2022 (7) TMI 251 - AT - Income Tax

Correct head of income - income from house property or Addition as 'Business income being, notional rent on unsold flats held as stock-in-trade - whether the annual value of such units can be assessed in the hands of assessee? - Scope of amendment - HELD THAT - A close scrutiny of the provision introduced by the Finance Act, 2017, transpires that where a property is held as stock-in-trade which is not let out during the year, its annual value for a period of one year, which was later enhanced by the Finance Act, 2019 to two years, from the end of the financial year in which the completion certificate is received, shall be taken as Nil. Obviously, it is a prospective amendment. The effect of this amendment is that stock-in-trade of buildings etc. shall be considered for computation of annual value under the head 'Income from house property' after one/two years from the end of the financial year in which the certificate of completion of construction of the property is obtained on and from the A.Y. 2018-19. Instantly, with the assessment year 2013-14. As such, the amendment cannot apply to the year under consideration. In the absence of the applicability of such an amendment, no rental income can be said to have accrued to the assessee from unsold flats available as stock-in-trade under the head Income from House property . In that view of the matter, the view point of the AO on this score is vacated. Taxing the amount as Business income - In the hue of the fact that the Finance Act, 2017 has covered this aspect of the matter u/s 23(5) of the Act, obviously, it becomes manifest that the intention of the Legislature has been to treat such income as falling under the head Income from house property and not as the Business income . Be that as it may, arguendo, we go with the standpoint of CIT(A) that income in question is chargeable to tax as business income , there is no provision under the Chapter IV-D of the Act which can envelope the above amount within its fold. Admittedly, the assessee did not earn any actual rental income from the letting out of the 11 units. Ex conseqeunti, taxing hypothetical income of rent, which is otherwise not covered under any provision of Chapter IV-D of the Act, cannot be allowed. The ld. DR also failed to point out any specific provision under Chapter IV-D of the Act for taxing such hypothetical income. In view of the foregoing discussion, it is held that the ld. CIT(A) was not justified in taxing as Business income . The impugned order is set aside and the addition is directed to be deleted. Appeal of assessee allowed.

Summary

Issues:
1. Addition of Rs.14,52,000 as 'Business income' for notional rent on unsold flats held as 'stock-in-trade' for assessment year 2013-14.

Analysis:
The appeal before the Appellate Tribunal ITAT Pune was against the order passed by the CIT(A)-8, Pune regarding the addition of Rs.14,52,000 as 'Business income' for notional rent on unsold flats held as 'stock-in-trade' for the assessment year 2013-14. The Assessing Officer (AO) calculated the gross annual value of the unsold flats at Rs.14.52 lakhs based on fair market rent of Rs.11,000 per month per flat, and after deductions, made an addition of Rs.10,16,400. The CIT(A) upheld the addition but classified it as 'Business income'. The main question was whether the annual value of unsold units could be assessed in the hands of the assessee under 'Income from house property' or 'Business income'.

The Finance Act, 2017 introduced a provision stating that if a property held as stock-in-trade is not let out during the year, the annual value for up to one year (later amended to two years) from the end of the financial year in which the construction completion certificate is obtained shall be considered nil. However, this amendment was prospective from 01.04.2018 and applicable from assessment year 2018-19 onwards. Since the assessment year in question was 2013-14, this amendment did not apply. Consequently, no rental income could be said to have accrued to the assessee from unsold flats under 'Income from house property', vacating the AO's viewpoint.

Regarding the classification of income as 'Business income', the Tribunal noted that the Finance Act, 2017 intended such income to fall under 'Income from house property' rather than 'Business income'. Additionally, there was no provision under Chapter IV-D of the Income-tax Act, 1961 to tax hypothetical rental income not covered by any specific provision. As the assessee did not earn actual rental income from the unsold units, taxing hypothetical income was deemed unjustified. Therefore, the Tribunal set aside the CIT(A)'s decision to tax Rs.14.52 lakhs as 'Business income' and directed the deletion of the addition.

In conclusion, the Tribunal allowed the appeal, emphasizing that the addition of Rs.14,52,000 as 'Business income' for notional rent on unsold flats held as 'stock-in-trade' for the assessment year 2013-14 was not justified and should be deleted.