Addition of notional annual value u/s 23(5) of property held as stock in trade deleted by ITAT

Addition on account of notional annual value u/s 23(5) of property held as stock in trade deleted by ITAT as sub section (5) was inserted later

ABCAUS Case Law Citation:
ABCAUS 3030 (2019) (06) ITAT

Important Case Laws Cited/relied upon by the parties:
CIT vs. Ansal Housing Finance and Leasing Co. Ltd. [354 ITR 180]
Neha Builders (P.) Ltd. ( 296 ITR 661)
Mangla Homes (P) Ltd v. ITO [2009] 182 Taxman 55/[2010] 325 ITR 281.
ITO Vs Arihant Estate Pvt Ltd
Runawal Constructions Vs ITO
CIT Vs Vegetable product Ltd. (88 ITR 192 SC).
Runawal Builder P Ltd Vs ACIT
ITO Vs Arihant Estate Pvt Ltd

This appeal by assessee was directed against the order of Commissioner of Income-tax (Appeals) in treating the unsold premises held as stock in trade as deemed let out house property and charging the same to tax u/s 23 of the Income Tax Act, 1961 (the Act).

The assessee was a partnership firm engaged in the business of builders and developers. In one of the project certain offices and shops remained unsold which were treated as the stock in trade. The return of income of the firm was selected for scrutiny and the assessment was completed under section 143(3).

The Assessing Officer while passing the assessment order estimated the annual letting value of unsold stock of flats and brought to tax under the head income from ‘house property’ by estimating the ALV in rupees per sq feet per month and after granting deductions u/s 24(i) @ 30%.

The Assessing Officer while computing ALV of unsold stock referred the decision of Delhi High Court. On appeal before Commissioner (Appeals) the action of Assessing Officer was confirmed.

The Tribunal noted that there was no dispute that the assessee was in the business of builders, developers and construction. The assessee had constructed two Commercial Complexes. The assessee had shown unsold units as stock in trade in the books of account. The units sold by the assessee were offered under the head ‘income from business’. There were certain unsold flats in stock in trade which the AO treated as property assessable under the head ‘income from house property’ and computed notional annual letting value on such unsold flats placing reliance on the decision of the Delhi High Court.

The assessee strongly relied on one of the decision of the Tribunal in which under similar facts, it was held that the AO was not correct in bringing to tax notional annual letting value in respect of unsold flats under the head ‘income from house property’.

The Tribunal noted that the Hon’ble Delhi High Court had taken a view that ALV of unsold flat built by the builder is assessable as income from the house property. However, there was contrary view of Hon’ble Gujarat High Court that income derived from the property would always be termed as ‘income’ from the property, but if the property is used as ‘stock in trade’, then said property would become or partake the character of the stock, and income derived from the stock, would be ‘income’ from the business, and not from the property. If the business of the assessee is to construct the property and to sell it or to construct and let out the same, then would be the ‘business’ and the business stocks, may included moveable or immoveable, would be taken to be ‘stock in trade’ and any income from such stock cannot be termed as ‘income from property’.

The Tribunal opined that there was no direct decision on this issue by Jurisdictional High Court; therefore, the view in favour of the assessee had to be adopted in view of decision of Hon’ble Apex Court.

The Tribunal also noted that sub-section (5) in section 23 was inserted by finance Act 2017 w.e.f. 01.04.2018; therefore, the same was not applicable for the assessment year under consideration. Therefore, the Tribunal rejected the submission of the Revenue that the legislature had already brought the amendment in section 23(5) of the Act to bring the unsold unit after a vacancy period of one year.

Therefore, respectfully following the decisions of coordinate bench the and the decisions of Gujarat High Court the Tribunal held that the view of the Assessing Officer was not justified in bringing the unsold flat to bring it under income from house property.

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