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Income Tax Appellate Tribunal, SURAT BENCH, SURAT
Before: SHRI PAWAN SINGH, JM & DR. A. L. SAINI, AM
O R D E R
PER DR. A. L. SAINI, ACCOUNTANT MEMBER:
By way of this appeal, the assessee has challenged correctness of the order dated 08.08.2017 passed by the learned CIT(A), in the matter of assessment under section 143(3) of the Income Tax Act 1961 ( for short “the Act”), for the assessment year 2013-14. Grievances raised by the assessee, which are interconnected and will be taken up together, are as follows:- “1. The learned CIT(A) erred in taxing the deemed rent of Rs.11,12,720/- while not considering the decision of Supreme Court in Rayala Corporation Pvt. Ltd. vs. ACIT.
That the CIT(A) erred in taxing the unsold shops used for the business of assessee society.
3. That the CIT(A) erred in Taxing the deemed rent on unsold shops, ignoring the amendment to section 23(5) w.e.f. AY. 2018-19.
4. The appellant craves leave to add, amend, alter, vary and / or withdraw any or all the above ground of Appeal.”
Udhna Udhyognagar Sahakari Sangh Ltd Assessment Year: 2013-14 2. The relevant material facts, as culled out from the material on record, are as follows. The assessee before us is a society and engaged in the business of development and maintenance of estate/buildings. The books of accounts of the assessee were called for and the same were examined by the assessing officer. It was noticed by the Assessing Officer (AO) that the society is the developer and having unsold property in the balance sheet and the assessee has not declared any rental or business income out of the unsold shops lying with the assessee. The assessee was asked to provide the details of number of shops which were unsold, their use, whether rented out and prevailing market rent in the area where the shops are located.
In response, the assessee-society submitted the written submissions before the assessing officer which are reproduced below: "Firstly, the assessee society is in the business of developing & maintaining the estate. The shops were constructed few years back out of which the unsold shops remind with the assessee in its possession & used as warehouse purpose of the assessee society wherein construction & building materials of the assessee society is stored. Your honour can visit & check the site.” Secondly the shops are still not furnished with electric meters. Also, urinary & water are also not available making it not fit for use. Third on possession of the shops, the assessee society undertakes to put the shops in a usable condition like colour-paint, repairs etc. Thus, the unsold shops are in the nature of work in progress (semi-finished). Every year the same is carried forward in balance sheet as a cost price value. Hence no separate profit & loss a/c or work in progress a/c is required to be prepared as the construction at site is in abeyance for few years. Fourth the electricity bill of the shops are paid by the assessee society from its own meter which is testimony to the facts that the shops are used & occupied for the business of assessee society for day to day factions. Fifth the stand of assessee is accepted continuously for last 4 to 5 years in as assessment framed u/s. 143(3) hence for the sake of consistency as held by SC in case of Radha Soami Satsang 100 CTR (SC) 267, the same stand may please be accepted & continued. There are 55 unsold shops, against which the assessee society has given on rent 10 shops at annual rent of approx. of Rs. 200000/- i.e. ranging 1500/-to 2000/- P.M. per shop. Whereas 45 shops are used as warehouse godown, the photographs of which will be produced before your honour."
Udhna Udhyognagar Sahakari Sangh Ltd Assessment Year: 2013-14 4. However, the assessing officer has rejected the contention of the assessee and held that since the assessee-society could not produce sufficient evidences for use of unsold shops therefore the reasons stated by the assessee were not accepted as it is not practically possible that shop will remain vacant or unused in the running commercial complex, therefore, the assessing officer was of the view that the concept of notional income should be applicable in the assessee’s case and rental income should be estimated as per deeming provisions. The AO noted that since the assessee’s rental income of Rs.2,00,000/- claimed to be declared in the computation was also not verifiable from the record submitted by the assessee, therefore, the AO estimated the rental income of Rs.13,20,000/- (Rs. 24,000 x 55) on all 55 shops at the rate of Rs.24,000/- per annum, and added to the total income of the assessee- society.
5. Aggrieved by the order of the assessing officer, the assessee carried the matter in appeal before the ld. CIT(A) who has partly confirmed the addition made by the assessing officer. The ld. CIT(A) noticed that out of the 55 shops on which deemed rental income of Rs.13,20,000/- had been calculated, the assessee had already shown rental income of Rs.2,07,280/-. Therefore, the addition made by the assessing officer up to Rs.11,12,720/- (Rs. 13,20,000 - Rs. 2,07,280) was upheld by ld. CIT(A).
Aggrieved by the order of the ld. CIT(A), the assessee is in appeal before us.
7. We have heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld. CIT(A) and other materials brought on record. The Learned Counsel for the assessee submitted before us that assessee`s main business is not of leasing and renting of property but maintenance and development of estate projects. The ld. Counsel contended that the vacant shops are not vacant and are under use for storage purpose and therefore it is not available for rent. The vacant shops are held as stock-in-trade. It is to be noted that out of fifty five unsold shops, the assessee society has given eight shops on rent at annual rent of Rs.2,07,280/-, the said annual rent of Udhna Udhyognagar Sahakari Sangh Ltd Assessment Year: 2013-14 Rs.2,07,280/- should not be treated as ‘Income from House Property’ as it is casual income which is for the time being only. The main source of income of the assessee society is from maintenance and development of estate projects, hence, all unsold shops (including eight shops given on temporary rent basis) should be treated as stock-in-trade, therefore ld. Counsel prayed the Bench that addition confirmed by the ld. CIT(A) may be deleted.
8. On the other hand, ld. DR for the Revenue submits before the Bench that assessee himself has shown rental income of Rs.2,07,280/- on the eight shops, therefore deemed rental income in respect of remaining shops have rightly been computed by the assessing officer under the head ‘Income from House Property’. Hence, ld. DR prayed the Bench that order passed by the assessing officer may be upheld.
9. We note that issue under consideration is no longer res integra. The assessee is engaged in the business of builders, developers and estate maintenance. The assessee`s main object is to develop and maintenance of the estate projects/buildings. The fifty five unsold shops are located in the complex viz. "Udhna Udyognagar Commercial Complex" and profit on sale of which are treated as business income from initial stage. In the light of the above facts, first of all, it is useful to refer the provisions of sub- section (5) of section 23 of the Act. We note that sub- section (5) of section 23 was inserted by the Finance Act 2017 w.e.f. 1-4-2018, which reads as follows: "5.Where the house property consisting of any building and land appurtenant thereto is held as stock-in-trade and the property or any part of the property is not let during the whole or any part of the previous year, the annual value of such property or part of the property, for the period up to[ two years] from the end of the financial year in which the certificate of completion of construction of the property is obtained from the competent authority, shall be taken to be nil.” We note that assessee`s case under consideration is relating to assessment year 2013-14 whereas the newly inserted sub- section (5) of section 23, as noted above, was inserted by the Finance Act 2017 w.e.f. 1-4-2018, therefore it does not apply to the assessee society under consideration.
Udhna Udhyognagar Sahakari Sangh Ltd Assessment Year: 2013-14
10. If the property is used as 'stock-in-trade', then the said property would become the stock-in trade, and any income derived from the stock-in trade, would be 'income' from the business, and not income from the house property. If the business of the assessee is to construct and develop the property then that would be the business of the assessee and the business stocks, which may include movable, immovable and unsold shops etc. would be taken to be 'stock-in-trade', and any income derived from such stocks cannot be termed as 'income from property' for that we rely on the judgment of the Hon'ble High Court of Gujarat in the case of Neha Builders (P) Ltd. vs. Commissioner of Income Tax, [ (2007) 164 Taxmann 342 (Guj.), wherein it was held as follows:-
“6. We have heard Mr. Naik at length. None appears for the respondent despite service of notice.
From the order passed by the learned CIT(A), it would clearly appear that the case of the assessee was that the company was incorporated with the main object of purchase, take on lease, or acquire by sale, or let out the buildings constructed by the assessee. Development of land or property would also be one of the businesses for which the company was incorporated.
8. True it is, 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 the said property would become or partake the character of the stock, and any income derived from the stock, would be 'income' from the business, and not income from the property. If the business of the assessee is to construct the property and sell it or to construct and let out the same, then that would be the 'business' and the business stocks, which may include movable and immovable, would be taken to be 'stock-in-trade', and any income derived from such stocks cannot be termed as 'income from property'. Even otherwise, it is to be seen that there was distinction between the 'income from business' and 'income from property' on one side, and 'any income from other sources'. The Tribunal, in our considered opinion, was absolutely unjustified in comparing the rental income with the dividend income on the shares or interest income on the deposits. Even otherwise, this question was not raised before the subordinate Tribunals and, all of sudden, the Tribunal started applying the analogy.
9. From the statement of the assessee, it would clearly appear that it was treating the property as 'stock-in-trade'. Not only this, it will also be clear from the records that, except for the ground floor, which has been let out by the assessee, all other portions of the property constructed have been sold Udhna Udhyognagar Sahakari Sangh Ltd Assessment Year: 2013-14 out. If that be so, the property, right from the beginning was a 'stock-in- trade'.
10. Agreeing with the submissions made by Mr. Naik, learned Counsel for the Revenue, we hold that the Tribunal was not correct in granting the appeal of the assessee.
11. For the reasons aforesaid, the reference deserves to be answered in favour of the Revenue. It is accordingly answered and stands disposed of No costs.”
On the identical facts, our view is fortified by the judgment of the Coordinate Bench of ITAT Mumbai, in the case of M/s. Runwal Constructions vs. ACIT, in order dated 22.02.2018, wherein it was held as follows:
“7. We have heard the rival submissions and perused the orders of the authorities below and the decisions relied upon. It is an undisputed fact that the assessees are in the business of builders, developers and construction. Both the assessees have constructed various projects and the projects were treated as stock in trade in the books of account. Flats sold. by the assessees were assessed 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 in the case of Ansal Housing Finance & Leasing Co. Ltd. (supra). The action of the AO was upheld by the learned CIT(A).
The Hon'ble Gujarat High Court in the case of Neha Build.ers Pvt. Ltd. (supra) considered the question whether the rental income received from any property in the construction business can be claimed under the head ‘income from property’ even though the said property was included in the closing stock. The Hon'ble Gujarat High Court held that if the business of the assessee is to construct the property and sell it or to construct and let out the same, then that would be the business and the business stocks, which may include movable and immovable, would be taken to be stock in trade and any income derived from such stocks cannot be termed as income from house property. While holding so the Hon'ble High Court observed as under: - “8. True it is, 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 the said property would become or partake the character of the stock, and any income derived from the stock, would be 'income' from the business, and not income from the property. If the business of the assessee is to construct the property and sell it or to construct and let out the same, then that would be the 'business' and the business stocks, which may include movable and immovable, would be taken to be 'stock-in-trade', and any income derived from such stocks cannot be termed as 'income from property'. Even otherwise, it is to be seen that there was distinction between Udhna Udhyognagar Sahakari Sangh Ltd Assessment Year: 2013-14 the 'income from business' and 'income from property' on one side, and 'any income from other sources'. The Tribunal, in our considered opinion, was absolutely unjustified in comparing the rental income with the dividend income on the shares or interest income on the deposits. Even otherwise, this question was not raised before the subordinate Tribunals and, all of sudden, the Tribunal started applying the analogy.
9. From the statement of the assessee, it would clearly appear that it was treating the property as 'stock-in-trade'. Not only this, it will also be clear from the records that, except for the ground floor, which has been let out by the assessee, all other portions of the property constructed have been sold. out. If that be so, the property, right from the beginning was a 'stock-in- trade'.”
Similarly the Coordinate Bench has considered similar issue as to whether the unsold property which is held as stock in trade by the assessee can be assessed under the head ‘income from house property’ by notionally computing the annual letting value from such property and the Coordinate Bench considering the decision of the Hon'ble Delhi High Court in the case of Ansal Housing Finance & Leasing Co. Ltd. (supra) which the AO relied upon and the decision of the Hon'ble Supreme Court in the case of Chennai Properties & Investments Ltd. vs. CIT reported in 373 ITR 673, held that unsold flats which are in stock in trade should. be assessed under the head ‘business income’ and there is no justification in estimating rental income from those flats and notionally computing annual letting value under Section 23 of the Act. While holding so the Coordinate Bench observed as under: - “3. The ld.. AR placed the order of Bombay Tribunal in the case of M/s Perfect Scale Company Pvt. Ltd., to 3234/Mum/2013, order dated 6-9-2013, wherein it was held that in respect of assets ITA Nos. 5408 & 5409/Mum/2016 Runwal Constructions & Runwal Builders 5 held as business, income from the same is not assessable u/s.23(1) of the IT Act.
On the other hand, ld. DR relied on the order of Hon’ble Delhi High Court in the case of Ansal Housing Finance & Leasing Co. Ltd., 354 ITR 180 (Delhi) in support of the proposition that even in respect of unsold flats by the developer is liable to be taxed as income from house property.
We have considered rival contentions and perused the record. The issue under consideration has been restored by the CIT(A) to the file of AO to compute the annual value. Recently the Hon’ble Supreme Court in the case of M/s Chennai Properties & Investments Ltd. Vs. CIT, reported in (2015) 42 SCD 651, vide judgment dated 9-4-2015 has held that where assessee company engaged in the activity of letting out properties and the rental income received was shown as business income, the action of AO treating the rental income as income from house property in place of income from business shown by the assessee was held to be not justified. The Hon’ble Supreme Court held that since the assessee company’s main object, is to Page | 7 Udhna Udhyognagar Sahakari Sangh Ltd Assessment Year: 2013-14 acquire and held properties and to let out these properties, the income earned by letting out these properties is main objective of the company, therefore, rent received from the letting out of the properties is assessable as income from business. On the very same analogy in the instant case, assessee is engaged in business of construction and development, which is main object of the assessee company. The three flats which could not be sold at the end of the year was shown as stock-in-trade. Estimating rental income by the AO for these three flats as income from house property was not justified insofar as these flats were neither given on rent nor the assessee has intention to earn rent by letting out the flats. The flats not sold. was its stock-in-trade and income arising on its sale is liable to be taxed as business income. Accordingly, we do not find any justification in the order of AO for estimating rental income from these vacant flats u/s.23 which is assessee’s stock in trade as at the end of the year. Accordingly, the AO is directed to delete the addition made by estimating letting value of the flats u/s.23 of the I.T. Act.”
In the case on hand before us it is an undisputed fact that both assessees have treated the unsold flats as stock in trade in the books of account and the flats sold. by them were assessed under the head ‘income from business’. Thus, respectfully following the above said decisions we hold that the unsold flats which are stock in trade when they were sold, they are assessable under the head ‘income from business’ when they are sold and therefore the AO is not correct in bringing to tax notional annual letting value in respect of those unsold flats under the head ‘income from house property’. Thus, we direct the AO to delete the addition made under Section 23 of the Act as income from house property.”
From the facts of the assessee`s case, it would clearly appear that assessee was treating the property as 'stock-in-trade'. It is also clear from the records that, except for the eight unsold shops, which has been let out by the assessee for the time being on temporary basis, all other forty five unsold shops were used by the assessee for his business storage purposes. The ld. Counsel submits that object of the assessee is to sale all the fifty five shops (including eight shops) to earn business income therefore all fifty five shops should be treated as stock-in trade.
We note that assessee has constructed buildings/ projects and these projects were treated as stock in trade in the books of accounts of the assessee society. The income arising on its sale is liable to be taxed as business income. The Shops and Flats already sold by the assessee were assessed under the head ‘income from business’. Therefore, the unsold fifty five shops should be treated as ‘stock in trade. We have Udhna Udhyognagar Sahakari Sangh Ltd Assessment Year: 2013-14 also clarified in para No. 9 of this order that assessee`s case under consideration is relating to assessment year 2013-14 whereas the newly inserted sub- section (5) of section 23, as noted above, was inserted by the Finance Act 2017 w.e.f. 1-4-2018, therefore it does not apply to the assessee under consideration.
Therefore, taking into account the assessee`s facts and applicable precedents to the facts, as narrated above, we do not find any justification in the order of assessing officer for estimating rental income from these unsold fifty five shops under section 23 of the Act, which is assessee’s stock in trade as at the end of the year. Hence, we are not inclined to accept the contention of the Assessing Officer in any manner and hence the addition so made should be deleted. Accordingly, the assessing officer is directed to delete the addition, made by him, estimating letting value of the unsold fifty five shops, under section 23 of the I.T. Act.
In the result, the appeal filed by the assessee is allowed.