Annual Letting Value Of Unsold Flats Held As Stock In Trade Cannot Be Considered For Addition U/s 22 I-T Act: Mumbai ITAT

While setting aside the order of CIT(A), the Mumbai ITAT directed the AO to delete the addition of annual letting out value (ALV) of the unsold flat u/s 22 of Income Tax Act, 1961.

The Bench comprising Pavan Kumar Gadale (Judicial Member) and Prashant Maharishi (Accountant Member) observed that “the annual value of unsold flats held as stock in trade has to considered as per the amendment in the finance Act 2017 under section 23(5) of the Act is applicable from A.Y 2018-19 and the present case is A.Y. 2012-13. Accordingly, we follow the judicial precedence and rely on the ratio of the legal decisions and the applicability of amendment Sec 23(5) of the act.” (Para 9)

As per the brief facts of the case, the Assessee's return was selected for scrutiny under CASS and notice was issued, wherein AO found while auditing the financial statement that the assessee company has disclosed inventory value of 14 flats. Whereas the remaining 6 flats are disclosed under the fixed Assets, and the assessee has offered the rental income after claiming vacancy allowance under income from house property. The AO issued letter to submit detailed reasons for conversion of stock in trade into fixed assets and why flats shown should not be considered as deemed to be let out and the notional rent to be taxed under the head income from house property. The assessee submitted the contention but the AO was not satisfied with the explanations and dealt on the provisions u/s 22 and U/sec 23(1) and computed the Annual let out value (ALV) of flats disclosed under stock in trade and allowed deduction u/s 24(a) @ 30% and the balance amount was taxed under income from house property. After assessing the total income passed the order u/s 143(3). The CIT(A) confirmed the action of AO.

The Coram noted on the perusal of the balance sheet that under inventories note 8, the assessee has disclosed the cost of flats which is opening balance for the subsequent year.

Referring the case of Unique Estates Development Co Ltd vs DCIT in ITA No. 4598/M/2019, the Bench reiterated 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.”

The Bench stated 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 Bench further stated that there is no provision to assess notional rent/ ALV of unsold flats u/s 22 of the Income Tax Act in the year under consideration.

Referring the decision of Co-ordinate Bench in case of NMS Enterprises Vs Pr. CIT in ITA No. 1103/M/2022, the Bench stated that the context of revision u/s 263 has dealt on the applicability of provisions of section 23(5) prospectively.

Referring to the case of NMS Enterprises Vs. Pr. CIT in ITA No. 1103/M/2022, the Bench emphasized that considering the ratio of judicial decisions on applicability of provisions prospectively, the observations of the Pr. CIT cannot be acceptable as the order passed by the AO does not satisfy the twin conditions of erroneous and prejudicial to the interest of the revenue.

Therefore, relying on the facts and previous decisions of coordinate Bench, the ITAT allowed the assessee's appeal.

Counsel for Appellant/ Taxpayer: H.S. Raheja

Counsel for Respondent/ Department: Bhumika Patel

Case Title: M/s Shamdarshan Properties Pvt Ltd verses DCIT

Case Number: ITA No. 2779/Mum/2023

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