PALM GROVE BEACH HOTELS PVT LTD.,,MUMBAI vs. DCIT-CC-4(1), MUMBAI

आदेश / O R D E R एभ. फारगणेश, रेखा सदस्म के द्वाया / PER M. BALAGANESH, AM:

This appeal of assessee is arising out of the order of the Commissioner of Income Tax (Appeals)]-52, Mumbai [in short CIT(A)], dated 30.04.2019. The assessment was framed by the Asst. Commissioner of Income Tax, Circle 4(1) Mumbai (in short ACIT/ AO) for the A.Y. 2016-17 vide order dated 13.01.2018 under section 143(3) of the Income-tax Act, 1961 (hereinafter ‘the Act’).

ITA Ns.4296/Mum/2019 Palm Grove Beach Hotels Pvt. Ltd.; AY 16-17 Page | 2 2. The only issue to be decided in this appeal is as to whether the learned CIT(A) was justified in confirming the disallowance amounting to Rs.21,70,233/- on account of annual letting value of unsold flats which was lying in closing stock under the head income from house property.

“3. The brief facts of the case are that the assessee filed its return of income for the A.Y. 2013-14 on 30.09.2013 declaring total income to the tune of Rs.9,72,43,120/-. The case was selected for scrutiny, therefore, notices u/s 143(2) & 142(1) of the Act were issued and served upon the assessee. The assessee was having unsold unit the details of which is hereby given as under.:-

S. Particulars No of Amount NO. flats 1. Wanwadi Project- 77 6,9795,580 Pune 2. Vakola Project- 1 43,01,115 Santacruz (E)

ITA Ns.4296/Mum/2019 Palm Grove Beach Hotels Pvt. Ltd.; AY 16-17 Page | 3 3. Radhanarayan – 2 1,13,38,000/- Bandra (E) 8,54,34,695 Thereafter, the notice was given and after the reply of the assessee, the notional value of the unsold unit was assessed after the deduction u/s 24 of the Act in sum of Rs.39,75,545/-. Feeling Aggrieved, the assessee filed an appeal before the CIT(A) who confirmed the order of the AO, therefore, the assessee has filed the present appeal before us. ISSUE NO.1 & 2:-

ITA Ns.4296/Mum/2019 Palm Grove Beach Hotels Pvt. Ltd.; AY 16-17 Page | 4 Rs.8,54,34,695/- but the AO has wrongly assessed the notional income and assessed the tax in view of the provisions u/s 23/ 24 of the Act and added in sum of Rs.39,75,545/- to the income of the assessee, hence, the finding of the CIT(A) confirming the order of the AO is wrong against law and facts and are liable to be set aside. The Ld. Representative of the assessee has argued that the case of the assessee has duly being covered by the decision of the Hon’ble ITAT in the case of Ferani Hotels Pvt. Ltd. Vs. ACIT Central Circle 4(1) in ITA. No. 6332/M/2016 dated 21.12.2018, therefore, the claim of the assessee is liable to be allowed. However, on the other hand, the Ld. Representative of the Department has refuted the said contention. On appraisal of the record and considering the argument advanced by the Ld. Representative of the parties, we observed that the assessee is carrying the business of construction and builder and developing the project. He was having the finished unit of three project situated at Wanwadi Project- Pune in sum of Rs.6,97,95,580/-, Vakola Project in sum of Rs.43,01,115/- & Radhanarayan in sum of Rs.1,13,38,000/-, the total in sum of Rs.8,54,34,695/- The notional income was assessed in sum of Rs. 39,75,545/- and added to the income of the assessee. Before going further, we deem it necessary to advert the finding of the Hon’ble ITAT in ITA. No.6332/M/2016 dated 21.12.2018 titled as

ITA Ns.4296/Mum/2019 Palm Grove Beach Hotels Pvt. Ltd.; AY 16-17 Page | 5 Ferani Hotels Pvt. Ltd. The relevant finding has been given in para no. 6 to 8 which are hereby reproduced as under: -

“Under this issue the assessee has challenged the confirmation of the addition of Rs.13,22,90,044/- under the head of income from house property on account of deemed income from unsold unit/ flat which was closing stock of the appellant as per provisions of Sections 22 and 23 of the Act. At the very outset, the Ld. Representative of the assessee has argued that the assessee is deriving its income from hotel business and construction. The assessee was also deriving income from dividend, share of profit and sale of flats and due to the recession, the assessee failed to sold out all the flats, therefore, some flats remain vacant which was being treated as stock in trade. The AO has wrongly assessed the notional rent and assessed the rent in view of the provision u/s 24 of the Act wrongly which can only be treated under the head of income from business, therefore, the finding of the CIT(A) is wrong against law and facts and is liable to be set aside. It is also argued that the case of the assessee has duly been covered in case of Runwal Construction Vs. ACIT in ITA. No. 5408/M/2016 & C.R. Developments Vs.

ITA Ns.4296/Mum/2019 Palm Grove Beach Hotels Pvt. Ltd.; AY 16-17 Page | 6 JCIT in ITA. No. 4277/M/2012 dated 13.05.2015. However, on the other hand, the Ld. Representative of the Department has refuted the said contention. On appraisal of the facts of the case and relevant record on the file, we noticed that the object of the assessee is deriving of income from Hotel Business and Construction. The assessee company is running a five star hotel in the name and style of The Carlton at Kodaikannal, Tamil Nadu, having rooms and other facilities. The assessee also derived income from dividend, share of profit from partnership firm and profit from sale of flats. The assessee failed to sold the flat which was being treated by him as stock in trade. The AO assessed the notional income and brought to tax as income as house property which has no doubt confirmed by CIT(A). It is to be seen whether the income of the assessee is liable to be treated as house property or business income. It is necessary to discuss the finding in the case of M/s. Runwal Constructions Vs. ACIT in ITA. No.5409/M/2016 dated 22.02.2018 which has been given in para no. 7 to 10 and are hereby reproduced as under.: - “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

ITA Ns.4296/Mum/2019 Palm Grove Beach Hotels Pvt. Ltd.; AY 16-17 Page | 7 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). 8. The Hon'ble Gujarat High Court in the case of Neha Builders 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

ITA Ns.4296/Mum/2019 Palm Grove Beach Hotels Pvt. Ltd.; AY 16-17 Page | 8 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 'stockin- 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 ITA. No.6332/M/2016 A.Y.2012-13 10 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

ITA Ns.4296/Mum/2019 Palm Grove Beach Hotels Pvt. Ltd.; AY 16-17 Page | 9 clearly appear that it was treating the property as 'stock-intrade'. 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'.” 9. 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: -

ITA Ns.4296/Mum/2019 Palm Grove Beach Hotels Pvt. Ltd.; AY 16-17 Page | 10 “3. The ld. AR placed the order of Bombay Tribunal in the case of M/s Perfect Scale Company Pvt. Ltd., ITA Nos.3228 to 3234/Mum/2013, order dated 6-9-2013, wherein it was held that in respect of assets held as business, income from the same is not assessable u/s.23(1) of the IT Act. 4. On the other hand, ld. DR relied on the order of Hon‟ble Delhi High Court in the case of Ansal Housing F ITA. No.6332/M/2016 A.Y.2012-13 11 Supreme Court held that since the assessee company‟s main object, is to 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

ITA Ns.4296/Mum/2019 Palm Grove Beach Hotels Pvt. Ltd.; AY 16-17 Page | 11 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.” 10. 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.

“5. We have considered rival contentions and perused the record. The issue under

ITA Ns.4296/Mum/2019 Palm Grove Beach Hotels Pvt. Ltd.; AY 16-17 Page | 12 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 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 stockin-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

ITA Ns.4296/Mum/2019 Palm Grove Beach Hotels Pvt. Ltd.; AY 16-17 Page | 13 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.”

ITA Ns.4296/Mum/2019 Palm Grove Beach Hotels Pvt. Ltd.; AY 16-17 Page | 14 is quite similar to the factual position of decision of the Hon’ble ITAT in the case of Ferani Hotels Pvt. Ltd. (supra). Since the case of the assessee has duly been covered by the decision of the Hon’ble ITAT in the case of Ferani Hotels Pvt. Ltd, therefore, in the said circumstances by honoring the said decision, we deleted the addition raised by AO on account of notional income of the vacant flats. Accordingly, these issues are decided in favour of the assessee against the revenue.

Sr. No. i. Makewaves Sea Resort Pvt. Ltd. V/s DCIT, Central Circle- 4(1), Mumbai ITA No. 36/Mum/2018 and 37/Mum/2018 decided on 20th March, 2019. ii. Ferani Hotels Pvt. Ltd. V/s ACIT, Central Circle – 4(1), Mumbai, ITA No. 6332/Mum/2016 decided on 21st December, 2018. iii. ITO 2(1)(1), Mumbai v/s Arihant Estates Pvt. Ltd., Mumbai, ITA No. 6037/Mum/2016 decided on 27th June, 2018. iv. M/s C.R. Development Pvt. Ltd V/s JCIT – 8(1)(OSD), Mumbai (ITA No.4277/Mum/2013). v. M/s Runwal Constructions V. Asst. CIT, Central Circle - 4 (1), Mumbai (I.T.A. No. 5408-5409/Mum/2016). vi. Progressive Homes V/s ACIT, Circle -4(4), Mumbai, (I.T.A. No. 5082/Mum/2016). vii. ACIT- 15(2)(1), Mumbai V/s Haware Construction Pvt. Ltd. (I.T.A. No. 3321/Mum/2016 &

ITA Ns.4296/Mum/2019 Palm Grove Beach Hotels Pvt. Ltd.; AY 16-17 Page | 15 No.3172/Mum/2016). viii. Haware Engineers & Builders Pvt. Ltd. V/s DCIT, Central Circle-4(2), Mumbai. (I.T.A. No. 7155/M/2016) 6. Respectfully following the aforesaid decisions and more particularly decision rendered by this Tribunal in assessee’s own case as detailed (supra), the grounds raised by the assessee are allowed. 7. In the result, the appeal of the assessee is allowed. Order pronounced in the open court on 22.06.2021. Sd/- Sd/- (भहावीय ससिंह /MAHAVIR SINGH) (एभ फारगणेश / M BALAGANESH) (रेखा सदस्म / ACCOUNTANT MEMBER) (उऩाध्मऺ / VICE PRESIDENT) भुिंफई, ददनािंक/ Mumbai, Dated: 22.06.2021 स दीप सरकार, व.निजी सधिव / Sudip Sarkar, Sr.PS आदेश की प्रनिलऱपप अग्रेपषि/Copy of the Order forwarded to : 1. अऩीराथी / The Appellant 2. प्रत्मथी / The Respondent. 3. आमकय आमुक्त(अऩीर) / The CIT(A) 4. आमकय आमुक्त / CIT 5. ववबागीम प्रनतननधध, आमकय अऩीरीम अधधकयण, भुिंफई / DR, ITAT, Mumbai 6. गार्ा पाईर / Guard file.

आदेशाि सार/ BY ORDER, सत्मावऩत प्रनत //True Copy// उप/सहायक पुंजीकार (Asstt. Registrar) आयकर अपीऱीय अधिकरण, भुिंफई / ITAT, Mumbai