2019 (4) TMI 368 - AT - Income Tax

Income from House Property - addition of deemed rent from unsold units lying in closing stock - incorrectness of the decision of the AO and the CIT(A) in making addition under the head income from house property - HELD THAT - This is not a case where Assessing Officer invoked the provisions relatable to the head of income i.e. profits and gains from business or profession. The unsold flats were never let out and assessee never earned rental income. As the Assessing Officer merely attempted to tax under the head income from house property and the same is now not approved by various Benches of the Tribunal in Cosmopolis Construction 2018 (9) TMI 1621 - ITAT PUNE , M/S. C.R. DEVELOPMENTS PVT LTD 2015 (5) TMI 1161 - ITAT MUMBAI , M/s. Runwal Constructions 2018 (2) TMI 1707 - ITAT MUMBAI wherein it was held that 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 . Therefore, the ground no.1 raised by the assessee is allowed.

Summary

Issues Involved:
1. Deemed rent from unsold units lying in closing stock.
2. Eligibility for deduction under section 80IB(10) of the Act.
3. Deduction of interest on borrowed capital under section 24(b) of the Act.
4. Computation of annual lettable value of the property.

Issue-wise Detailed Analysis:

1. Deemed Rent from Unsold Units Lying in Closing Stock:
The primary issue revolves around the addition made by the Assessing Officer (AO) of ?87,941/- as deemed rent from unsold units under the head "Income from House Property." The assessee, a builder and developer, argued that the unsold flats were used for storage and office purposes, and one as a guest house, thus not generating any rental income. The AO, however, computed the Annual Lettable Value (ALV) of these flats under section 23(1)(a) of the Act. The CIT(A) upheld this addition, leading the assessee to appeal to the Tribunal. The Tribunal found that the unsold flats, held as stock-in-trade, should not be taxed under the head "Income from House Property" as they were not actually rented out. The Tribunal referred to various decisions, including CIT vs. Neha Builders Pvt. Ltd., CIT vs. Sane & Doshi Enterprises, and CIT vs. Ansal Housing Finance And Leasing Co. Ltd., concluding that notional income from unsold flats should be treated as "business income" rather than "income from house property."

2. Eligibility for Deduction under Section 80IB(10) of the Act:
The assessee claimed a deduction under section 80IB(10) amounting to ?26,42,039/-, which was rejected by the AO on the grounds that the project was incomplete. The Tribunal did not specifically address this issue in the detailed judgment, as the primary focus was on the treatment of deemed rent.

3. Deduction of Interest on Borrowed Capital under Section 24(b) of the Act:
The assessee sought to claim a deduction of interest on borrowed capital amounting to ?87,941/- under section 24(b) if the addition of deemed rent was sustained. However, since the Tribunal ruled in favor of the assessee regarding the primary issue of deemed rent, this ground became academic and was not adjudicated.

4. Computation of Annual Lettable Value of the Property:
The assessee contended that the ALV considered by the AO was on the higher side and that the municipal value should be used instead. The Tribunal, however, did not delve into this computation detail, as it resolved the primary issue by ruling that the notional income from unsold flats should not be taxed under the head "income from house property."

Conclusion:
The Tribunal allowed the appeal of the assessee on the primary ground, ruling that the notional income from unsold flats held as stock-in-trade should be treated as "business income" and not "income from house property." Consequently, the other grounds became academic and were dismissed. The appeal was partly allowed, and the order was pronounced on April 3, 2019.