Case Law Details
Chamber Construction Pvt. Ltd Vs DCIT (ITAT Mumbai)
Mumbai, [Current Date]: The Income Tax Appellate Tribunal (ITAT), Mumbai Bench, has delivered a significant ruling favoring real estate developers, holding that the notional annual letting value (ALV) of unsold flats held as stock-in-trade cannot be taxed as “Income from House Property.” This decision, pronounced on November 30, 2018, overturns an order by the Commissioner of Income Tax (Appeals) [CIT(A)] that had upheld the Assessing Officer’s (AO) action of computing deemed income on unsold inventory for Chamber Construction Pvt. Ltd.
Background of the Dispute:
The case pertains to Assessment Year 2012-13. Chamber Construction Pvt. Ltd., a company engaged in the business of builder and property developer, had e-filed its return of income declaring a loss. During scrutiny assessment, the AO observed that the assessee held an inventory of several unsold flats, covering an area of 75,215 sq. ft. in its RNA Mirage project at Worli, Mumbai.
The AO, believing that the deemed ALV of these completed unsold flats was taxable under the head “Income from House Property” as per Section 22 of the Income Tax Act, 1961, sought an explanation from the assessee. The AO proposed to determine the ALV at Rs. 50 per sq. ft. per month, which amounted to Rs. 4,51,29,000/-.
Chamber Construction contended that its sole business was real estate development, and it had no intention of leasing or renting out the flats. Therefore, it argued that the flats did not fall within the ambit of Section 22. The AO, however, rejected this argument, asserting that mere passive possession did not constitute “own occupation” for business purposes to qualify for exemption under Section 22. The AO heavily relied on the Delhi High Court’s judgment in CIT Vs. M/s Ansal Housing Finance and Leasing Co. Ltd. (2013) 354 ITR 180 (Del) to support the taxability of notional ALV on unsold stock-in-trade.
Appellate Proceedings and Conflicting Views:
Aggrieved by the AO’s order, Chamber Construction appealed to the CIT(A). The CIT(A) concurred with the AO, confirming that the deemed income from the unsold flats was rightly assessed under Sections 22 and 23 of the Act. The CIT(A) also noted that the assessee had not objected to the method of ALV computation.
The assessee then escalated the matter to the ITAT Mumbai. Before the Tribunal, the assessee’s Authorized Representative (AR) argued that the notional lettable value of unsold flats held as stock-in-trade by a developer should not be brought to tax under “Income from House Property.”
A key argument advanced by the assessee revolved around Section 23(5) of the Act. This sub-section, introduced by the Finance Act, 2017, with effect from April 1, 2018 (A.Y. 2018-19 onwards), states that if a property held as stock-in-trade is not let out, its annual value shall be considered nil for a period of up to one year from the end of the financial year in which the completion certificate is obtained. The AR contended that prior to this amendment, no statutory provision existed to deem the notional lettable value of property held as stock-in-trade as “Income from House Property.”
To buttress its contention, the assessee placed strong reliance on the judgment of the Hon’ble Gujarat High Court in CIT Vs. Neha Builders (Pvt. Ltd.) (2008) 296 ITR 661 (Guj). In this case, the Gujarat High Court had observed that if a property is used as “stock-in-trade,” it partakes the character of stock, and any income derived therefrom would be business income, not income from property. The assessee also cited a coordinate bench decision of the ITAT, Mumbai, in ACIT-15(2)(1) Vs. M/s Haware Construction Pvt. Ltd. (ITA 3321 & 3172/Mum/2016; dated August 31, 2018), which had preferred the Neha Builders view over Ansal Housing.
The Departmental Representative (DR), on the other hand, staunchly supported the lower authorities’ orders, primarily relying on the Ansal Housing judgment, which held that unsold flats as stock-in-trade were indeed taxable as “Income from House Property.”
ITAT’s Analysis and Verdict:
The ITAT acknowledged that Section 22 charges the annual value of property owned by an assessee to income tax under the head “Income from House Property,” with Section 23 outlining how this annual value is determined. However, the Tribunal distinguished between a property simpliciter owned by an assessee and a property held as stock-in-trade in a business.
The ITAT explicitly stated its view that “a property which is held by an assessee as stock-in-trade of his business as that of a developer would lose its color and character as that of a property simpliciter owned by him.” This view, the Tribunal noted, was fortified by the Gujarat High Court’s judgment in Neha Builders (P) Ltd. (2008) 296 ITR 661 (Guj). The ITAT quoted the relevant portion of the Neha Builders judgment, which clearly stated that income derived from stock (including immovable stock-in-trade) would be “income from the business” and not “income from property.”
Crucially, the ITAT addressed the conflict between the Neha Builders (Gujarat High Court) and Ansal Housing (Delhi High Court) judgments. It concluded that when there are conflicting views from non-jurisdictional High Courts on a taxing provision, the view that favors the taxpayer must be preferred. This principle was supported by the Hon’ble Supreme Court’s judgment in CIT Vs. Vegetable Products Ltd. (1973) 88 ITR 192 (SC).
The Tribunal further noted that its own coordinate benches had consistently followed the Neha Builders precedent. It specifically referenced:
- ACIT-15(2)(1) Vs. M/s Haware Construction Pvt. Ltd. (supra)
- M/s C.R Development Pvt. Ltd. Vs. JCIT-8(1)(OSD), Mumbai (ITA No. 4277/ Mum/2012; dated May 13, 2015)
- ITO-2(1)(1), Mumbai Vs. M/s Arihant Estates Pvt. Ltd. (ITA No. 6037/Mum/2016; dated June 27, 2018), which relied on M/s Runwal Constructions Vs. ACIT (ITA No. 5408 & 5409/Mum/2016; dated February 22, 2018)
- Progressive Homes, Mumbai Vs. ACIT-Circle 4(4), Mumbai (ITA No. 5082/Mum/2016; dated May 16, 2018)
- Haware Engineers & Builders Pvt. Ltd. Vs. DCIT, Central Circle-4(2), Mumbai (ITA No. 7155/Mum/2016; dated October 10, 2018)
All these ITAT decisions consistently held that the notional lettable value of unsold flats held as stock-in-trade should not be taxed as “Income from House Property.” They emphasized that such flats were neither rented out nor was there an intention to earn rent from them.
In conclusion, the ITAT Mumbai, by respectfully following the Gujarat High Court’s judgment in Neha Builders (P) Ltd. and its own consistent line of decisions, found that the lower authorities erred in determining and taxing the notional lettable value of the unsold flats as “Income from House Property.”
The Tribunal set aside the CIT(A)’s order, thereby allowing the assessee’s appeal. This ruling provides clarity for real estate developers, affirming that unsold inventory should be treated as business stock, and any income (or deemed income) derived from it falls under “Profits and Gains of Business or Profession” rather than “Income from House Property,” especially for assessment years prior to the specific amendment of Section 23(5).
FULL TEXT OF THE ORDER OF ITAT MUMBAI
The present appeal filed by the assessee is directed against the order passed by the CIT(A)-51, Mumbai, dated 20.03.2017, which in turn arises from the order passed by the A.O under Sec.143(3) of the Income Tax Act, 1961 (for short „Act’), dated 31.03.2015. The assessee assailing the order of the CIT(A) has raised before us the following grounds of appeal:
“1. The learned Commissioner of Income Tax (Appeals) erred in confirming the action of the Assessing Officer computing deemed income under the head Income from House Property in respect of unsold flats in the project.
2. The learned Commissioner of Income Tax (Appeals) erred in holding that deemed income from House Property is to be computed u/s 22 even when these are unsold flats lying as stock-in-trade of completed projects.
3. The learned Commissioner of Income Tax (Appeals) erred in confirming the Gross Annual Value of Rs.4,51,29,000/- in respect of unsold flats of total area 75,215 sq. Feet in the project RNA Mirage at Worli, Mumbai at the rate of Rs. 50 per sq. feet per month.
4. The learned Commissioner of Income Tax (Appeals) erred in not allowing deduction u/s 24 of the Income Tax Act, 1961 of 30% of the Gross Annual Value computed.
5. The appellant craves to add to, alter or amend the foregoing grounds, which are without prejudice to one another, at the time of hearing.”
2. Briefly stated, the assessee company which is engaged in the business as that of a builder and property developer had e-filed its „return of income‟ for A.Y. 2012-13 on 29.09.2012, declaring a loss of Rs.6,03,22,822/-. Subsequently, the case of the assessee was selected for scrutiny assessment under Sec. 143(2) of the Act.
3. In the course of the assessment proceedings it was observed by the A.O that the assessee which was engaged in real estate business, had an inventory of several unsold flats (area of 75215 sq. ft.) at RNA mirage at Worli, Mumbai. The A.O holding a conviction that the deemed annual lettable value (for short „ALV‟) of the completed unsold flats in possession of the assessee was liable to be brought to tax under the head „Income from house property‟, thus called upon the assessee to put forth an explanation as regards the same. Further, the assessee was also called upon to show cause as to why the „ALV‟ of the said unsold flats may not be determined at a „Fair Market Value‟ (for short „FMV‟) of Rs.50 per Sq. ft. per month. The reply of the assessee that as it was only carrying on the business of real estate development and had never contemplated into leasing or renting of the flats and thus would not fall within the sweep of Sec. 22 of the Act, however did not find favour with the A.O. The A.O was of the view that mere passive occupation of the property did not amount to “own occupation” in the course of business or for the purpose of business, and thus did not qualify for exemption from income tax under Sec. 22 of the Act. Further, in order to fortify his conviction that the ‘ALV’ of the unsold flats held by the assessee as stock-in-trade was liable to be determined under Sec. 22, the A.O placed heavy reliance on the judgment of the Hon’ble High Court of Delhi in the case of CIT Vs. M/s Ansal Housing Finance and Leasing Co. Ltd. Vs. CIT (2013) 354 ITR 180 (Del). In the backdrop of his aforesaid view the A.O computed the deemed ‘ALV’ of the unsold flats held by the assessee as stock-in-trade at an amount of Rs.4,51,29,000/-.
4. Aggrieved, the assessee carried the matter in appeal before the CIT(A). The CIT(A) after deliberating at length on the contentions advanced by the assessee was however not persuaded to subscribe to the same. It was observed by the CIT(A) that the A.O had rightly assessed the deemed income of the unsold flats in possession of the assessee as per the provisions of Sec. 22 and Sec. 23 of the Act. Further, it was observed by the CIT(A) that the assessee had also not objected to the working of the ‘ALV’ and computation of its income from house property by the A.O. In the backdrop of his aforesaid observations the CIT(A) dismissed the appeal.
5. The assessee being aggrieved with the order of the CIT(A) has carried the matter in appeal before us. The ld. Authorized Representative (for short ‘A.R’) for the assessee at the very outset of the hearing of the appeal submitted that the lower authorities had erred in determining the notional lettable value of the unsold flats held by the assessee developer as stock-in-trade and had wrongly brought the same to tax under the head „Income from house property‟. In support of his aforesaid contention the ld. A.R placed heavy reliance on the judgment of the Hon‟ble High Court of Gujarat in the case of CIT Vs. Neha Builders (Pvt. Ltd.) (2008) 296 ITR 661 (Guj). The ld. A.R taking us through the aforementioned judgment submitted, that the Hon‟ble High Court had observed that though the income derived from a property would always be termed as income from the property, but if the property is used as „stock in trade‟, then the same would partake the character of stock and any income derived therefrom would be income from business and not the income from property in the hands of the assessee. The ld. A.R taking support from the aforesaid judgment submitted that as in the case of present assessee the property viz. unsold flats at RNA mirage, Worli, Mumbai, were admittedly held by the assessee as stock-in-trade, therefore, there was no occasion for deeming the annual value of the same as per the provisions of Sec. 23(1) of the Act. In order to buttress his aforesaid contention, it was submitted by the ld. A.R that sub-section (5) to Sec. 23 which facilitated determination of „ALV‟ of a property held as stock-in-trade by an assessee after a period of one year from the end of the financial year in which the certificate of completion of construction of the property was obtained from the competent authority, was made available on the statute by the Finance Act, 2017, w.e.f 01.04.2018. It was submitted by the ld. A.R that as per Sec. 23(5) if the assessee is holding any property as stock-in-trade which is not let during the whole or any part of the previous year, then the annual value of such property or part of the property for a period of up to one year from the end of the financial year in which the certificate of completion of the property is obtained from the competent authority shall be taken to be nil. It was averred by the ld. A.R that prior to the aforesaid amendment there was nothing available on the statute, as per which the notional lettable value of a property held by the assessee as stock-in-trade could be deemed as its „Income from house property‟ under Sec. 22 of the Act. The ld. A.R in support of his aforesaid contention relied on the order of a coordinate bench of the Tribunal i.e. ITAT, Mumbai Bench “C”, Mumbai in ACIT-15(2)(1) Vs. M/s Haware Construction Pvt. Ltd. [ITA 3321 & 3172/Mum/2016; dated 31.08.2018]. Insofar the reliance placed by the lower authorities on the judgment of the Hon‟ble High Court of Delhi in CIT Vs. Ansal Housing Finance & Leasing Company Ltd. (2013) 354 ITR 180 (Delhi) wherein it was observed by the High Court that the unsold flats held as stock-in-trade by the assessee were liable to be taxed as its income from house property, it was submitted by the ld. A.R that the aforesaid judgment of the Hon‟ble High Court of Delhi was deliberated upon by the ITAT in the case of M/s Haware Construction Pvt. Ltd. (supra). It was submitted by the ld. A.R that the Tribunal in the aforesaid case by taking support of the judgment of the Hon‟ble Supreme Court in the case of CIT Vs. Vegetable Products Ltd. (1973) 88 ITR 192 (S.C) had concluded that as the judgment of the Hon‟ble High Court of Gujarat in the case of Neha Builders Pvt. Ltd. (supra) was in favour of the assessee, therefore, the same was to be preferred as against that of the Hon‟ble High Court of Delhi in the case of Ansal Housing Finance & Leasing Company Ltd.(supra). The ld. A.R further relied on a host of certain other orders of the coordinate benches of the Tribunal.
6. Per contra, the ld. Departmental Representative (for short „D.R‟) relied on the orders of the lower authorities. The ld. D.R relying on the judgment of the Hon‟ble High Court of Delhi in CIT Vs. Ansal Housing Finance & Leasing Company Ltd. (2013) 354 ITR 180 (Delhi), submitted that the „ALV‟ of the unsold flats held by the assessee as stock-in-trade was rightly brought to tax by the lower authorities under the head „Income from house property‟.
7. We have heard the authorized representatives of both the parties, perused the orders of the lower authorities and the material available on record. We find that our indulgence has been sought by the assessee by preferring the present appeal, for adjudicating as to whether the CIT(A) is right in law and facts of the case in concluding that the deemed notional lettable value of the completed unsold flats held by the assessee company as stock-in-trade was liable to be determined and brought to tax under the head „Income from house property‟. We find from a perusal of Sec. 22 of the Act that the „annual value‟ of any property consisting of any building or land appurtenant thereto of which the assessee is the owner, other than such portions of such property as he may occupy for the purposes of any business or profession carried on by him the profits of which are chargeable to income tax, shall be chargeable to income tax under the head „Income from house property‟. Further, the determination of the „annual value‟ of the property is envisaged in Sec. 23 of the Act. Sec. 23(1)(a) contemplates that the sum for which the property might reasonably be expected to let from year to year is to be deemed as the „annual value‟ of the property which though might not have been let out by the assessee.
8. We have deliberated at length on the issue under consideration in the backdrop of the aforesaid statutory provisions, and are of the considered view that though the „annual value‟ of a property simpliciter owned by an assessee would be liable to be assessed under the head „Income from house property‟, however a similar treatment cannot be accorded to a property which is held by the assessee as stock-in-trade of his business. In our considered view a property which is held by an assessee as stock-in-trade of his business as that of a developer would loose its color and character as that of a property simpliciter owned by him. Our aforesaid view is fortified by the judgment of the Hon’ble High Court of Gujarat in the case of CIT Vs. Neha Builders (P) Ltd. (2008) 296 ITR 661 (Guj). The Hon’ble High Court while disposing off the appeal filed by the revenue in the case of an assessee company which was engaged in the business of construction of property, had observed that where a property is held as stock-in-trade, then the same would become or partake the character of the stock, and any income derived therefrom would be income from business and cannot be held as income from property. The Hon’ble High Court while concluding as hereinabove had observed as under:
“7. From the order passed by the learned CIT(A), it would clearly appear that the case of the assessee was that the company was incorporated with the main object of purchase, take on lease, or acquire by sale, or let out the buildings constructed by the assessee. Development of land or property would also be one of the businesses for which the company was incorporated.
8. True it is, that income derived from the property would always be termed as „income‟ from the property, but if the property is used as „stock-in-trade‟, then the said property would become or partake the character of the stock, and any income derived from the stock, would be „income‟ from the business, and not income from the property. If the business of the assessee is to construct the property and sell it or to construct and let out the same, then that would be the „business‟ and the business stocks, which may include movable and immovable, would be taken to be „stock-in-trade‟, and any income derived from such stocks cannot be termed as „income from property‟. Even otherwise, it is to be seen that there was distinction between the „income from business‟ and „income from property‟ on one side, and ‘any income from other sources’. The Tribunal, in our considered opinion, was absolutely unjustified in comparing the rental income with the dividend income on the shares or interest income on the deposits. Even otherwise, this question was not raised before the subordinate Tribunals and, all of sudden, the Tribunal started applying the analogy.”
9. Admittedly, the lower authorities had relied on the judgement of the Hon’ble High Court of Delhi in the case of CIT Vs. Ansal Housing Finance & Leasing Company Ltd. (2013) 354 ITR 180 (Delhi) and had therein concluded that the notional lettable value of the unsold flats held by the assessee was liable to be determined and brought to tax under the head „Income from house property‟. We find that the issue under consideration before us i.e whether the notional lettable value of the property held by an assessee as stock-in-trade in its business as that of a developer is liable to be assessed under the head „income from house property‟, has been differently answered by the Hon‟ble High Court of Gujarat in CIT Vs. Neha Builders Pvt. Ltd. (2008) 296 ITR 661 (Guj) and the Hon‟ble High Court of Delhi in CIT Vs. Ansal Housing Finance and Leasing Ltd. (2013) 354 ITR 186 (Del). We are of the considered view that in the backdrop of the aforesaid conflicting views of the aforesaid non-jurisdictional High Courts, the view in favour of the assessee as had been arrived at by the Hon‟ble High Court of Gujarat is to be preferred. Our aforesaid view is fortified by the judgment of the Hon‟ble Supreme Court in the case of CIT Vs. Vegetable Products (1973) 88 ITR 192 (SC), wherein the Hon‟ble Apex Court had observed that if two reasonable constructions of a taxing provision is possible, then that construction which favours the tax payer must be adopted. Further, we find that ITAT, Mumbai in the case of ACIT-15(2)(1) Vs. M/s Haware Construction Pvt. Ltd. [ITA no. 3321 & 3172/Mum/2016; dated 31.08.2018] had after deliberating on the aforesaid judgments of the Hon‟ble High Court of Gujarat in Neha Builders (P) Ltd.(supra) and that of the Hon‟ble High Court of Delhi in Ansal Housing Finance & Leasing Company Ltd.(supra), had by taking support of the judgment of the Hon‟ble Supreme Court in the case of CIT Vs. Vegetable Products Ltd. (1973) 88 ITR 192 (SC), had followed the decision of the Hon‟ble High Court of Gujarat in Neha Builders (P) Ltd. (supra), and had concluded that the notional lettable value of the unsold flats held by the assessee cannot be determined and brought to tax under the head „Income from house property‟. Still further, a similar view had also been taken by the Tribunal in the case of M/s C.R Development Pvt. Ltd. Vs. JCIT-8(1)(OSD), Mumbai [ITA No. 4277/ Mum/2012; dated 13.05.2015]. It was observed by the Tribunal that estimating of the rental income of the flats held by the assesses as stock-in-trade was not justified, as the said flats were neither given on rent nor the assessee had any intention to earn rent by letting out the same. We further find that another coordinate bench of the Tribunal i.e. ITAT, Mumbai Bench “G”, Mumbai in ITO-2(1)(1), Mumbai Vs. M/s Arihant Estates Pvt. Ltd. [ITA No. 6037/Mum/2016; dated 27.06.2018] had relied on an earlier view taken by the Tribunal in the case of M/s Runwal Constructions Vs. ACIT in [ITA No. 5408 & 5409/Mum/2016; dated 22.02.2018], and after deliberating on the judgment of the Hon’ble High Court of Gujarat in CIT Vs. Neha Builders Pvt. Ltd. (2008) 296 ITR 661 (Guj) and that of the Hon’ble High Court of Delhi in Ansal Housing Finance & Leasing Company Ltd. (2013) 354 ITR 186 (Del), has held that the assessing officer was not correct in bringing to tax the notional annual lettable value of the unsold flats which were held by the assessee as stock-in-trade. On a similar footing a similar view had also been taken by the ITAT, Mumbai Bench “G”, Mumbai in the case of Progressive Homes, Mumbai Vs. ACIT-Circle 4(4), Mumbai [ITA No. 5082/Mum/2016; dated 16.05.2018) and ITAT “H” Bench, Mumbai in Haware Engineers & Builders Pvt. Ltd. Vs. DCIT, Central Circle-4(2), Mumbai [ITA No. 7155/Mum/2016; dated 10.10.2018].
10. In the backdrop of our aforesaid observations, respectfully following the judgment of the Hon’ble High Court of Gujarat in the case of CIT Vs. Neha Builders (P) Ltd. (2008) 296 ITR 661 (Guj) and the aforesaid orders of the coordinate benches of the Tribunal, we are of the considered view that the lower authorities had erred in determining the notional lettable value of the unsold flats held by the assessee company as stock-in-trade of its business of builders and property developers, and bringing the same to tax in the hands of the assessee under the head „Income from house property‟. We thus in terms of our aforesaid observations set aside the order of the CIT(A).
11. The appeal of the assessee is allowed.
Order pronounced in the open court on 30.11.2018
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