2019 (2) TMI 1587 - AT - Income Tax

Income from house property - annual letting value (ALV) of the unsold units of properties lying as stock in trade - taxing hypothetical income - source of income - deemed income - AO computed deemed rental income u/s.23 and added it to the assessee s total income - levy of income tax in respect of properties held by the assessee as an owner even if the same have been held as stock in trade - HELD THAT - It is no doubt true that section 23 deems the determination of income from house property, which is not let out, but it is equally trite that a deeming provision cannot be extended beyond its ambit, so as to cover the heads of income or the sections, to which it does not operate. No attention has not been drawn by the DR towards any specific provision under Chapter IV-D of the Act which deems rental income on the properties held as stock in trade, waiting for sale and not actually let out, as chargeable to tax under the head Profit and gains of business or profession . As the assessee admittedly did not earn any rental income from letting out of these two units, which position has also not been disputed by the AO, taxing any hypothetical income, which is otherwise not sanctioned by any provision under Chapter IV-D, cannot be permitted. Even otherwise, section 5 of the Act clearly stipulates that a person who is a resident can be subjected to tax in respect of income from whatever source which is received or is deemed to be received in India or accrues or arises or deemed to accrue or arise to him in or outside India during such year. As the instant imaginary income charged to tax by the AO is neither a deemed income under the head Business income nor is received or deemed to be received or accruing or arising or deemed to accrue or arise, not falling in any of the categories given in clauses (a) to (c) of section 5(1) - there is no rationale in charging it to tax. - additions to be deleted - decided in favour of assessee.

Summary

Issues:
Addition of income under the head "Income from house property" for unsold units held as stock in trade.

Analysis:
The appeal pertains to the addition of income under the head "Income from house property" for unsold units held as stock in trade. The Assessing Officer (AO) determined the Annual Letting Value of the properties and added it to the assessee's total income. The assessee contended that no income could be determined on these units under this head as they were stock in trade. The CIT(A) upheld the AO's decision, leading to the appeal before the Tribunal.

The AO relied on judgments stating that income from properties held as stock in trade and let out should be taxed under "Income from house property" and not as "Business income." However, subsequent decisions have clarified that the nature of operations, not ownership, determines the tax treatment. The Supreme Court held that rental income from properties held as stock in trade can be chargeable under "Profits and gains of business or profession" based on the company's objectives. The Tribunal noted that the legal position evolved, emphasizing the need to consider the nature of operations for tax classification.

The Tribunal found that the AO's application of section 23 of the Act to determine income from unsold properties held as stock in trade was not valid in light of later Supreme Court judgments. The Tribunal highlighted that deeming provisions cannot be extended beyond their scope, and no specific provision under Chapter IV-D deems rental income on unsold properties as chargeable under "Profits and gains of business or profession" if not actually let out. Additionally, the Tribunal invoked section 5 of the Act, emphasizing that the imaginary income charged by the AO did not fall within the categories for taxation, leading to the decision to overturn the addition.

Ultimately, the Tribunal allowed the appeal, directing the deletion of the addition of income under the head "Income from house property" for the unsold units held as stock in trade. The decision was based on the evolving legal interpretations and the lack of statutory provisions supporting the taxation of hypothetical income not falling within the prescribed categories.

In conclusion, the Tribunal's decision provides clarity on the tax treatment of income from properties held as stock in trade, emphasizing the need to consider the nature of operations and statutory provisions for determining the appropriate tax head for such income.