MAHANAGAR CONSTRUCTIONS,,PUNE vs. INCOME-TAX OFFICER, WARD - 7(2),, PUNE

आयकर अपीलीय अिधकरण “बी” �यायपीठ पुणे म� । IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH, PUNE �ी डी. क�णाकरा राव, लेखा सद�य एवं �ी िवकास अव�थी, �याियक सद�य के सम� BEFORE SHRI D. KARUNAKARA RAO, AM AND SHRI VIKAS AWASTHY, JM आयकर अपील सं. / ITA No.623/PUN/2018 िनधा�रण वष� / Assessment Year : 2014-15 Mahanagar Constructions, S.No.129, H.No.1/2, Hari Ganga, Near RTO Office, Yerwada, Pune-411006. .......अपीलाथ� / Appellant PAN : AAJFM8909K बनाम / V/s. ITO, Ward-7(2), ……��यथ� / Respondent Pune. Assessee by : Shri Vipin Gujrathi Revenue by : Shri N. Ashok Babu सुनवाई क� तारीख / Date of Hearing : 15.07.2019 घोषणा क� तारीख / Date of Pronouncement : 05.09.2019 आदेश / ORDER PER D. KARUNAKARA RAO, AM: This appeal is filed by the assessee against the order of CIT(A)-5, Pune dated 12.12.2017 for the Assessment Year 2014-15. 2. The grounds raised by the assessee are as under :- “1) On the facts and in the circumstances of the case and in law the honorable CIT (Appeals) - 5, Pune erred in confirming the addition of Rs 11,59,200/- to the Income of the appellant under the head “Income from House Property” being the Annual Letting Value of the unsold units lying as Stock in Trade of the appellant without appreciating the fact that the appellant is engaged in the business of real estate development and the unsold flats are held as Stock in Trade and not as Investments. The appellant hereby prays that the addition may please be deleted. 2) Without Prejudice to Ground of Appeal No. 1, On the facts and in the circumstances of the case and in law the honorable CIT (Appeals) - 5, Pune

2 ITA No.623/PUN/2018 erred in confirming the addition of Rs 11,59,200/- being the Annual Letting Value of the unsold units lying as Stock in Trade of the appellant without considering the annual letting value as calculated by the appellant based on leave and license agreement of one of the flat situated in the said project. The appellant hereby prays that the addition may please be restricted to Rs 5,19,960/-. 3) The appellant hereby reserves the right to add, amend, alter, delete or raise any additional ground of appeal.” 3. Briefly stated the relevant facts include that the assessee is a partnership firm and is engaged in the business of Builders, Promoters and Developers. The assessee filed the return of income declaring Nil income. During the year under consideration, the assessee reported 6 unsold flats, which were never let out and the assessee never earned rental income for the same. Relying on a rental agreement relating to the flats actual let out the Annual Letting Value (ALV) of these unsold flats are calculated by the Assessing Officer and added Rs.11,59,200/- as per the discussion given in para 8 of the assessment order of the Assessing Officer. The CIT(A) confirmed the same. 4. Aggrieved with the said order of the Assessing Officer and the CIT(A), the assessee is in appeal before us with the above extracted grounds. 5. Before us, at the outset, ld. Counsel for the assessee submitted that on similar facts, where unsold flats were never let out the deemed income cannot be taxed in the hands of the assessee, were adjudicated in various decisions of the Tribunal. Relying on the decision of the Tribunal in the cases of (i) M/s. Cosmopolis Construction vs. ITO vide ITA Nos.230 & 231/PUN/2018 dated 12.09.2018; (ii) M/s. Shree Balaji Ventures vs.

3 ITA No.623/PUN/2018 ITO vide ITA No.1914/PUN/2018 dated 19.02.2019; and, (iii) Kumar Becharay Rathi vs. ITO vide ITA No.327/PUN/2018 dated 03.04.2019, ld. Counsel for the assessee submitted that notional income by way of ALV in respect of the unsold flats cannot be taxed in the hands of the assessee. For the sake of completeness, the contents of para 6 to 10 of the order of the Tribunal in the case of M/s. Cosmopolis Construction (supra) are extracted hereunder :- “6. We have heard the submissions made by representatives of rival sides and have perused the orders of authorities below. The solitary issue in the appeal by assessee is against the addition of Rs.75,50,995/- under the head „Income from House Property‟ in respect of notional rental income on the flats held as stock-in-trade. In so far as the facts narrated by the ld. AR of the assessee, there is no dispute. 7. The issue before us for adjudication is whether the notional annual rental value on unsold flats held as stock-in-trade by the assessee is to be assessed under the head „Business Income‟ or under the head „Income from House Property‟. The Hon‟ble Gujarat High Court in the case of Commissioner of Income Tax Vs. Neha Builders (P.) Ltd. (supra) has held that where the property is held as stock-in-trade any income derived rom stock would be „income from business‟ and not „income from house property‟. The relevant extract of the findings of Hon‟ble High Court are 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. 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

4 ITA No.623/PUN/2018 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-intrade’.” 8. In the case of Commissioner of Income Tax Vs. Ansal Housing Finance And Leasing Co. Ltd. (supra) the Hon‟ble Delhi High Court taking a contrary view has held that annual rental value on unsold flats built by assessee engaged in construction business is assessable as income from house property. It is a well settled law that when two divergent views of non-jurisdictional High Courts are available and there is no decision on the issue from the Jurisdictional High Court, the view in favour of the assessee has to be adopted [Commissioner of Income Tax Vs. Vegetable Products Ltd.(supra)]. In so far as the decision of Hon‟ble Bombay High Court in the case 9. of Commissioner of Income Tax Vs. Sane & Doshi Enterprises (supra) is concerned we find that the facts in the said case are at variance. In the said case the assessee was engaged in construction business. The assessee rented out unsold flats and suo-motu offered rental income from the flats under the head „Income from House Property‟. On the contrary the Revenue wanted to tax rental income under the head „Business Income‟. The matter travelled to the Tribunal. The Tribunal held that the income earned by the assessee from renting of flats is to be assessed under the head „Income from House Property‟. The Department carried the matter in appeal before the Hon‟ble High Court. The Hon‟ble High Court confirmed the findings of Tribunal and held that rental income received from unsold portion of property constructed by the assessee, is assessable as income from house property. The core difference between the case of the assessee and in the case of Commissioner of Income Tax Vs. Sane & Doshi Enterprises (supra) is that in the case of assessee, it is notional annual rental income on flats held as stock which is sought to be taxed, whereas in the case of Commissioner of Income Tax Vs. Sane & Doshi Enterprises (supra) it was the case of actual rental income earned by the assessee from renting of flats constructed by it. Hence, the decision rendered in the case of Commissioner of Income Tax Vs. Sane & Doshi Enterprises (supra) would not apply in the facts of the present case. 10. We further find that Mumbai Bench of the Tribunal in M/s. C.R. Developments Pvt. Ltd. Vs. JCIT (supra), M/s. Runwal Constructions Vs. ACIT (supra) and Shri Girdharilal K. Lulla Vs. DCIT (supra) under similar set of facts have taken a consistent view in holding notional annual rental value on unsold flats held as stock-in-trade by the assessee engaged in construction and development activities as „Business Income‟.”

5 ITA No.623/PUN/2018 relevant lines from para 5 to 6 of the said order of the Tribunal (supra) where the Tribunal overturned the impugned order and direct to delete the addition. The said relevant lines are extracted hereunder :- “5. ........... As the assessee admittedly did not earn any rental income from letting out of these two units, which position has also not been disputed by the AO, in my considered opinion, taxing any hypothetical income, which is otherwise not sanctioned by any provision under Chapter IV-D, cannot be permitted. 6. Even otherwise, section 5 of the Act clearly stipulates that a person who is a resident can be subjected to tax in respect of income from whatever source which is received or is deemed to be received in India or accrues or arises or deemed to accrue or arise to him in or outside India during such year. As the instant imaginary income charged to tax by the AO is neither a deemed income under the head `Business income’ nor is received or deemed to be received or accruing or arising or deemed to accrue or arise, not falling in any of the categories given in clauses (a) to (c) of section 5(1), I hold that there is no rationale in charging it to tax. I, therefore, overturn the impugned order and direct to delete the addition of Rs.34.35 lakh.”

6 ITA No.623/PUN/2018 rendered in the case of Commissioner of Income Tax Vs. Ansal Housing Finance And Leasing Co. Ltd. (supra) the ld. AR fairly admitted that the decision is against the assessee. However, the ld. AR submitted that in view of the decision of Hon‟ble Supreme Court of India in the case of Commissioner of Income Tax Vs. Vegetable Products Ltd. reported as 88 ITR 192 the ratio laid down by the Hon‟ble Gujarat High Court in the case of Commissioner of Income Tax Vs. Neha Builders (P.) Ltd. (supra) has to be followed. 6. We have heard the submissions made by representatives of rival sides and have perused the orders of authorities below. The solitary issue in the appeal by assessee is against the addition of Rs.75,50,995/- under the head „Income from House Property‟ in respect of notional rental income on the flats held as stock-in-trade. In so far as the facts narrated by the ld. AR of the assessee, there is no dispute. 7. The issue before us for adjudication is whether the notional annual rental value on unsold flats held as stock-in-trade by the assessee is to be assessed under the head “Business Income” or under the head “Income from House Property”. The Hon‟ble Gujarat High Court in the case of Commissioner of Income Tax Vs. Neha Builders (P.) Ltd. (supra) has held that where the property is held as stock-in-trade any income derived from stock would be „income from business‟ and not „income from house property‟. The relevant extract of the findings of Hon‟ble High Court are 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. 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.

7 ITA No.623/PUN/2018 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-intrade’.” 8. In the case of Commissioner of Income Tax Vs. Ansal Housing Finance And Leasing Co. Ltd. (supra) the Hon‟ble Delhi High Court taking a contrary view has held that annual rental value on unsold flats built by assessee engaged in construction business is assessable as income from house property. It is a well settled law that when two divergent views of non-jurisdictional High Courts are available and there is no decision on the issue from the Jurisdictional High Court, the view in favour of the assessee has to be adopted [Commissioner of Income Tax Vs. Vegetable Products Ltd.(supra)]. 9. In so far as the decision of Hon‟ble Bombay High Court in the case of Commissioner of Income Tax Vs. Sane & Doshi Enterprises (supra) is concerned we find that the facts in the said case are at variance. In the said case the assessee was engaged in construction business. The assessee rented out unsold flats and suo-motu offered rental income from the flats under the head “Income from House Property”. On the contrary the Revenue wanted to tax rental income under the head “Business Income”. The matter travelled to the Tribunal. The Tribunal held that the income earned by the assessee from renting of flats is to be assessed under the head “Income from House Property”. The Department carried the matter in appeal before the Hon‟ble High Court. The Hon‟ble High Court confirmed the findings of Tribunal and held that rental income received from unsold portion of property constructed by the assessee, is assessable as income from house property. The core difference between the case of the assessee and in the case of Commissioner of Income Tax Vs. Sane & Doshi Enterprises (supra) is that in the case of assessee, it is notional annual rental income on flats held as stock which is sought to be taxed, whereas in the case of Commissioner of Income Tax Vs. Sane & Doshi Enterprises (supra) it was the case of actual rental income earned by the assessee from renting of flats constructed by it. Hence, the decision rendered in the case of Commissioner of Income Tax Vs. Sane & Doshi Enterprises (supra) would not apply in the facts of the present case. 10. We further find that Mumbai Bench of the Tribunal in M/s. C.R. Developments Pvt. Ltd. Vs. JCIT (supra), M/s. Runwal Constructions Vs. ACIT (supra) and Shri Girdharilal K. Lulla Vs. DCIT (supra) under similar set of facts have taken a consistent view in holding notional annual rental value on unsold flats held as stock-in- trade by the assessee engaged in construction and development activities as “Business Income”. 11. Thus, in view of the facts of the case and the decision rendered in the case of Commissioner of Income Tax Vs. Neha Builders (P.)

8 ITA No.623/PUN/2018 Ltd. (supra) we find merit in the submissions of assessee and allow the appeal. 12. In the result, the impugned order is set aside and the appeal of assessee is allowed.” 10. From the above extracts, it is evident that the taxation of rental income earned out of stock-in-trade i.e. unsold flats of the construction company, depends on various facts such as if the flats are rented out actually or not. As held by various decisions, the rental income can be actual rent received by the assessee out of renting of the unsold flats or deemed rental/notional rental income calculated by the Assessing Officer attributable to such unsold flats which were not actually rented out. From the judgements in the case of CIT vs. Sane & Doshi Enterprises, 377 ITR 165 (Bom) and in the case of CIT vs. Ansal Housing Finance And Leasing Co. Ltd., 354 ITR 180 (Delhi), the cases where the unsold flats are actually let out for earning such rent income, it is held that the rental income is taxable under the head ‘Income from house property’. In these cases, the Revenue’s argument is that such income should be taxable under the head ‘business income’. This argument of the Revenue stands rejected by the Hon’ble Bombay High Court (supra). Flat not actually rented out: In case of notional/deemed rental 11. income calculated by the Assessing Officers in various cases, the Tribunal took a consistent view that such notional/deemed rental income is taxable under the head ‘business income’ and not under the head ‘income from house property’. The decision of the Tribunal in the cases of (i) M/s. C. R. Developments Pvt. Ltd. vs. JCIT in ITA No.4277/Mum/2012 for the assessment year 2009-10, order dated 13.05.2015 (Mum.-Trib.); (ii) M/s. Runwal Constructions vs. ACIT in ITA No.5408/Mum/2016 for the assessment year 2012-13, order dated 22.02.2018 (Mum.-Trib.); and, (iii) Shri Girdharilal K. Lulla vs. DCIT in ITA No.1604/Mum/2016 for the assessment year 2011-12, order dated 17.11.2017 (Mum.-Trib.) support the taxation of such notional rental income under the head’ business income’. The undersigned are party to the decision of the Tribunal in the case of M/s. Cosmopolis Construction (supra). 12. In the present case, it is an undisputed fact that the assessee never let out the unsold flats held as stock-in-trade. Further, it is the case of the Assessing Officer that the provisions of sections 22 to 23 of the Act should be invoked for taxing the notional income on such flats. I also perused all the four grounds revolved around the provisions of sections 22 to 23 of the Act relating to the head of income i.e. income from house property. Further, it is an undisputed fact the provisions of section 23(5) of the Act was amended by the Finance Act, 2017 w.e.f. 01.04.2018 and, therefore, these provisions will not come to the rescue of the Assessing Officer for bringing the deemed income on such unsold flats to taxation under the head ‘income from house property’. In absence of enabling the provisions of the Income Tax Act, I am of the opinion that calculating the notional income in respect of the properties which were not rented out and rental income was never earned actually, the Assessing Officer’s policy to tax such income is unsustainable in law in view of the various decisions cited in the preceding

9 ITA No.623/PUN/2018 paragraphs of this order. Accordingly, the grounds raised by the assessee are allowed.” 8. Considering the above settled proposition on this issue and following the rule of consistency, we find the order of the CIT(A) is fair and reasonable and it does not call for any interference. Therefore, the relevant grounds raised by the assessee are allowed. 9. In the result, the appeal of the assessee is allowed. Order pronounced on 05th day of September, 2019. Sd/- Sd/- (िवकास अव�थी /VIKAS AWASTHY) (डी. क�णाकरा राव/D. KARUNAKARA RAO) �याियक सद�य/JUDICIAL MEMBER लेखा सद�य/ACCOUNTANT MEMBER पुणे / Pune; �दनांक / Dated : 05th September, 2019. Sujeet आदेश क� �ितिलिप अ�ेिषत / Copy of the Order forwarded to : अपीलाथ� / The Appellant. 1. ��यथ� / The Respondent. 2. 3. The CIT(A)-5, Pune. 4. The CCIT, Pune. िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण, “बी” ब�च, 5. पुणे / DR, ITAT, “B” Bench, Pune. गाड� फ़ाइल / Guard File. 6. आदेशानुसार / BY ORDER, // True Copy // Senior Private Secretary आयकर अपीलीय अिधकरण, पुणे / ITAT, Pune.