2018 (7) TMI 1169 - AT - Income Tax

Rent received - treated as income from house property and the assessee s treatment of crediting the same towards work-in-progress is justified - Held that - We note that the assessee s business is development of property. For the same property, for getting vacation, the sums paid are being debited to the work-in-progress which is being accepted by the Assessing Officer. However, pending vacation, the rent receipt from the tenants of the said property is not being given the same treatment by the Assessing Officer. He is treating the same as income from house property. In our considered opinion, the rent received is inextricably linked with the business of the assessee, i.e., development of the property. Hence, in our considered opinion, the rent received cannot be treated as income from house property and the assessee s treatment of crediting the same towards work-in-progress is justified. For this proposition, the case laws relied upon by the ld. Counsel of the assessee referred in the submissions hereinabove are germane and support the case of the assessee, particular the case law from the Hon ble Bombay High Court in the case of Lokholdings (2008 (1) TMI 365 - BOMBAY HIGH COURT) is of particular emphasis. - Decided in favour of assessee Income from assignment of Development Rights of Chaudhary Plot at Thane - Value of constructed area to be acquired pursuant to the development agreement - Held that - The assessee entered into an agreement for the receipt of ₹ 300 lacs on 28.11.2011 in lieu of the carpet area it was entitled as per the agreement for sale. The assessee offered the same for taxation in assessment year 2012-13. The above was not accepted by the authorities below. The Revenue is of the view that the assessee should have accounted for the value of constructed area to be acquired pursuant to the development agreement. However, the assessee s plea is that no construction work had commenced and even the plan of the project was not approved. Hence, it has been claimed that there is no question of accrual of income during the year. For this proposition, reliance has been placed by the tribunal decisions. Further, the claim of the assessee is that the agreement to sale the development right in the said property is related to assessee s stock-in-trade and, hence, since the stock-in-trade is to be valued at cost or net realizable value, no profit can be attributed by the assessee in this regard. Assessing Officer shall examine as to whether the assessee s claim that during the year neither the plan of the project was approved nor any construction was started. If the said claim is true, the ratio from the tribunal s decisions referred by the assessee in the submissions hereinabove will follow. The assessee cannot be fastened with liability for taxation on hypothetical income. Accordingly, we remit the issue to the file of the Assessing Officer with the above directions.

Summary

Issues Involved:
1. Taxation of rental income from Datar Block property.
2. Taxation of income from the assignment of Development Rights of Chaudhary Plot at Thane.

Issue-wise Detailed Analysis:

1. Taxation of Rental Income from Datar Block Property:

The primary contention revolves around whether the rental income received from tenants in Datar Block should be taxed under "Income from House Property" or as "Business Income." The Assessing Officer (AO) treated the rental income as "Income from House Property," citing that no construction or development activities were shown, and computed the income accordingly after allowing a deduction under Section 24(a).

The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, emphasizing that the property was not used for business purposes but was rented out. The CIT(A) referenced Section 22 of the Income Tax Act, which charges the annual value of property to tax under "Income from House Property" unless occupied for business purposes. The CIT(A) also dismissed the appellant's claim for interest expenditure under Section 24(b) since the interest was charged to work-in-progress as business expenditure.

Upon appeal, the Tribunal noted that the assessee is a builder and developer, and the rental income was received from tenants in a property intended for development. The Tribunal found that the rent received is inextricably linked with the business of property development. It concluded that the rental income should not be treated as "Income from House Property" but credited towards work-in-progress, supporting the assessee's treatment. The Tribunal referenced case laws, including the Hon'ble Bombay High Court's decision in Lokholdings, which supported the assessee's stance. Consequently, the Tribunal set aside the orders of the authorities below and decided in favor of the assessee.

2. Taxation of Income from Assignment of Development Rights of Chaudhary Plot at Thane:

The issue concerns whether the income from the assignment of development rights should be taxed in the year of the agreement or when the actual constructed area is received. The AO observed that the assessee entered into an agreement with M/s Shree Sachidanand Developers for developing the Chaudhary Plot, receiving a monetary consideration of ?25 lakhs and a constructed area equivalent to 10,500 sq.ft. The AO taxed the monetary consideration and the estimated value of the constructed area in the year of the agreement, calculating the income from the plot accordingly.

The CIT(A) confirmed the AO's decision, stating that the agreement involved transferring all rights in the property for ?25 lakhs and 10,500 sq.ft. of constructed area. The CIT(A) noted that the possession of the property was given to the developer, and an irrevocable power of attorney was executed. The CIT(A) applied Section 2(47)(v) of the Income Tax Act, which considers such transactions as "Transfer," and held that the income should be taxed in the year of the agreement. The CIT(A) also justified the AO's estimation of the sale consideration at ?2,500 per sq.ft., noting that the assessee later agreed to receive ?300 lakhs in lieu of the constructed area.

Upon appeal, the Tribunal considered the assessee's arguments that the project plan was not approved, and no construction had started during the year, implying no income accrual. The Tribunal noted that the agreement related to the assessee's stock-in-trade, and as per accounting standards, stock-in-trade should be valued at cost or net realizable value. The Tribunal found merit in the assessee's claim that no profit could be taxed in the year under consideration if no construction activity had commenced. The Tribunal remitted the issue to the AO to verify if the project plan was not approved and no construction had started, directing that if the claim is true, no income should be taxed for that year.

Conclusion:

The Tribunal allowed the appeal partly, deciding in favor of the assessee on the rental income issue and remitting the development rights issue to the AO for verification. The order was pronounced on 16/07/2018.