Unsold flats held as stock-in-trade should be treated as business stock and not Income from House Property

Palm Grove Beach Hotels Pvt Ltd Vs DCIT (ITAT Mumbai)

Conclusion: Assessee was in the business of construction and in developing housing complexes i.e to construct the property and sell it therefore, unsold flats held as stock-in-trade should be treated as business stock, not income from house property.

Held: Assessee was engaged in developing housing complexes, and industrial parks, and operating five-star hotels. It e-filed its income tax return declaring a total income at a loss of Rs. 1,22,20,66,420. AO made a disallowance of Rs. 22,59,926 under section 14A, determining a deemed annual letting value of unsold flats held in stock as “income from house property.” Assessee appealed to the Commissioner of Income Tax (Appeals) [CIT(A)], who reduced the annual letting value to 2.5% from 8.5% but still treated it as “income from house property.” Aggrieved by the CIT(A) order, assessee appealed before the Mumbai Bench, ITAT arguing that the unsold flats were held as stock-in-trade. Thus, it should be treated as business assets and not as “income from house property.” Assessee’s counsel relied on the Bombay High Court’s ruling in Classique Associates Ltd., which held that unsold flats treated as stock-in-trade could not be classified as “income from house property” but as business income. It was held that undisputedly, assessee was a builder & developer and was in the business of construction and in developing housing complexes i.e to construct the property and sell it. During the year under consideration, assessee treated three unsold flats as stock in trade. This would be treated as a business stock. The flats held by the assessee as stock in trade could not therefore be termed as income from house property. The issue was also covered by the aforesaid order of this Tribunal in assessee’s own case.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

1. This appeal has been preferred against the impugned order dated 05.06.2024 passed in Appeal no. CIT (A) 52, Mumbai/10060/2019-20 by the Ld. Commissioner of Income–tax(Appeals)/ National Faceless Appeal Centre (NFAC) [hereinafter referred to as the “CIT(A)”] u/s. 250 of the Income-tax Act, 1961 [hereinafter referred to as “Act”] for the Assessment year [A.Y.] 2017-18, wherein learned CIT(A) has partly allowed assessee’s appeal by reducing the estimated annual letting value to 2.5% as against 8.5% determined vide assessment order dated 19.12.2019 as income from house property.

2. The brief facts related to the case state that the assessee is engaged in the business of development of housing complexes, industrial parks and runs five star hotels at Kodaikanal. Assessee e-filed return of income for A.Y. 2017-18 on 31.10.2017, declaring total income at a loss of Rs. 1,22,20,66,420/-. The case was processed u/s. 143(1) of the Act. Subsequently the case was selected for scrutiny. Statutory notices u/s. 143(2) and 142(1) were issued and served upon the assessee. Assessee uploaded the details through ITBA. After considering the submissions of the assessee, learned assessing officer made disallowance of Rs. 22,59,926/- u/s. 14A of the Act r/w rule 8D of Income Tax Rule 1962, as deemed annual letting value of finished property held in stock. Aggrieved, assessee filed an appeal before learned CIT(A), who partly allowed assessee’s appeal in aforestated terms.

3. Aggrieved by the impugned order, assessee has filed his appeal on the ground that learned CIT(A) has erred in confirming the aforesaid disallowance on the basis of deemed annual letting value of the unsold flats, which are held in closing stock.

4. We have heard learned representatives for both the parties and perused the material available on record.

5. The main point for consideration under appeal is as to whether the flats held by the assessee as stock in trade, be treated as income from house property?

6. Learned representative for the assessee has submitted that Hon’ble Bombay High Court in ITA No. 1216/2016, PCIT Central-1 V. M/S. Classique Associates Ltd., vide order dated 28.01.2019, has held that deemed annual letting value of unsold flats held in closing stock of the assessee cannot be determined as income from house property but income from business. Further submitting that the issue under appeal is covered by common order dated 01.07.2021 passed in ITA NO. 1973/MUM/2019 and 1974/MUM/2019 for A.Y. 2014-15 and 2015-16 respectively.

7. Learned DR has vehemently supported the impugned order.

8. The issue under consideration is no more res integra. The observations made by Hon’ble Bombay High Court in M/S. Classique Associates Ltd. (Supra), are important. The relevant paras 3 to 5 are reproduced as under:

“ 3. The respondent-assessee is a partnership firm and is engaged in the business of development of real estate. The questions arise out of the assessee’s return of income for the Assessment Year 2006-07. While scrutinising such return, the Assessing Officer noticed that the assessee had earned an amount of Rs.1.51 crores (rounded off) by leasing out certain flats and treated such income as the business income, inturn claiming various expenses by way of business expenditure. The Assessing Officer held that, the income was from house property being rental income. The issue eventually reached the Tribunal. The Tribunal by the impugned judgment while confirming the view of the Commissioner of Income Tax (Appeals) and dismissing the Revenue’s Appeal, noted that the assessee was engaged in the business of real estate development. During the year under consideration, the assessee had declared total income of Rs.10.45 crores (rounded off). Only small portion of the number of units constructed by the assessee were given on lease and license basis. The Tribunal therefore held that the activity of letting out the premises on leave and license was only ancillary business of the assessee to the main business of development of real estate. The Tribunal referred to and relied upon the decision of the Division Bench of the Gujarat High Court in the case of Commissioner of Income-tax V. Neha Builders (P.) Ltd. reported in 2008 (296) ITR 661 and of the Supreme Court in the case of Chennai Properties and Investments Ltd. V/s. Commissioner of Income-Tax, reported in [2015] 377 ITR 673 to come to the conclusion that the Assessing Officer incorrectly held that the income was from house property and not business income.

4. The Tribunal, having noted the relevant facts, by placed reliance on the above decisions of the Gujarat High Court in the case of Neha Builders (supra) and of the Supreme Court in the case of Chennai Properties (supra). In Neha Builders (supra), the Division Bench of the Gujarat High Court was considering a very similar issue. While accepting the assessee’s contention in this respect, the Court held and observed as under:

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.

5. In the case of Chennai Properties (supra), the facts were that the assessee was engaged in the business of acquiring and holding properties. During the course of such business, the assessee had let out certain properties so acquired and earned income out of such activity. The Supreme Court confirmed the view of the High Court that income generated from such source was assessee’s business income and not the assessee’s house property.”

9. As noted hereinabove, the observations of Hon’ble Gujarat High Court in Neha Builders (Supra) and the observation of Hon’ble Supreme Court in Chennai Properties (Supra) are not being reproduced again to avoid repetition. That apart, the co-ordinate bench of this Tribunal in assessee’s own of case in M/s. Palm Grove Beach Hotels Pvt Ltd (Supra), vide paras 4 and 5 held as under:

“4. The only identical issue in all these appeals is that whether the ld. CIT(A) was justified in confirming the action of the ld. AO in charging notional income considering annual letting value of unsold flats (closing stock of assessee) under the head ‘income from house property’ in the facts and circumstances of the instant case. 5. We have heard rival submissions and perused the materials available on record. Both the parties before us agreed that the issue in dispute before us had been decided by this tribunal in favour of the assessee in its own case in ITA No. 5062/Mum/2017 dated 13/03/2019 for Asst Year 2013-14. The relevant operative portion of the said order is reproduced hereunder:-

“4. Issue nos. 1 & 2 are inter-connected, therefore, are being taken up together for adjudication. Under these issues the assessee has challenged the confirmation of the addition in sum of Rs.39,75,545/- under the head of income form house property on account of deemed income from unsold unit/flats which was the closing stock of the assessee under the year of consideration in view of the provisions u/s 22 & 23 of the Act. At the very outset, the Ld. Representative of the assessee has argued that the assessee was carrying the business of construction and builder and development of project and was having finished unit in three project namely Wanwadi Project-Pune in sum of Rs.6,97,95,580/-, Vakola Project in sum of Rs.43.01.115/- & Radhanarayan in sum of Rs. 1,13,38,000/-, the total in sum of Rs.8.54,34.695/- but the AO has wrongly assessed the notional income and assessed the tax in view of the provisions u/s 23/ 24 of the Act and added in sum of Rs.39,75,545/- to the income of the assessee, hence, the finding of the CIT(A) confirming the order of the AO is wrong against law and facts and are liable to be set aside. The Ld. Representative of the assessee has argued that the case of the assessee has duly being covered by the decision of the Hon’ble ITAT in the case of Ferani Hotels Pvt. Ltd. Vs. ACIT Central Circle 4(1) in ΙΤΑ. Νο. 6332/M/2016 dated 21.12.2018, therefore, the claim of the assessee is liable to be allowed. However, on the other hand, the Ld. Representative of the Department has refuted the said contention. On uppraisal of the record and considering the argument advanced by the Ld. Representative of the parties, we observed that the assessee is carrying the business of construction and builder and developing the project. He was having the finished unit of three project situated at Wanwadi Project- Pune in sum of Rs.6.97.95.580-Vakola Project in sum of Rs.43.01.115/- & Radhanarayan in sum of Rs. 1,13,38,000/-, the total in sum of Rs.8,54,34,695/- The notional income was assessed in sum of Rs. 39,75,545/- and added to the income of the assessee. Before going further, we deem it necessary to advert the finding of the Hon’ble ITAT in ITA. No.6332/M/2016 dated 21.12.2018 titled as Ferani Hotels Pvt. Ltd. The relevant finding has been given in para no. 6 to 8 which are hereby reproduced as under:-

“Under this issue the assessee has challenged the confirmation of the addition of Rs.13,22,90,044/- under the head of income from house property on account of deemed income from unsold unit/ flat which was closing stock of the appellant as per provisions of Sections 22 and 23 of the Act. At the very outset, the Ld. Representative of the assessee has argued that the assessee is deriving its income from hotel business and construction. The assessee was also deriving income from dividend, share of profit and sale of flats and due to the recession, the assessee failed to sold out all the flats, therefore, some flats remain vacant which was being treated as stock in trade. The AO has wrongly assessed the notional rent and assessed the rent in view of the provision u/s 24 of the Act wrongly which can only be treated under the head of income from business. therefore, the finding of the CIT(A) is wrong against law and facts and is liable to be set aside. It is also argued that the case of the assessee has duly been covered in case of Runwal Construction Vs. ACIT in ITA. No. 5408/M/2016 & C.R. Developments Vs. JCIT in ITA. No. 4277/4/2012 dated 13.05.2015. However, on the other hand, the Ld. Representative of the Department has refuted the said contention. On appraisal of the facts of the case and relevant record on the file, we noticed that the object of the assessee is deriving of income from Hotel Business and Construction. The assessee company is running a five star hotel in the name and style of The Carlton at Kodaikannal, Tamil Nadu, having rooms and other facilities. The assessee also derived income from dividend, share of profit from partnership firm and profit from sale of flats. The assessee failed to sold the flat which was being treated by him as stock in trade. The AO assessed the notional income and brought to tax as income as house property which has no doubt confirmed by CIT(A). It is to be seen whether the income of the assessee is liable to be treated as house property or business income It is necessary to discuss the finding in the case of M/s. Runwal Constructions Vs. ACIT in ITA. No.5409/M/2016 dated 22.02.2018 which has been given in para no. 7 to 10 and are hereby reproduced us under-

“7. We have heard the rival submissions and perused the orders of the authorities below and the decisions relied upon. It is undisputed fact that the assessees are in the business of builders. developers and construction. Both the assessees have constructed various projects and the projects were treated as stock in trade in the books of account. Flats sold by the assessees were assessed under the head income from business”. There were certain unsold flats in stock in trade which the AO treated as property assessable under the head income from house property” and computed notional annual letting value on such unsold flats placing reliance on the decision in the case of Ansal Housing Finance & Leasing Co. Ltd. (supra). The action of the AO was upheld by the learned CIT(A). 8. The Hon’ble Gujarat High Court in the case of Neha Builders Pvt. Ltd. (supra) considered the question whether the rental income received from any ponsidered the unstruction business can be claimed under the head ..income from property” even though the said property was included in closing stock. The Hon’ble Gujarat High Court held that 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 house property While holding so the Hon’ble High Court observed as under:

“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 ITA. No.6332/M/2016 A.Y 2012-13 10 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. From the statement of the assessee, it would clearly appear that it was treating the property as ‘stock-in-trade’. Not only this, it will also be clear from the records that, except for the ground floor, which has been let out by the assessee, all other portions of the property constructed have been sold out. If that be so, the property, right from the beginning was a ‘stock-in-trade’.”

9. Similarly the Coordinate Bench has considered similar issue as to whether the unsold property which is held as stock in trade by the assessee can be assessed under the head…income from house property” by notionally computing the annual letting value from such property and the Coordinate Bench considering the decision of the Hon’ble Delhi High Court in the case of Ansal Housing Finance & Leasing Co. Ltd. (supra) which the AO relied upon and the decision of the Hon’ble Supreme Court in the case of Chennai Properties & Investments Lid. vs. CIT reported in 373 ITR 673, held that unsold flats which are in stock in trade should he assessed under the head business income” and there is no justification in estimating rental income from those flats and notionally computing annual letting value under Section 23 of the Act. While holding so the Coordinate Bench observed as under:-

“3. The ld. AR placed the order of Bombay Tribunal in the case of M/s Perfect Scale Company Pvt. Ltd., ITA Nos.3228 to 3234/Mum/2013, order dated 6-9-2013, wherein it was held that in respect of assets held as business, income from the same is not assessable u/s.23(1) of the IT Act.

4. On the other hand, Id. DR relied on the order of Hon’ble Delhi High Court in the case of Ansal Housing F ITA. No. 6332/Μ/2016 Α.Υ.2012-13 11 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-in-trade. 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 w/s.23 of the 1.T. Act.”

7. In the case on hand before us it is an undisputed fact that both assessees have treated the unsold flats as stock in trade in the books of account and the flats sold by them were assessed under the head “income from business”. Thus, respectfully following the above said decisions we hold that the unsold flats which are stock in trade when they were sold they are assessable under the head ..income from business” when they are sold and therefore the AO is not correct in bringing to tax notional annual letting value in respect of those unsold flats under the head income from house property” Thus, we direct the AO to delete the addition made under Section 23 of the Act as income from house property.

7. In the case of titled as M/s. C.R. Developments P. Ltd. Vs. JCIT The relevant para 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 Lid. 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-in-trade. Estimating rental income by the AO for these three flats as income from house property was not justified in so far 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 w/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 w/s.23 of the I.T. Act.”

8. 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 Lid. 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.

5. On appraisal of the above mentioned finding, we noticed that the factual position of the present case is quite similar to the factual position of decision of the Hon’ble ITAT in the case of Ferani Hotels Pvt. Ltd. (supra). Since the case of the assessee has duly been covered by the decision of the Hon’ble ITAT in the case of Ferani Hotels Pvt. Ltd, therefore, in the said circumstances by honoring the said decision, we delete the addition raised by AO on account of notional income of the vacant flats. Accordingly, these issues are decided in favour of the assessee against the revenue.”

10. In the instant case, undisputedly, the assessee is a builder & developer and is in the business of construction and in developing housing complexes i.e to construct the property and sell it. During the year under consideration, assessee treated three unsold flats as stock in trade. This would be treated as a business stock. The flats held by the assessee as stock in trade cannot therefore be termed as income from house property. The issue is also covered by the aforesaid order of this Tribunal in assessee’s own case. The aforesaid point is accordingly determined in favour of the assessee and against the revenue.

11. In the result, the appeal is allowed. The impugned order dated 05.06.2024 is set aside. Learned assessing officer is directed to deal the disallowance as income from house property.

Order pronounced on 11.10.2024.