2021 (5) TMI 850 - AT - Income Tax

Income from house property - estimating rental income from the unsold fifty five shops u/s 23 which is assessee s stock in trade - scope of newly inserted sub- section (5) of section 23 - HELD THAT - Assessee was treating the property as 'stock-in-trade'. It is also clear from the records that, except for the eight unsold shops, which has been let out by the assessee for the time being on temporary basis, all other forty five unsold shops were used by the assessee for his business storage purposes. We note that assessee has constructed buildings/ projects and these projects were treated as stock in trade in the books of accounts of the assessee society. The income arising on its sale is liable to be taxed as business income. The Shops and Flats already sold by the assessee were assessed under the head income from business . Therefore, the unsold fifty five shops should be treated as stock in trade. As assessee s case under consideration is relating to assessment year 2013-14 whereas the newly inserted sub- section (5) of section 23, as noted above, was inserted by the Finance Act 2017 w.e.f. 1-4-2018, therefore it does not apply to the assessee under consideration. No justification in the order of assessing officer for estimating rental income from these unsold fifty five shops under section 23 of the Act, which is assessee s stock in trade as at the end of the year. Hence, we are not inclined to accept the contention of the Assessing Officer in any manner and hence the addition so made should be deleted. Accordingly, the assessing officer is directed to delete the addition, made by him, estimating letting value of the unsold fifty five shops, under section 23 - Decided in favour of assessee.

Issues Involved:
1. Taxation of deemed rent on unsold shops.
2. Consideration of unsold shops used for business purposes.
3. Applicability of amendment to section 23(5) of the Income Tax Act, 1961, effective from AY 2018-19.

Detailed Analysis:

1. Taxation of Deemed Rent on Unsold Shops:
The primary issue revolves around whether the deemed rental income on unsold shops should be taxed. The Assessing Officer (AO) observed that the assessee society, engaged in the development and maintenance of estates, had unsold shops in its balance sheet but did not declare any rental or business income from these properties. The AO estimated the rental income of ?13,20,000/- for 55 shops at ?24,000/- per annum each, based on the notion that it is impractical for shops in a commercial complex to remain vacant or unused. The AO added this estimated rental income to the total income of the assessee society.

2. Consideration of Unsold Shops Used for Business Purposes:
The assessee contended that the unsold shops were used as warehouses for storing construction materials and were not fit for renting due to lack of utilities like electricity and water. It was also argued that the unsold shops should be treated as stock-in-trade since the main business of the society is development and maintenance of estate projects. The assessee highlighted that this treatment had been consistently accepted in previous assessments. The CIT(A) partially upheld the AO's addition, reducing the deemed rental income to ?11,12,720/- after accounting for already declared rental income of ?2,07,280/-.

3. Applicability of Amendment to Section 23(5) Effective from AY 2018-19:
The assessee argued that the amendment to section 23(5) of the Income Tax Act, effective from AY 2018-19, which provides that the annual value of property held as stock-in-trade shall be taken as nil for up to two years from the end of the financial year in which the completion certificate is obtained, should apply. However, the Tribunal noted that this amendment does not apply to the assessment year 2013-14 under consideration.

Tribunal's Findings:
The Tribunal concluded that the unsold shops should be treated as stock-in-trade, aligning with the assessee's primary business of estate development and maintenance. The Tribunal referenced the Gujarat High Court's decision in Neha Builders (P) Ltd. vs. Commissioner of Income Tax, which held that income derived from stock-in-trade should be treated as business income, not as income from house property. Additionally, the Tribunal cited the ITAT Mumbai's decision in M/s. Runwal Constructions vs. ACIT, which reinforced that unsold properties held as stock-in-trade should not be taxed under the head 'Income from House Property'.

The Tribunal emphasized that the newly inserted sub-section (5) of section 23, effective from 1-4-2018, does not apply to the assessment year 2013-14. Therefore, the AO's addition of deemed rental income was not justified. The Tribunal directed the AO to delete the addition, recognizing the unsold shops as stock-in-trade.

Conclusion:
The appeal filed by the assessee was allowed. The Tribunal ruled that the unsold shops should be treated as stock-in-trade, and any income derived from them should be considered business income. The addition of deemed rental income under section 23 of the Income Tax Act was deleted. The order was pronounced on 13/10/2020.

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