2024 (9) TMI 867 - AT - Income Tax

Addition under the head Income from house property on unsold stock of flats held as stock in trade as per the provisions of section 22 r.w.s. 23(4) - AO calculated deemed rental income on the vacant flats held as stock in trade u/s 22 r.w.s. 23(4) - HELD THAT - From perusal of both the above sections it is apparent that from assessment year 2018-19 the Legislature showed its intention to tax the deemed rental income from the property held as stock in trade and prior to that no such wording was used in section 23 of the IT Act which clearly shows that it was never the intention of the Legislature to tax the deemed rental income from property held as stock in trade. It is only from assessment year 2018-19 that a new section 23(5) was inserted which permits the AO to calculate the deemed rental income of the property held as stock in trade even if such property is not let during the whole or any part of the previous year. Therefore we are of the considered opinion that for assessment year 2016-17 there was no such provision which empowers the AO to calculate the deemed rental income/annual value of the property which was held as stock in trade by the builder. In the light of section 22 it is clear that if the property was held as stock in trade i.e. for the purposes of business of the assessee the annual value of such property shall not be chargeable to income tax under the head Income from house property . Therefore no annual value or deemed rental income can be determined of such property for the purposes of income tax prior to assessment year 2018-19. The intentions of the Legislature are very much clear because they introduced section 23(5) w.e.f. assessment year 2018-19 only and nowhere it was mentioned that it has been retrospectively made applicable. When the operation of this section was not made retrospective it is very much clear that the annual value/deemed rental income of property held as stock in trade can be calculated and shall be chargeable to income tax only w.e.f. assessment year 2018-19 and not prior to that. The decision of Dimple Enterprises 2023 (9) TMI 426 - ITAT MUMBAI relied on by ld. DR does not support the case of the Revenue. Therefore respectfully following the above decision of Pride Purple Properties 2023 (4) TMI 1353 - ITAT PUNE we hold that the annual value/deemed rental income cannot be calculated for property held as stock in trade by the assessee for assessment year 2016-17 hence we direct the AO to delete the addition made on account of deemed rental income u/s 22 r.w.s. 23(4) in respect of unsold units/flats held as stock in trade. Therefore the grounds of appeal filed by the assessee are allowed.

Summary

Issues Involved:
1. Addition of Rs. 7,98,000/- on account of deemed rent in respect of unsold units u/s 22 r.w.s. 23(4).
2. Whether unsold units held as stock in trade should be taxed as income from house property.
3. Applicability of section 23(1)(c) regarding vacancy allowance.
4. Determination of net annual retable value on an adhoc basis vs. municipal retable value.

Detailed Analysis:

1. Addition of Rs. 7,98,000/- on Account of Deemed Rent in Respect of Unsold Units u/s 22 r.w.s. 23(4):
The Assessing Officer (AO) added Rs. 7,98,000/- as deemed rental income for unsold flats held as stock in trade, based on provisions of section 22 r.w.s. 23(4) of the IT Act. The AO determined this amount by comparing it to the rent shown for another flat in the same project, after allowing deductions u/s 24(a).

2. Whether Unsold Units Held as Stock in Trade Should be Taxed as Income from House Property:
The CIT(A)/NFAC upheld the AO's decision, stating that the unsold units were not occupied by the assessee for business purposes and hence the annual value was chargeable to tax as "Income from house property" under section 22. The Tribunal, however, found that the flats were held for business purposes, and under section 22, property occupied for business is not chargeable to tax under "Income from house property." The Tribunal noted that section 23(5), which allows for taxing deemed rental income on stock in trade, was only introduced from assessment year 2018-19 and is not applicable retrospectively.

3. Applicability of Section 23(1)(c) Regarding Vacancy Allowance:
The assessee argued that even if the income from unsold units was taxable as Income from House Property, the units were vacant for the entire year, and thus the income should be considered nil under section 23(1)(c). The Tribunal did not need to address this argument in detail as it concluded that the deemed rental income provisions did not apply for the assessment year 2016-17.

4. Determination of Net Annual Retable Value on an Adhoc Basis vs. Municipal Retable Value:
The assessee contended that the net annual retable value adopted by the AO was on an adhoc basis and should be substituted by the municipal retable value. The Tribunal did not explicitly address this point, as the primary issue of whether deemed rental income could be taxed was resolved in favor of the assessee.

Conclusion:
The Tribunal concluded that for the assessment year 2016-17, there was no provision empowering the AO to calculate deemed rental income for property held as stock in trade. The Tribunal directed the AO to delete the addition of Rs. 7,98,000/-, thereby allowing the appeal filed by the assessee. The decision was based on the understanding that section 23(5) was applicable only from assessment year 2018-19 and not retrospectively. The appeal was allowed, and the addition made by the AO was deleted.