2019 (9) TMI 1403 - AT - Income Tax

Income from House Property - Annual Letting Value of the unsold units lying as Stock in Trade - notional income by way of ALV in respect of the unsold flats cannot be taxed in the hands of the assessee - appellant is engaged in the business of real estate development and the unsold flats are held as Stock in Trade and not as Investments - HELD THAT - It is an undisputed fact that the assessee never let out the unsold flats held as stock-in-trade. It is the case of the AO that the provisions of sections 22 to 23 of the Act should be invoked for taxing the notional income on such flats. As 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. 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 AO 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, 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 paragraphs of this order. Accordingly, the grounds raised by the assessee are allowed.

Issues Involved:

1. Addition of ?11,59,200/- as "Income from House Property" for unsold units held as stock-in-trade.
2. Consideration of Annual Letting Value (ALV) based on a leave and license agreement.
3. Right to add, amend, alter, delete, or raise any additional ground of appeal.

Issue-wise Detailed Analysis:

1. Addition of ?11,59,200/- as "Income from House Property" for unsold units held as stock-in-trade:

The assessee, engaged in real estate development, reported six unsold flats held as stock-in-trade, which were never let out and did not generate rental income. The Assessing Officer (AO) calculated the Annual Letting Value (ALV) of these unsold flats based on a rental agreement and added ?11,59,200/- as income. The CIT(A) confirmed this addition. The assessee contended that notional income from unsold flats should not be taxed as "Income from House Property" but rather as "Business Income," citing various Tribunal decisions. The Tribunal referenced multiple cases, including M/s. Cosmopolis Construction, M/s. Shree Balaji Ventures, and Kumar Becharay Rathi, which supported the view that notional income from unsold flats held as stock-in-trade should not be taxed under "Income from House Property." The Tribunal emphasized that if the property is used as stock-in-trade, any income derived from it should be considered "Business Income." The Tribunal also noted the divergent views of non-jurisdictional High Courts and opted for the view favoring the assessee, as per the principle established in Commissioner of Income Tax Vs. Vegetable Products Ltd. The Tribunal concluded that in the absence of actual rental income, the notional income should not be taxed under "Income from House Property."

2. Consideration of Annual Letting Value (ALV) based on a leave and license agreement:

The assessee argued that the ALV should be based on a leave and license agreement of one of the flats, which would reduce the addition to ?5,19,960/-. However, the Tribunal found that taxing hypothetical income not sanctioned by any provision under Chapter IV-D of the Income Tax Act was not permissible. The Tribunal reiterated that section 5 of the Act stipulates that only actual income received or deemed to be received can be taxed. The Tribunal overturned the impugned order and directed the deletion of the addition of ?11,59,200/-, reaffirming that notional income is not taxable under the head "Business Income."

3. Right to add, amend, alter, delete, or raise any additional ground of appeal:

The assessee reserved the right to add, amend, alter, delete, or raise any additional ground of appeal. However, this issue was not elaborated upon in the judgment, as the primary focus was on the taxation of notional income from unsold flats.

Conclusion:

The Tribunal allowed the appeal of the assessee, concluding that the notional income from unsold flats held as stock-in-trade should not be taxed under "Income from House Property." The Tribunal's decision was based on consistent views from various cases and the principle that hypothetical income not sanctioned by the Income Tax Act cannot be taxed. The addition of ?11,59,200/- was deleted, and the appeal was allowed in favor of the assessee.

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