy allowance and estimation of annual letting value.

Issue 1: Jurisdiction of revision under section 263 of the Income Tax Act, 1961

The appeal was filed against the order passed by the Principal Commissioner of Income Tax under section 263 of the Income Tax Act for the Assessment Year 2017-18. The grounds raised by the assessee challenged the jurisdiction of the Principal Commissioner under section 263, arguing that the original assessment order was not erroneous or prejudicial to the Revenue. The Principal Commissioner invoked jurisdiction based on the assessee's business of real estate and the failure to report rental income from completed units under the head "Income from House Property." The Principal Commissioner found the original assessment erroneous as it did not consider the deemed annual letting value under section 22 of the Act, causing prejudice to the Revenue. The assessee contended that the completed units were stock-in-trade and income should be taxed under "Income from Business and Professions." The Tribunal held that the jurisdictional High Court's decision in a similar case was applicable, and the income from stock-in-trade was not taxable under "Income from House Property." The Tribunal set aside the Principal Commissioner's order under section 263, allowing the assessee's appeal.

Issue 2: Taxability of notional rent from stock-in-trade under "Income from House Property"

The Principal Commissioner argued that the assessee should have reported notional rental income from completed units held as stock-in-trade under "Income from House Property." The assessee contended that the units were stock-in-trade and income should be taxed under "Income from Business and Professions." The Tribunal found that the nature of the property, whether stock-in-trade or not, was crucial for determining the taxability. The Tribunal held that the decision of the jurisdictional High Court in a similar case applied, and the income from stock-in-trade was not taxable under "Income from House Property." The Tribunal noted that the AO had correctly accepted the assessee's explanation based on the High Court's decision. Consequently, the Tribunal set aside the Principal Commissioner's order and allowed the assessee's appeal.

Issue 3: Allowance of vacancy allowance and estimation of annual letting value

The assessee also challenged the Principal Commissioner's decision not to allow vacancy allowance and to estimate the annual letting value of closing inventory. The Tribunal found merit in the assessee's contentions based on the High Court's decision. The Tribunal held that the AO had correctly followed the High Court's decision, and there was no error in not allowing vacancy allowance or estimating annual letting value. Consequently, the Tribunal set aside the Principal Commissioner's order and allowed the assessee's appeal.

In conclusion, the Tribunal ruled in favor of the assessee, setting aside the Principal Commissioner's order under section 263 and allowing the appeal. The Tribunal held that income from completed units held as stock-in-trade was not taxable under "Income from House Property," following the jurisdictional High Court's decision. The Tribunal also upheld the AO's decision regarding vacancy allowance and annual letting value estimation based on the High Court's precedent.

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