2019 (3) TMI 1649 - AT - Income Tax

Income from house property - ALV - Computing deemed rental income in respect of certain unsold flats - CIT-A allowing statutory deduction u/s. 24(a) of the Act at 30% of gross annual value computed - HELD THAT - In the instant case admittedly the assessee had treated the unsold flats at Jolly Bhavan and Aurovilla as its stock in trade. It is not in dispute before us that the assessee had not let out its unsold flats at Jolly Bhavan and Aurovilla to any person and had rather actually occupied the same for the purpose of its business. Hence there cannot be any assessment of notional rental income or deemed rental income under the head income from business in the absence of specific provisions contained in the statute. Amendment brought in by the Finance Act 2017 w.e.f. 01/04/2018 wherein a new sub-section (5) has been inserted in Section 23 wherein the properties held as stock in trade which are not let out during the previous year the annual value of the said property for a period up to one year from the end of the financial year in which the certificate of completion of construction and property is obtained from the competent authority shall be taken to be nil. This amendment brought in Section 23 sub-section(5) of the Act is effective only from A.Y.2018-19 onwards and cannot be applied retrospectively. Hence there cannot be any addition that could be made based on notional rental income or deemed rental income in the hands of the assessee in respect of unsold flats held as stock in trade by the assessee during the year under consideration under the head income from business also. We have already held that the rental income if any derived from properties held as stock in trade cannot be assessed as income from house property We find when there are divergent views given by two non-Jusidrictional High Courts by interpreting the provisions of the Act then the construction that is favourable to the assessee should have to be construed - We direct the Ld. AO to delete the addition made towards annual letting value in respect of two unsold flats. Accordingly grounds raised by the assessee are allowed.

Issues Involved:

1. Whether the Ld. CIT(A) was justified in confirming the action of the Ld. AO for computing deemed rental income in respect of certain unsold flats.
2. Whether the Ld. CIT(A) was justified in not allowing statutory deduction u/s. 24(a) of the Income Tax Act at 30% of gross annual value computed.

Detailed Analysis:

1. Deemed Rental Income on Unsold Flats:

The primary issue in this appeal is the computation of deemed rental income on unsold flats held by the assessee as stock-in-trade. The assessee, engaged in the business of construction and real estate development, had unsold flats at Jolly Bhavan and Aurovilla. The Ld. AO assessed the annual letting value of these flats as income from house property, citing Section 22 of the Income Tax Act. The AO relied on the Delhi High Court's decision in Ansal Housing Finance and Leasing Company Ltd., which supported the notion of assessing deemed rental income for unsold flats.

However, the assessee contended that these properties were held as stock-in-trade and not for rental purposes, arguing that any income derived should be classified as business income. The Ld. CIT(A) upheld the AO's decision, distinguishing the case from Chennai Properties and Investments Ltd., where the Supreme Court ruled in favor of treating rental income as business income due to the nature of the business.

2. Statutory Deduction u/s. 24(a):

The Ld. AO did not grant the statutory deduction of 30% of the gross annual value under Section 24(a) while computing the deemed rental income. The Ld. CIT(A) supported this stance, maintaining that the properties in question were not intended for rental income and thus did not qualify for the deduction.

Tribunal's Findings:

The Tribunal examined the rival submissions and placed significant reliance on the Gujarat High Court's decision in CIT vs. Neha Builders Pvt. Ltd., which held that properties held as stock-in-trade should be treated as business assets, and any income derived therefrom should be classified as business income, not income from house property. It was noted that the unsold flats were occupied by the assessee for business purposes, and no rental income was derived from them.

The Tribunal acknowledged the conflicting decisions between the Gujarat High Court and the Delhi High Court on this matter. In such cases, the Tribunal preferred the interpretation favorable to the assessee, as supported by the Supreme Court's ruling in CIT vs. Vegetable Products.

The Tribunal also referred to its own previous decisions, including the case of Chamber Construction Pvt. Ltd. vs. DCIT, where it was held that the notional rental value of unsold flats held as stock-in-trade should not be taxed under the head "Income from house property."

Conclusion:

The Tribunal concluded that the lower authorities erred in assessing the notional rental value of the unsold flats as income from house property. It directed the AO to delete the addition of Rs. 23,71,200 towards annual letting value of the unsold flats. Consequently, the appeal of the assessee was allowed, and the statutory deduction issue became moot.

Order Pronounced:

The appeal of the assessee was allowed, and the order was pronounced in court on 13/03/2019.

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