Case Law Details
Runwal Constructions Vs ACIT (ITAT Mumbai)
Income Tax Appellate Tribunal (ITAT), Mumbai bench, has allowed appeals filed by entities within the Runwal Constructions group for the Assessment Year 2012-13. The appeals challenged orders from the Commissioner of Income Tax (Appeals) [CIT(A)] that upheld the Assessing Officer’s (AO) decision to levy tax on the notional annual letting value (ALV) of unsold flats held as stock-in-trade.
This verdict addresses a persistent area of dispute between real estate developers and income tax authorities regarding the classification of income from unsold property inventory.
Assessment Background
Runwal Constructions and other assessees in its group, primarily engaged in the business of builders, developers, and construction, filed their income tax returns for the Assessment Year 2012-13. During the assessment proceedings, conducted under Section 143(3) of the Income Tax Act, 1961, the AO observed that the assessees held several completed but unsold flats.
The assessees contended before the AO that their core business involved the construction and sale of developed properties, and therefore, any unsold flats constituted “stock-in-trade.” They argued that income arising from the sale of such properties is properly assessable as “business income,” and thus, the unsold units, merely because they remained unsold at the end of the year, could not be subjected to tax under the head “Income from House Property.”
In support of their stance, the assessees referred to the decision of the Gujarat High Court in CIT vs. Neha Builders Pvt. Ltd. (296 ITR 661). However, the AO disregarded these contentions. Citing the Delhi High Court’s ruling in Ansal Housing Finance & Leasing Co. Ltd. (354 ITR 180), the AO proceeded to compute the notional ALV for these unsold flats and brought this amount to tax under Section 23 of the Act as income from house property.
Upon appeal, the CIT(A) sustained the AO’s action, agreeing that the notional annual letting value of the unsold flats should be taxed under the head “Income from House Property.” This led the assessees to file the current appeal before the ITAT.
Arguments Before the ITAT
Assessees’ Contentions:
The learned Authorized Representative (AR) for the assessees vigorously argued against the taxation of notional ALV. Strong reliance was placed on the Gujarat High Court’s decision in CIT vs. Neha Builders Pvt. Ltd. (296 ITR 661). In this case, the Gujarat High Court explicitly stated that if a property is used as “stock-in-trade,” it assumes the character of stock, and any income derived from such stock would be considered “income from business,” not “income from property.” The court emphasized that if the assessee’s business is to construct and sell, or construct and let out, then any stock-in-trade (whether movable or immovable) generates business income. The court also criticized comparing rental income from business stock to dividend or interest income.
The AR further bolstered the argument by citing a decision of the Mumbai ITAT’s own Coordinate Bench in C.R. Developers Pvt. Ltd. vs. JCIT (ITA No. 4277/Mum/2013), dated May 13, 2015. This ruling, according to the AR, dealt with an identical issue and concluded that properties held as stock-in-trade should be assessed under the head “income from business,” precluding the imposition of notional ALV under “income from house property.”
Revenue’s Stance:
Conversely, the learned Departmental Representative (DR) supported the orders of the AO and CIT(A). The DR primarily relied on the Delhi High Court’s decision in Ansal Housing Finance & Leasing Co. Ltd. (354 ITR 180). This precedent supports the view that even unsold flats held by a developer are liable to be taxed on their annual letting value as “income from house property.”
ITAT’s Analysis and Judicial Precedents
The ITAT meticulously reviewed the arguments, the orders of the lower authorities, and the judicial precedents cited by both parties. It was an undisputed fact that the assessees were engaged in the business of builders, developers, and construction, and that they had consistently treated their projects, including the unsold flats, as stock-in-trade in their books of account. The income from sold flats had also been assessed under the head “income from business.”
The Tribunal first considered the Neha Builders Pvt. Ltd. decision from the Gujarat High Court. The ITAT noted that this judgment clearly distinguished between income from property and income from business when the property itself is held as stock-in-trade. The Gujarat High Court had unequivocally stated that “any income derived from such stocks cannot be termed as ‘income from property’.”
Next, the ITAT turned to its own Coordinate Bench’s decision in C.R. Developers Pvt. Ltd. The Tribunal observed that this judgment had directly addressed the very issue at hand. Crucially, the Coordinate Bench in C.R. Developers Pvt. Ltd. had taken into account the Delhi High Court’s ruling in Ansal Housing Finance & Leasing Co. Ltd. (which the AO relied upon). However, the Mumbai ITAT bench in C.R. Developers Pvt. Ltd. ultimately decided the issue in favor of the assessee based on the Supreme Court’s landmark pronouncement in M/s Chennai Properties & Investments Ltd. vs. CIT (373 ITR 673).
The Supreme Court in Chennai Properties had held that where an assessee company’s main object is to acquire and let out properties, the rental income received is assessable as “income from business.” By drawing an analogy from this Supreme Court ruling, the Mumbai ITAT’s Coordinate Bench in C.R. Developers Pvt. Ltd. concluded that if a builder’s main business is construction and development, and unsold flats are held as stock-in-trade with no intention to rent them out, then the income arises only from their sale, taxable as business income. Consequently, estimating notional rental income from such flats under Section 23 was deemed unjustified.
ITAT’s Decision
Following the binding precedents set by the Supreme Court in M/s Chennai Properties & Investments Ltd. and the consistent view of its own Coordinate Bench in C.R. Developers Pvt. Ltd., the ITAT concluded that the approach taken by the AO and CIT(A) was incorrect. The Tribunal explicitly stated that the Delhi High Court’s decision in Ansal Housing Finance & Leasing Co. Ltd. would not be applicable in this context due to the Supreme Court’s pronouncement.
The ITAT held that since the unsold flats were treated as stock-in-trade, their income, when realized, would be assessed under the head “income from business.” Therefore, the AO was directed to delete the addition made under Section 23 of the Act, which pertained to notional income from house property.
In the result, the appeals filed by the Runwal Constructions group assessees were allowed. The order was pronounced in open court on February 22, 2018. This decision reinforces the principle that for builders, unsold inventory held as stock-in-trade should not be subject to taxation on notional rental income.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
Both these appeals are filed by assessees of the same group against separate orders of CIT(A)-52, Mumbai for A.Y. 2012-13.
2. The common issue in these appeals is that the learned CIT(A) erred in confirming the action of the AO in making addition on account of alleged notional annual letting value of unsold flats held as stock in trade.
3. The brief facts of the case are that the assessees, engaged in the business of builders and developers, filed return of income for A.Y. 201213. The assessment was completed under Section 143(3) of Income Tax Act, 1961 (hereinafter “the Act”) and while completing the assessment the AO computed the annual letting value in respect of unsold flats held as stock in trade by the assessees. The assessees contended before the AO that they are engaged in the business of builder, developers and construction and the property they purchased is stock in trade and the income from sale of such developed property into flats is assessable as business income. Therefore the unsold flats which are in the stock in trade cannot be brought to tax under the head ‘income from house property’ simply because the flats remain unsold at the end of the year. The assessees also placed reliance on the decision of the Hon’ble Gujarat High Court in the case of CIT vs. Neha Builders Pvt. Ltd. (296 ITR 661) in support of their contentions. However, the AO referring to the decision of the Hon’ble Delhi High Court in the case of Ansal Housing Finance & Leasing Co. Ltd. (354 ITR 180) computed the notional annual letting value on the unsold flats and brought to tax under Section 23 of the Act as income from house property.
4. On appeal the learned CIT(A) sustained the action of the AO in bringing to tax the notional annual letting value under the head ‘income from house property’ in respect of the unsold flats. Aggrieved, assessees are in appeal before us.
5. The learned A.R. before us strongly placing reliance on the decision of the Hon’ble Gujarat High Court in the case of Neha Builders Pvt. Ltd. (supra) submitted that if the property is used as stock in trade then such property would become or partake the character of stock and any income derived from such stock in trade would be income from business and not income from house property. The learned counsel also placed reliance on the decision of the Coordinate Bench in the case of C.R. Developers Pvt. Ltd. vs. JCIT in ITA No. 4277/Mum/2013 dated 13.05.2015 and submitted that identical issue has been decided by the Coordinate Bench holding that in the case of property held as stock in trade the income should be assessable under the head ‘income from business’ and no income shall be brought to tax as notional annual letting value under the head ‘income from house property’.
6. The learned D.R., on the other hand, vehemently supported the orders of Authorities below. He also placed reliance decision of the Hon’ble Delhi High Court in the case of Ansal Housing Finance & Leasing Co. Ltd. (supra)
7. We have heard the rival submissions and perused the orders of the authorities below and the decisions relied upon. It is an 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 property in the construction business can be claimed under the head ‘income from property’ even though the said property was included in the 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 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 Ltd. vs. CIT reported in 373 ITR 673, held that unsold flats which are in stock in trade should be 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, ld. DR relied on the order of Hon’ble Delhi High Court in the case of Ansal Housing Finance & Leasing Co. Ltd., 354 ITR 180 (Delhi) in support of the proposition that even in respect of unsold flats by the developer is liable to be taxed as income from house property.
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-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 u/s.23 of the I.T.Act.”
10. 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.
11. In the result, the appeals filed by the assessees are allowed.
Order pronounced in the open court on 22nd February, 2018.
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