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Income Tax Appellate Tribunal, ‘’ SMC’’ BENCH, AHMEDABAD
Before: SHRI WASEEM AHMED
PER WASEEM AHMED, ACCOUNTANT MEMBER:
The captioned appeal has been filed at the instance of the Assessee against the order of the Learned Commissioner of Income Tax (Appeals)-8, Ahmedabad dated 16/10/2017( in short “Ld.CIT(A)”) arising in the matter of assessment order passed under s.143(3) of the Income Tax Act, 1961 (here-in- after referred to as "the Act") dt.22/12/2016 relevant to the Assessment Year 2014-2015.
The assessee has raised the following grounds of appeal;
1. On the facts and circumstances of the case as well as law on the subject, the learned CIT(Appeals) has earned in confirming addition of Rs.13,33,640/- on account of alleged income from house property in respect of stock in trade u/s.23 of the Act.
2. It is therefore prayed that the above addition/disallowance made by the assessing officer and confirmed by CIT (Appeals) may please be deleted.
3. Appellant craves to add, alter or delete any grounds either before in the course of hearing of the appeal. The only issue raised by the assessee is that the Ld.CIT(A) erred in upholding the order of the AO for the deemed rental income with respect to the properties held as stock in trade under section 23 of the Act.
The facts, in brief, are that the assessee in the present case is a private limited company and engaged in the activity of building and developing of the real estate. The assessee in the year under consideration has shown certain unsold properties as stock in trade worth of Rs. 2,38,15,000 only. The AO was of the view that the assessee is liable to offer the income in respect of such flats as deemed rental income under section 23 of the Act.
2.1 On a question by the AO, the assessee submitted that it has been showing unsold properties as stock in trade consistently which was accepted by the Revenue and there was no addition on account of deemed rental income. The assessee claimed to apply the principles of consistency as held by the Hon’ble Supreme Court in the case of Radhasoami Satsang reported in 193 ITR 321. Therefore, there cannot be any question of computing the deemed rental income under section 23 of the Act in respect of the properties held as stock in trade. Page 2 of 11 The assessee also claimed that the AO is required to reject the books of accounts under section 145(3) of the Act if he wishes to compute the deemed rental income under section 23 of the Act. As per the assessee, the books of accounts cannot be rejected as there was no defect in it as per the provisions of section 145(3) of the Act.
2.2 The assessee also claimed that the unsold properties are not in a condition to be let out. Therefore even the income is to be computed in respect of such property then the annual letting value would remain nil.
2.3 The assessee without prejudice to the above also submitted that the proposed annual letting value computed at the rate of 12% of the value of the closing stock lacks any rational basis. As such, the prevailing market yield is less than 7% of the investment. Thus the rate of ALV proposed by the AO is baseless. The assessee further submitted that if the income needs to be worked out on deemed rental basis under section 23 of the Act, then it is entitled to the deduction of the proportionate interest expenses against such deemed rental income.
2.4 The assessee also submitted that if the deemed rental income is calculated with respect to the value of the properties held as stock in trade amounting to Rs. 2,38,15,000.00 than the same should be reduced for the purpose of computing business income.
2.5 However, the AO disagreed with the contention of the assessee and calculated the ALV at the rate of 8% on the value of the closing stock shown by the assessee, which works out to Rs. 19,05,200/- under section 23 of the Page 3 of 11 Act. Nevertheless, the AO allowed a deduction to the assessee under section 24 on account of repair and maintenance at the rate of 30% of the ALV. Thus the AO determined the income under the head house property at Rs.13,33,640 and added the same to the total income of the assessee.
Aggrieved assessee preferred appeal to the learned CIT-A.
The assessee before the Ld.CIT (A) submitted that it had received the BU permission in respect of the properties valued at Rs. 2,38,15,000.00. But these properties cannot be used for habitable purposes. It is because BU permission is issued by the Municipal authorities to certify that the superstructure of the building is complete. As such, the interiors of the properties are pending. Similarly, the electric, drainage, and water connection is yet to be obtained. Accordingly, these properties cannot be used for the habitable purpose though the municipal authorities have issued the BU.
3.1 There is an amendment in the Finance Bill 2017 effective from 1 April 2018 for computing the deemed rental income with respect to the properties held as stock in trade. But such amendment cannot be applied retrospectively, i.e. for the year under consideration.
3.2 The assessee reiterated the submissions as made before the AO.
3.3 However, Ld. CIT (A) disregarded the contention of the assessee by observing that the assessee being the owner of the properties shall be subject to tax on the deemed rental basis under section 23 of the Act in respect of the properties held as stock in trade. It is because the assessee did not use such properties for its business purposes/operations. Page 4 of 11 3.4 Similarly, Ld. CIT (A) observed that merely receipt of an advance against the property to sell does not debar the assessee from the ownership of such property. As such, the assessee is under the obligation to return the advance in the event the sale of the properties does not culminate.
3.5 The Ld. CIT (A) also observed that the BU permission from the Municipal Authorities evidences that the building is fit for use and it has complied with all the requirements for the construction of the building.
3.6 The Ld. CIT (A) has also relied on the judgment of Hon’ble Delhi High Court in the case of CIT Vs. Ansal housing finance and leasing company Ltd reported in 389 ITR 373.
3.7 The Ld. CIT (A) also held that the income in respect of the impugned properties could be subject to tax under the head business and profession as well as house property. Therefore, the argument of the assessee that the amount of closing stock with respect to the impugned properties for Rs. 2,38,15,00/- should be reduced from the business income was rejected.
3.8 Similarly, Ld. CIT (A) also observed that the assessee has already claimed the deduction of interest expenses while computing the income under the head business and profession. Accordingly, the claim of the assessee for the deduction of the interest expenses against the property income was denied.
Being aggrieved by the order of the Ld.CIT (A), the assessee is in appeal before us.
The learned AR before us reiterated the submissions as made before the respective IT authorities being AO and CIT(A) and further submitted that the income from the properties being held as stock in trade is liable to be taxed under the head business and profession. The Ld. AR in support of his argument, relied on the judgment of Hon’ble Gujarat High Court in the case of CIT Vs. Neha builders private Ltd reported in 296 ITR 661. Accordingly, the Ld. AR emphasized that there cannot be any question of treating the income with respect to the properties held as stock in trade under the head income from the house property.
4.1 The Ld.AR further submitted that the ITAT Mumbai in the case of Saranga Estates Pvt. Ltd. Vs. DCIT in ITA 4420/Mum/2017 vide order dated 13th March 2019 involving identical facts, and circumstances have decided the issue in favour of the assessee after considering the judgement of Hon’ble Delhi High Court in the case of Neha builders private Ltd(supra).
On the other hand, the Ld. DR vehemently argued on the basis of findings culled by the AO and subsequently upheld by the CIT(A) in their respective orders..
We have heard the rival contentions of both the parties in the light of the materials available on record. The issue in the instant case relates whether the properties held as stock in trade will be subject to the deemed rental income under the provisions of section 23 of the Act. In this regard, we are inclined to refer to the judgment of Hon’ble Gujarat High Court in the case of NEHA builders private Ltd (supra) wherein it was held that the income from the property held as stock in trade should be treated as business income. The relevant extract of the order is reproduced as under: Page 6 of 11
“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’”
6.1 From the above judgment, it is inferred that the income with respect to the properties held as stock in trade can be taxed under the head business and profession. Thus there is no question of computing the income qua the properties held as stock in trade under the head income from house property. We further hold that there is no provision under the head of income, namely “income from the business and profession” for computing the deemed rental income qua the properties held as stock in trade. Therefore, we are of the view that there cannot be any income under the head house property on account of deemed rent with respect to such properties held as stock in trade.
6.2 We also note that the Mumbai Tribunal in the case of Saranga Estate Private Limited VS DCIT in after considering the judgment in the case of Ansal housing finance and leasing company Ltd(supra) has decided the issue in favor of the assessee. The relevant extract of the order is reproduced as under:
“In any case, this issue had been duly adjudicated by the Co-ordinate Bench of this Tribunal in the case of Chamber Construction Pvt. Ltd., vs. DCIT in for A.Y.2012-13 dated 30/11/2018 wherein it has been held as under:- "7. We have heard the authorized representatives of both the parties, perused the orders of the lower authorities and the material available on record. We find that our indulgence has been sought by the assessee by preferring the present appeal, for adjudicating as to whether the CIT(A) is right in law and facts of the case in concluding that the deemed notional lettable value of the completed unsold flats held by the assessee company as stock-in-trade was liable to be determined and brought to tax under the head „Income from house property‟. We find from a perusal of Sec. 22 of the Act that the „annual value‟ of any property consisting of any building or land appurtenant thereto of which the assessee is the owner, other than such portions of such property as he may occupy for the purposes of any business or profession carried on by him the profits of which are chargeable to income tax, shall be chargeable to income tax under the head „Income from house property‟. Further, the determination of the „annual value‟ of the property is envisaged in Sec. 23 of the Act. Sec. 23(1)(a) contemplates that the sum for which the property might reasonably be expected to let from year to year is to be deemed as the „annual value‟ of the property which though might not have been let out by the assessee.
8. We have deliberated at length on the issue under consideration in the backdrop of the aforesaid statutory provisions, and are of the considered view that though the „annual value‟ of a property simpliciter owned by an M/s. Saranga Estates Pvt. Ltd., assessee would be liable to be assessed under the head „Income from house property‟, however a similar treatment cannot be accorded to a property which is held by the assessee as stock-in-trade of his business. In our considered view a property which is held by an assessee as stock- in- trade of his business as that of a developer would loose its color and character as that of a property simpliciter owned by him. Our aforesaid view is fortified by the judgment of the Hon‟ble High Court of Gujarat in the case of CIT Vs. Neha Builders (P) Ltd. (2008) 296 ITR 661 (Guj). The Hon‟ble High Court while disposing off the appeal filed by the revenue in the case of an assessee company which was engaged in the business of construction of property, had observed that where a property is held as stock-in-trade, then the same would become or partake the character of the stock, and any income derived therefrom would be income from business and cannot be held as income from property. The Hon‟ble High Court while concluding as hereinabove had observed as under: "7. 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.
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 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."
Admittedly, the lower authorities had relied on the judgement of the Hon‟ble High Court of Delhi in the case of CIT Vs. Ansal Housing Finance & Leasing Company Ltd. (2013) 354 ITR 180 (Delhi) and had therein concluded that the notional lettable value of the unsold flats held by the assessee was liable to be determined and brought to tax under the M/s. Saranga Estates Pvt. Ltd., head „Income from house property‟. We find that the issue under consideration before us i.e whether the notional lettable value of the property held by an assessee as stock-in-trade in its business as that of a developer is liable to be assessed under the head „income from house property‟, has been differently answered by the Hon‟ble High Court of Gujarat in CIT Vs. Neha Builders Pvt. Ltd. (2008) 296 ITR 661 (Guj) and the Hon‟ble High Court of Delhi in CIT Vs. Ansal Housing Finance and Leasing Ltd. (2013) 354 ITR 186 (Del). We are of the considered view that in the backdrop of the aforesaid conflicting views of the aforesaid non- jurisdictional High Courts, the view in favour of the assessee as had been arrived at by the Hon‟ble High Court of Gujarat is to be preferred. Our aforesaid view is fortified by the judgment of the Hon‟ble Supreme Court in the case of CIT Vs. Vegetable Products (1973) 88 ITR 192 (SC), wherein the Hon‟ble Apex Court had observed that if two reasonable constructions of a taxing provision is possible, then that construction which favours the tax payer must be adopted. Further, we find that ITAT, Mumbai in the case of ACIT-15(2)(1) Vs. M/s Haware Construction Pvt. Ltd. [ITA no. 3321 & 3172/Mum/2016; dated 31.08.2018] had after deliberating on the aforesaid judgments of the Hon‟ble High Court of Gujarat in Neha Builders (P) Ltd.(supra) and that of the Hon‟ble High Court of Delhi in Ansal Housing Finance & Leasing Company Ltd.(supra), had by taking support of the judgment of the Hon‟ble Supreme Court in the case of CIT Vs. Vegetable Products Ltd. (1973) 88 ITR 192 (SC), had followed the decision of the Hon‟ble High Court of Gujarat in Neha Builders (P) Ltd. (supra), and had concluded that the notional lettable value of the unsold flats held by the assessee cannot be determined and brought to tax under the head „Income from house property‟. Still further, a similar view had also been taken by the Tribunal in the case of M/s C.R Development Pvt. Ltd. Vs. JCIT-8(1)(OSD), Mumbai [ITA No. 4277/ Mum/2012; dated 13.05.2015]. It was observed by the Tribunal that estimating of the rental income of the flats held by the assesses as stock-in- trade was not justified, as the said flats were neither given on rent nor the assessee had any intention to earn rent by letting out the same. We further find that another coordinate bench of the Tribunal i.e. ITAT, Mumbai Bench "G", Mumbai in ITO-2(1)(1), Mumbai Vs. M/s Arihant Estates Pvt. Ltd. [ITA No. 6037/Mum/2016; dated 27.06.2018] had relied on an earlier view taken by the Tribunal in the case of M/s Runwal Constructions Vs. ACIT in [ITA No. 5408 & 5409/Mum/2016; dated 22.02.2018], and after deliberating on the judgment of the Hon‟ble High Court of Gujarat in CIT Vs. Neha Builders Pvt. Ltd. (2008) 296 ITR 661 (Guj) and that of the Hon‟ble High Court of Delhi in Ansal Housing Finance & Leasing Company Ltd. (2013) 354 ITR 186 (Del), has held that the assessing officer was not correct in bringing to tax the notional annual lettable value of the unsold flats which were held by the assessee as stock-in- trade. On a similar footing a similar view had also been taken by the ITAT, Mumbai Bench "G", Mumbai in the case of Progressive Homes, Mumbai Vs. ACIT-Circle 4(4), Mumbai [ITA No. 5082/Mum/2016; dated 16.05.2018) M/s. Saranga Estates Pvt. Ltd., and ITAT "H" Bench, Mumbai in Haware Engineers & Builders Pvt. Ltd. Vs. DCIT, Central Circle-4(2), Mumbai [ITA No. 7155/Mum/2016; dated 10.10.2018].
In the backdrop of our aforesaid observations, respectfully following the judgment of the Hon‟ble High Court of Gujarat in the case of CIT Vs. Neha Builders (P) Ltd. (2008) 296 ITR 661 (Guj) and the aforesaid orders of the coordinate benches of the Tribunal, we are of the considered view that the lower authorities had erred in determining the notional lettable value of the unsold flats held by the assessee company as stock-in-trade of its business of builders and property developers, and bringing the same to tax in the hands of the assessee under the head „Income from house property‟. We thus in terms of our aforesaid observations set aside the order of the CIT(A).
The appeal of the assessee is allowed. 7.2. In view of the aforesaid observations and respectfully following the judicial precedents relied upon hereinabove, we direct the Ld. AO to delete the addition made towards annual letting value of Rs.23,71,200/- in respect of two unsold flats. Accordingly, grounds raised by the assessee are allowed 6.3 In view of the above, we hold that there cannot be any income under the head house property qua the properties held as stock in trade on account of deemed rental income.
6.4 As the assessee succeeds on the reasoning as elaborated in the preceding paragraph, therefore we are not inclined to adjudicate the other contentions raised by the Ld. AR for the assessee. Hence the ground of appeal of the assessee is allowed.
In the result, the appeal of the assessee is allowed.
Order pronounced in the Court on 19/07/2019 at Ahmedabad.