2025 (6) TMI 1118 - AT - Income Tax

Unsold Real Estate Inventory Not Liable for Notional Rental Income Under Section 22 of Income Tax Act

Shyamdarshan Properties Pvt Limited. Versus DCIT Circle 3 (3) (1), Mumbai

Tribunal ruled that unsold flats held as stock in trade cannot attract notional rental income under section 22 of Income Tax Act. Following coordinate ... Addition under the head income from property - addition u/s 22 by applying average rate of notional rental income in respect of six flats with which were remained unsold during the year - HELD THAT:- We find that on similar set of fact, the assessing officer made addition in assessment year 2012-13 and in 2014-15 and on appeal before Commissioner of Income tax (Appeals) the action of assessing officer was upheld. However, on further appeal before Tribunal, the assessee succeeded in both the assessment years [2024 (2) TMI 388 - ITAT MUMBAI] Thus, respectfully following the decision of coordinate bench, the action of assessing officer is set aside. Resultantly the addition made on account of notional rental value in respect of six unsold unit are deleted. Assessee appeal allowed. The core legal questions considered in this appeal pertain to the tax treatment of unsold flats held by the assessee as stock in trade for the assessment year 2013-14. Specifically, the issues include:(a) Whether the addition of Rs. 11,02,060/- under the head income from house property by the Assessing Officer (AO) and confirmed by the Commissioner of Income Tax (Appeals) (CIT(A)) was justified;(b) Whether notional income under section 22 of the Income Tax Act, 1961 (the Act) can be levied on unsold flats held as stock in trade;(c) The correctness of applying the Delhi High Court decision in Ansal Housing Finance Leasing & Co Ltd. by the CIT(A);(d) The validity of estimating Annual Letting Value (ALV) based on rent received for one flat and rejecting municipal rateable value as a basis for notional income;(e) Whether deduction for allowance to workers during the period the flats were held was rightly denied.Issue-wise detailed analysis follows:1. Addition under Income from House Property and Notional Rental Income on Unsold Flats Held as Stock in TradeThe relevant legal framework involves section 22 of the Income Tax Act, which governs income from house property. Generally, income from property is taxable under this head if the property is let out or deemed to be let out. However, the question arises whether unsold flats held as stock in trade of a builder/developer can be subjected to notional rental income under this provision.Precedents relied upon include the Bombay High Court decision in PCIT vs. Classique Associates Ltd., which held that income from stock in trade is taxable under business income and not under house property. Similarly, the Gujarat High Court in CIT vs. Neha Builders Pvt. Ltd. ruled that when property is held as stock in trade, income derived therefrom is business income, not income from house property. The Court emphasized that although property income is generally deemed as such, the character of the property as stock in trade changes the nature of income.The assessee's authorized representative (AR) also cited a Pune Tribunal decision in Kumar Properties & Real Estate Pvt. Ltd. vs. DCIT, where the Tribunal held that unsold flats held as stock in trade do not attract deemed rental income under section 22. The Tribunal distinguished the applicability of section 23(5) of the Act, which was introduced only from AY 2017-18 onwards, and therefore not applicable for AY 2013-14.The AO had computed notional rental income by applying an average rental rate of Rs. 35,839 per flat on six unsold flats, arriving at a total ALV of Rs. 16,09,209/-. After statutory deductions under section 24(a) at 30%, the AO added Rs. 11,02,060/- as income from house property. The CIT(A) confirmed this addition.The Tribunal noted that in the immediately preceding and succeeding assessment years (AY 2012-13 and AY 2014-15), similar additions were made and upheld by CIT(A) but subsequently deleted by the Tribunal on appeal. Following these coordinate bench decisions, the Tribunal set aside the addition for AY 2013-14 as well, holding that the flats being stock in trade cannot attract notional rental income under section 22.The Tribunal found no contrary facts or legal principles warranting a different conclusion. The assessee's contention that income from unsold flats as stock in trade is taxable only under business income was accepted.2. Application of Delhi High Court Decision in Ansal Housing Finance Leasing & Co Ltd.The CIT(A) had relied on the Delhi High Court decision in Ansal Housing Finance Leasing & Co Ltd. to uphold the addition. However, the Tribunal examined this reliance critically. The Tribunal observed that the Ansal Housing decision was distinguished and not followed in the subsequent coordinate bench decisions favoring the assessee. The Tribunal implicitly held that the Ansal Housing decision does not apply to the facts where the flats are stock in trade, and the income arises from business activity rather than from house property.3. Estimation of ALV Based on Rent Received for One Flat and Rejection of Municipal Rateable ValueThe AO estimated the ALV based on rent received for one flat (flat no. 1) and rejected the assessee's contention to adopt municipal rateable value as the basis for notional income. The Tribunal did not specifically elaborate on this point in detail but by setting aside the addition under section 22, effectively negated the need to delve into the correctness of ALV estimation methods. The issue became moot as the Tribunal held that no notional income under house property can be levied on stock in trade.4. Deduction of Allowance to Workers During Period Flats Were HeldThe assessee contended that deduction for workers' allowance during the period the flats were held as stock in trade was wrongly denied. The Tribunal did not expressly address this ground in its order, presumably because the primary addition itself was set aside. Since the flats are held as stock in trade and no income under house property was accepted, the issue of allowance deduction under house property income did not arise. The Tribunal's silence on this ground suggests acceptance of the assessee's position or its irrelevance post the main ruling.Conclusions on IssuesThe Tribunal concluded that the addition of Rs. 11,02,060/- under income from house property was not justified. The unsold flats held as stock in trade cannot be subjected to notional rental income under section 22 of the Income Tax Act. The Tribunal followed coordinate bench decisions for preceding and succeeding years where similar additions were deleted. The reliance on the Ansal Housing Finance decision was found misplaced in the present facts. The estimation of ALV based on rent received for one flat and rejection of municipal rateable value became irrelevant given the primary conclusion. The grounds relating to deduction of workers' allowance were not specifically dealt with but were subsumed in the overall ruling favoring the assessee.Significant holdings include the following verbatim excerpts and principles:'Thus, respectfully following the decision of coordinate bench, the action of assessing officer is set aside. Resultantly the addition made on account of notional rental value in respect of six unsold unit are deleted. No contrary facts or law is brought to our notice to take other view.'Core principles established are:Income from unsold flats held as stock in trade of a builder/developer is taxable under the head 'business income' and not under 'income from house property'.Notional rental income under section 22 cannot be levied on stock in trade properties.Precedents from High Courts and Tribunals support this principle, including the Bombay High Court in Classique Associates Ltd. and Gujarat High Court in Neha Builders Pvt. Ltd.Section 23(5), which allows deemed rental income on unsold flats, is not applicable prior to AY 2017-18.Reliance on decisions such as Ansal Housing Finance Leasing & Co Ltd. must be contextualized based on the nature of property and facts.The final determination was in favor of the assessee, allowing all grounds of appeal and deleting the addition made under section 22 of the Income Tax Act for the assessment year 2013-14.