Income from unsold flats shall be treated as business income

Unique Estates Development Co. Ltd Vs. DCIT
(Income Tax Appellate Tribunal, Mumbai)
ITA No. 4598/Mum/2019 | 22-03-2021

SUB: INCOME FROM UNSOLD FLATS SHALL BE TREATED AS BUSINESS INCOME OF THE DEVELOPER AND NO INCOME FROM HOUSE PROPERTY ON THE BASIS OF ANNUAL LETTING VALUE OR NOTIONAL VALUE OF RENT.

FACT OF THE CASE

1. The assessee company is engaged in the business of development of real estate, development of residential complex and malls.
2. The assessee has filed the return of income for Assessment Year 2016-17 on 17.10.2016 with total income of Rs. 215,99,70,220/- and the assessee company also filed the revised return of income on 01.12.2017 and 11.12.2017 with the total income of Rs. 214,75,70,217/-.
3. The return of income was processed u/s. 143(1) of the Act.
4. Subsequently, the case was selected for scrutiny and notice u/s. 143(2) & 142(1) of the Act were issued.
5. In compliance, the assessee-company complied with the notice and submitted the details.
6. On perusal of financial statements, the Assessing Officer (AO) found that the assessee has received dividend income and share of profit from partnership firm aggregating to Rs. 71,60,368/-and was claimed exempt u/s. 10 of the Act.
7. The A.O. is of the opinion that the assessee has not made disallowance u/s 14A r.w. rule 8D.
8. Hence the AO has calculated the disallowance under Rule 8D(2)(iii) of. Rs. 3,02,234/.
9. Further, the A.O. found that the assessee is a builder and developer of projects, but on perusal of the balance-sheet, the assessee has inventories of Rs. 33,36,51,425/- which includes finished goods of Rs.32,44,35,530/-.The AO has called for the submissions to furnish the breakup of inventory of finished goods.
10. The AO find that the stock of finished goods consists of flats of value of Rs. 32,44,35,530/- and required the assessee to explain why Annual Letting Value (ALV) of the unsold properties should not be computed. In response to the same, the assessee has filed the details referred at para-5.2 of the assessment order. The A.O. considered the submissions and proviso to section 23 of the Act and the judicial decisions and finally observed that the Annual Letting value (ALV) of the finished flats held by the assessee as closing stock has to be treated as Income from House Property after allowing the deductions.
11. The A.O. worked out ALV @ 7% on the investments of flats being Rs. 1,71,71,201/- and allowed deduction @30% of the ALV and made addition of ALV of unoccupied properties in three projects to the extent of Rs. 1,20,19,841/-. Similarly, the AO made a disallowance of Rs. 2,49,386/- by adopting rate@12% on interest free funds and assessed the total income of Rs. 2,16,01,41,680/- and passed the order u/s 143(3) of the Act dated 18.12.2018.

APPEAL BEFORE CIT(APPEAL)

12. Aggrieved by the order of AO, the assessee has filed the appeal before the CIT(A). The CIT(A) dealt on the disputed issue of addition of ALV of unsold flats, the submissions of the assessee and judicial decisions and observed at page 10 para-.5.9 of the order as under:

"5.9. In view of the discussion in the foregoing paragraphs, I hold that the AO has rightly assessed deemed income from the unsold units in the hands of the appellant as per the provisions of Sec.22 and 23 of the Act by adopting a rate of 7% of the investments made, 'in accordance with the decision of Radha Devi Dalmia (4 Taxman 183)(ALL HC). Accordingly, the addition of Rs. 1,20,19,841/- made by the AO after adopting the deemed rental income to be of Rs. 1,71,71,201/- is upheld and the ground of appeal taken by the appellant is rejected. Accordingly, this ground of appeal of the assessee is dismissed."

APPEAL BEFORE HON'BLE TRIBUNAL

13. The assessee has filed the appeal against the order of the Ld. Commissioner of Income Tax (Appeals)-52 , Mumbai passed u/sec.143(3) and 250 of the Income Tax Act,1961. The assessee has raised the following grounds of appeal:

• On the facts and in the circumstances of the case as well as in law, learned CIT(A) erred in confirming the disallowance amounting to Rs.1,20,19,841/- considering the Annual Letting Value of unsold flats which is closing stock of the appellant, treated as "Income from House Property".
• On the facts and in the circumstances of the case as well as in law, learned CIT(A) erred in not following jurisdictional ITAT decisions which squarely apply to the facts of the appellant's case. The ITAT has decided same subject matter in its earlier decisions in the same assessee case.

ITAT DECISION

1. In the case of titled as M/s. C.R. Developments P. Ltd. Vs. JCIT. The relevant para in 5 is hereby reproduced as under.: -

"5. We have considered rival contentions and perused the record. The issue under consideration has been restored by the CIT(A) to the file of AO to compute the annual value. Recently the Hon'ble Supreme Court in the case of M/s Chennai Properties & Investments Ltd. Vs. CIT, reported in (2015) 42 SCD 651, vide judgment dated 9-4-2015 has held that where assessee company engaged in the activity of letting out properties and the rental income received was shown as business income, the action of AO treating the rental income as income from house property in place of income from business shown by the assessee was held to be not justified.

The Hon'ble Supreme Court held that since the assessee company's main object, is to acquire and held properties and to let out these properties, the income earned by letting out these properties is main objective of the company, therefore, rent received from the letting out of the properties is assessable as income from business.

On the very same analogy in the instant case, assessee is engaged in business of construction and development, which is main object of the assessee company. The three flats which could not be sold at the end of the year was shown as stock-intrade. Estimating rental income by the AO for these three flats as income from house property was not justified insofar as these flats were neither given on rent nor the assessee has intention to earn rent by letting out the flats. The flats not sold was its stock in trade and income arising on its sale is liable to be taxed as business income. Accordingly, we do not find any justification in the order of AO for estimating rental income from these vacant flats u/s.23 which is assessee's stock in trade as at the end of the year. Accordingly, the AO is directed to delete the addition made by estimating letting value of the flats u/s.23 of the I.T. Act."

2. In the factual position of the present case is quite similar to the facts of the case mentioned above. In view of the law relied upon the law representative of the assessee i.e. M/s. Runwal Constructions Vs. ACIT and M/s. C.R. Developments P. Ltd. Vs. JCIT (supra), we are of the view that the finding of the CIT(A) on this issue is wrong against law and facts whereas the case of the assessee has duly been covered by the law mentioned above, therefore, by honoring the orders mentioned above. We deleted the addition raised by assessee on account of notional income of vacant flats. Accordingly, this issue is decided in favour of the assessee against the revenue."
3. The facts and the issue involved in the present case are similar to the facts of the case and the issue involved in the case of Ferani Hotels Pvt. Ltd. (supra). In the said case, the coordinate Bench has deleted the addition confirmed by the CIT (A) on account of notional rent determined by the AO by holding that the ALV of the unsold unit of assessee project is assessable under the head 'income from house property'. Since, the findings of the Ld.CIT (A) is not in accordance with the decision of the coordinate Bench rendered in the case of Ferani Hotels Pvt. Ltd. (supra), we respectfully following the decision of the coordinate Bench set aside the order of the Ld. CIT (A) and allow the appeal of the assessee and direct the AO to delete the addition made under the head 'income from house property'.
4. On perusal of the said order, we find that the issue is squarely covered in favour of the assessee and, hence, the order of the CIT(A) upholding the addition made by AO estimating the ALV in respect of unsold flats cannot be sustained. The decision relied upon by the learned DR in the case of CIT vs. Gundecha Builders (supra), is distinguishable on facts as in that case the unsold portion of the property constructed by the builder was given on rent and rental income was treated as business income. Whereas, in the present case, the assessee has not let out any flats and all were lying unsold as stock in trade. Accordingly, we are inclined to set aside the order of the CIT(A) and direct the AO to delete the addition on account of estimation of ALV in respect of unsold flats for A.Y. 2013-14.

We follow the judicial precedence and apply the ratio of the decision to the facts of the present case. Accordingly We set aside the order of CIT(A) and direct the AO to delete the addition and allow the grounds of appeal of the assessee.

CONCLUSION

From the above decisions, it is clear that income from unsold flats/shops/units of a developer or builder, shown as stock-in trade in books of account of the builder/developer should be assessed as income from Business and Professional and should not be considered as income from house property. In case of vacant flats/ shops /units , AO could not assess the same on the basis of their Annual Letting Value as income from house property.

DISCLAIMER: The above case law is for information and knowledge of readers. The views expressed are the personal views of the author and same should not be taken a professional advice. In case of necessity do consult with tax professionals.