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Facts
The assessee, engaged in hotel business and construction, filed its return declaring a loss. The assessment was completed with an addition for deemed income from unsold flats treated as income from house property. The CIT(A) confirmed the disallowance, though he directed a recomputation at a lower rate.
Held
The Tribunal held that unsold flats, being part of the closing stock of a builder and developer, should be treated as 'stock-in-trade' and any income derived from them should be considered 'business income', not 'income from house property'. Previous judgments, including the assessee's own case, supported this view.
Key Issues
Whether the annual letting value of unsold flats, held as inventory by a builder/developer, can be treated as income from house property or business income.
Sections Cited
Section 23(5) of the Income-tax Act, 1961, Section 250 of the Income-tax Act, 1961, Section 23 of the Income-tax Act, 1961, Section 22 of the Income-tax Act, 1961, Section 24 of the Income-tax Act, 1961
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Before: SMT. BEENA PILLAI & SMT. RENU JAUHRI
Assessee by : Shri Sanjaj B. Sawant Revenue by : Shri R. R. Makwana Date of Hearing 07.11.2024 Date of Pronouncement 16.12.2024 आदेश / O R D E R PER RENU JAUHRI [A.M.] :- This appeal is filed by the assessee against the order of the Learned Commissioner of Income-tax (Appeals), Mumbai-52 /National Faceless Appeal Centre, Delhi [hereinafter referred to as “CIT(A)”] dated 05.06.2024 passed u/s. 250 of the Income-tax Act, 1961 [hereinafter referred to as “Act”] for Assessment Year [A.Y.] 2017-18.
The assessee has raised following grounds of appeal: “1(a) On the facts and in the circumstances of the case and as well as in law, the learned CIT(A) erred in confirming the disallowance on merits considering the Annual Letting A.Y. 2017-18. Makewaves Sea Resorts Pvt. Ltd. Value of unsold flats which is closing stock of the appellant, treated as "Income from House Property" 1(b) On the facts and in the circumstances of the case as well as in law, learned CIT(A) erred in not following jurisdictional ITAT decisions including appellant's own case which squarely apply to the facts of the appellant's case, which are as under:- (i) Ferani Hotels Pvt. Ltd. v/s ACIT, Central Circle 4(1), Mumbai, decided on 21st December, 2018. (ii) Makewaves Sea Resort Pvt. Ltd. v/s DCIT, Central Circle 4(1), Mumbai, and 37/MUM/2018 decided March, 2019. on 20th (iii)Runwal Constructions v/s ACIT, Central Circle - 4(1), Mumbai ITA No. 5408/MUM/2016 decided on 22nd February, 2018; (iv) Progressive Homes v/s ACIT, Circle -4(4), Mumbai, ITA No. 5082/MUM/ 2016 decided on 16th May, 2018; (v) ACIT-15(2)(1), Mumbai, v/s Haware Construction Pvt. Ltd. ITA No. 3321/MUM/2016 decided on 31st August, 2018; (vi) Haware Engineers & Builders v/s DCIT, Central Circle - 4(2), Mumbai, ITA No.7155/MUM/2016 decided on 10th October 2018. (vii) ITO 2(1) (1), Mumbai v/s Arihant Estates Pvt. Ltd., Mumbai, ITA No. 6037/MUM/2016 decided on 27th June, 2018. (viii) M/s. C.R. Development Pvt. Ltd. v/s JCIT-8(1)(OSD), Mumbai (ITA No. 4277/Mum/2012). (ix) M/s Shamdarshan Properties Pvt. Ltd. Vs. DCIT Circle 3(3)(1), Mumbai (ITA No. 2779/Mum/2023 - Α.Υ. 2012-13 2777/Mum/2023 & ITA No. Α.Υ. 2014-15 dated 22.01.2024) wherein various cases were discussed including Appellant's own case and sister concerns viz. Unique Estates Development Co ltd. Vs DCIT in ITA No. 4598/M/2019 for Α.Υ.2016-17 dated 22.03.2021 and Makewaves Sea resort Pvt. Ltd. and (x) Mack Star Marketing Private Limited, Mumbai V. national Faceless Appeal Centre, Delhi (ITA Nos. 1709 & 1812/ MUM/2023- A. Ys. 2012-13 & 2014-15 dated 19.04.2024).”
3. The brief facts of the case are that the assessee had filed its return declaring loss of Rs. 6,10,94,237/- on 31.10.2017. The case was selected for scrutiny and the assessment was completed u/s 143(3) of the Act wherein the assessed loss was computed at Rs. 5,12,81,265/- after making an addition of Rs. 98,12,971/- on account of deemed income from unsold flats under the head income from house property.
A.Y. 2017-18. Makewaves Sea Resorts Pvt. Ltd.
4. The assessee filed an appeal before CIT(A) who allowed part relied vide order dated 05.06.2024. In his order, Ld. CIT(A) observed that the amendment to section 23(5) comes into effect from AY 2018-19 and, therefore, assessee was not entitled to claim the benefit of section 23(5) for AY 2017-18. However, he directed the AO to recompute the income from house property at 2.5% instead of 8.5% applied by him after considering various co-ordinate benches’ decisions on the issue.
5. Aggrieved with the order of the Ld. CIT(A), the assessee is in appeal before us.
We have heard the rival submissions. Admittedly, the assessee is engaged in the business of running hotel and also undertakes construction and development of projects. The sole substantive issue involved in this appeal is whether the annual letting value of unsold flats, held by the assessee as inventory, can be treated as income from house property. The assessee has relied on several decisions of the co-ordinate benches on this issue including in its own case for AY 2013-14 and AY 2014-15. Relevant portion of the order of co-ordinate bench for AY 2013-14 in in assessee’s own case is reproduced below:
8. We have heard the rival submissions of the parties and also perused the on record including the decision relied upon by the assessee. As pointed out by the Ld. counsel the coordinate Bench has decided the identical issue in favour of the assessee in the case of Ferani Hotels Ltd. vs. ACIT (supra). The findings of the coordinate Bench are as under:-
A.Y. 2017-18. Makewaves Sea Resorts Pvt. Ltd. "6. 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 ugly at 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 is fully covered by the case of Runwal Construction Vs. ACIT in & C.R. Developments Vs. JCIT in 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 tr of it 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 Fnotional 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 IТА. 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 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 High Court observed as under: - "8. True it is, that income derived from the property would always be termed as A.Y. 2017-18. Makewaves Sea Resorts Pvt. Ltd. '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 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. us. 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 Id. 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 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 acquire and held properties and A.Y. 2017-18. Makewaves Sea Resorts Pvt. Ltd. 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.
In the case of titled as M/s. C.R. Developments P. Ltd. Vs. JCIT. The relevant para in 5 is hereby reproduced as under.: - "5. 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 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 its stock-intrade and income arising on its sale is liable to be taxed as business income. Accordingly, we do not find any justification in the A.Y. 2017-18. Makewaves Sea Resorts Pvt. Ltd. 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 L.T. Act."
8. In the factual position of the present case is quite similar to the facts of the case mentioned above. In view of the law relied upon the law representative of the assessee ie. M/s. Runwal Constructions Vs. ACIT and M/s. C.R. Developments P. Ltd. Vs. JCIT (supra), ше are of the view that the finding of the CIT(A) on this issue is wrong against law and facts whereas the case of the assessee has duly been covered by the law mentioned above, therefore, by honoring the orders mentioned above. We deleted the addition raised by on account of notional income of vacant flats. Accordingly, issue is decided in favour of the assessee against the revenue." The facts and the issue involved in the present case are similar to the facts se and the issue involved in the case of Ferani Hotels Pvt. Ltd. (supra). In the said case, the coordinate Bench has deleted the addition confirmed by the CIT (A) on account of notional rent determined by the AO by holding that the ALV of the unsold unit of assessee project is assessable under the head 'income from house property'. Since, the findings of the Ld.CIT (A) is not in accordance with the decision of the coordinate Bench rendered in the case of Ferani Hotels Pvt. Ltd. (supra), we respectfully following the decision of the coordinate Bench set aside the order of the Ld. CIT (A) and allow the appeal of the assessee and direct the AQ to delete the addition made under the head property: 7 'income from house property”
7. Respectfully following the decision of the co-ordinate bench in the assessee’s own case, we hereby allow the appeal of the assessee and direct the AO to delete the addition on account of notional rent made under the head ‘income from house property’.
In the result, the appeal of the assessee is allowed. Order pronounced in the open court on 16.12.2024.