Moraj Finanz Corporation Vs DCIT (ITAT Mumbai)
Summary:
The Income Tax Appellate Tribunal, Mumbai Bench, in the case of Moraj Finanz Corporation, considered the taxability of notional annual letting value of unsold flats/units held by the assessee as stock-in-trade for Assessment Year 2010-11. The matter arose from a difference of opinion between the Members of the Division Bench, following which a Third Member was nominated. The Third Member concurred with the Judicial Member and held that the unsold flats/units could not be subjected to notional rent taxation under the head “Income from House Property”.
The Tribunal noted that the flats/units were held as stock-in-trade and had not been let out during the relevant year. Consequently, the assessee had derived no financial benefit from them. The Third Member considered the Bombay High Court decision in PCIT Vs Classique Associates Ltd., which dealt with income from properties held as stock-in-trade and concluded that such income could be assessed as business income rather than income from house property. The decision had not been brought to the notice of the coordinate Bench when the assessee’s matter was earlier considered.
The Third Member also considered the principles stated in CIT Vs Neha Builders (P) Ltd., where the Gujarat High Court held that where property is held as stock-in-trade, income derived from such stock is business income. The Supreme Court decision in Chennai Properties & Investments Ltd Vs CIT was also considered in the discussion concerning the character of income derived from properties.
Applying the jurisdictional Bombay High Court precedent, the Tribunal concluded that income from unsold flats/units held as stock-in-trade could not be assessed under the head “Income from House Property”. The assessee’s case was considered to be on an even stronger footing because the flats/units had never been let out and no income had been earned from them.
The Tribunal further noted that Finance Act 2017 inserted section 23(5) of the Income-tax Act with effect from 01.04.2018, applicable from AY 2018-19 onwards, providing a specific deeming framework for annual value of certain properties held as stock-in-trade. The Tribunal held that this prospective provision could not apply to AY 2010-11.
Accordingly, the Third Member agreed with the Judicial Member that the addition under the head “Income from House Property” was required to be deleted. The appeal was therefore allowed. The matter was thereafter placed before the Division Bench for passing the confirmatory order, and the majority opinion ultimately held that unsold flats/units held as stock-in-trade could not be assessed under the head “Income from House Property”.
Cases Discussed
- PCIT Vs Classique Associates Ltd. (Bombay High Court)
- CIT Vs Neha Builders (P) Ltd. (Gujarat High Court)
- Chennai Properties & Investments Ltd Vs CIT (Supreme Court)
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT MUMBAI
1. Owing to the difference of opinion between the Members of the Division Bench, the Hon’ble President of Income Tax Appellate Tribunal deemed it appropriate to nominate a Third member to adjudicate the dispute between the members constituting the bench.
2. The Hon’ble Vice President/ Third Member concurred with the view expressed by Judicial Member and ruled as under;
“11. I have considered rival submissions and perused the materials on record. There is no dispute that the unsold flats/units, which were subjected to computation of notional rent, were held as stock-in-trade by the assessee and not as owner of property. It is also a fact on record that the unsold flats/units held as stock-in-trade were not let out during the year. Thus, the assessee has not derived any financial benefit from them. It is a fact on record that while deciding the issue relating to computation of notional rent on the unsold flats/units in the order referred to above, the ITAT had directed the AO to verify the fact that as on 31.03.2010 allotment letters were issued to the buyers of the flats and then decide applicability of the ratio laid down in ‘Ansal Housing Finance and Leasing Company Ltd. (Supra). It is the case of the Department that the AO has determined ALV in respect of unsold flats/units wherein allotment letters were not issued by 31.03.2010. In my view, what is of importance is whether ALV of unsold flats/units held as stock-in-trade can at all be determined and assessed under the head Income from House Property. In this context, I deem it appropriate to refer to a decision of the Hon’ble Bombay High Court in case of PCIT vs. M/s Classique Associates Ltd., ITA No. 1216/Mum/2016. The following questions wereframedfor consideration by the Hon’ble High Court:
“1. Whether on the facts and circumstances of the case and in law, the Hon’ble Tribunal was justified, in not upholding the AO’s findings that the income derived by the assessee from letting out of its properties, held as stock-in-trade, represents income from house property, by relying on the decision of the Hon’ble Supreme Court in the case of Chennai Properties Pvt. Ltd. Without appreciating the facts of the case of M/s. Chennai Properties Pvt. Ltd. Was distinguishable in so far as the main object of Chennai Properties Pvt. Ltd. Was to acquire and give properties on rent, whereas, the assessee firm is engaged in development and construction of properties?
2. Whether on the facts and circumstances of the case and in law the Hon’ble Tribunal was justified in not upholding the pro-rata disallowance of Rs.1,41,00,000/- being expenses pertaining to stock-on-lease, which was rightly made by the AO since such deduction is not allowable while computing income from house property?”
12. While answering Question No.1, the Hon’ble Jurisdictional High Court discussed and decided the issue 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, in turn 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, 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.”
13. As could be seen from the aforesaid observations, applying the ratio laid down in the case of Neha Builders (P) Ltd. (Supra), the Hon’ble jurisdictional High Court has ultimately concluded that income derived from unsold flats/units held as stock-in-trade can be assessed as business income and not under the head “Income from House Property”. Though, this decision was available when the appeal was decided by the Coordinate Bench in the first round, unfortunately, it was not brought to the notice of the coordinate Bench. Therefore, while deciding the issue, learned coordinate Bench did not have the benefit of the decision of the Hon’ble jurisdictional High Court. Even, in course of hearing of the appeal in the second round, the decision was not cited before the learned Members constituting the Division Bench. It goes without saying that a decision of the Hon’ble Jurisdictional High Court is binding on all subordinate courts and authorities within the territorial jurisdiction of the High Court. As discussed earlier, applying the principle laid down by the Hon’ble Jurisdictional High Court in case of CIT vs Classique Associate (Supra) income from unsold flats/units held as stock in trade cannot be assessed under the head income from house property.
14. Assessee’s case stands on a much better footing, as unlike the facts in the case of PCIT vs. Classique Associates Ltd. (Supra), in assessee’s case flats/units were never let out and the assessee did not earn any income therefrom. Thus, applying the ratio laid down by the Hon’ble Jurisdictional High Court in case of PCIT Vs. Classique Associates (Supra), I hold that there cannot be any addition under the head “Income from House Property” by notionally computing ALV of the unsold flats/units held as stock-in-trade. At this stage, I must observe, there was an amendment to Section 23 of the Act with insertion of Section 5 by the Finance Act 2017 w.e.f. 01.04.2018 applicable to the AY 2018-19 onwards. The said provision reads as under:-
“[(5) Where the property consisting of any building or land appurtenant thereto is held as stock-in-trade and the property or any part of the property is not let during the whole or any part of the previous year, the annual value of such property or part of the property, for the period up to “[two years] from the end of the financial year in which the certificate of completion of construction of the property is obtained from the competent authority, shall be taken to be nil]”
15. Thus, by virtue of a deeming provision, the legislature intended to bring notional rent to tax in respect of unsold flats/units held as stock-in-trade. However, the provision, as held in various judicial precedents, would apply prospectively and not to the assessment year under dispute.
16. In view of the aforesaid, I agree with the learned JM that the addition made under the head “Income from House Property” has to be deleted.
17. In so far as, the questions proposed by learned AM, I have already observed that while deciding the appeal in the first round, the coordinate Bench did not have the benefit of the decision of the Hon’ble jurisdictional High Court in case of ACIT vs. Classique Associates (Supra).Had the Bench been made aware of such decision of the Jurisdictional High Court, definitely it would have followed the same. Thus, in my considered opinion, there is no question of ITAT reviewing its own order. Rather, it is a case where decision of the Hon’ble Jurisdictional High Court, which is a binding precedent, is being followed.
18. In view of the aforesaid, appeal records be returned back to the Registry and the Registry is directed to place the matter before the ld. Division Bench for passing the confirmatory order, as per majority view.”
3. In view of the majority opinion, we hold that unsold flats/units held as stock in trade cannot be assessed under the head income from house property.
4. In the result, the appeal filed by the assessee is allowed.
Order pronounced in open court on 28.08.2026.
