Read order: Palm Grove Beach Hotels Pvt. Ltd v. Dcit Central Circle-4(1) 

Pankaj Bajpai

Mumbai, July 26, 2021: While allowing the appeal of a taxpayer, the Mumbai ITAT has ruled that unsold property held as stock-in-trade by the assessee cannot be assessed under the head ‘income from house property’ by notionally computing ALV from it. 

The Coram of Mahavir Singh (Vice President) & M Balaganesh (Accountant Member), observed that the unsold flats that were in stock-in-trade should be assessed under the head ‘business income’. 

In the present case, the assessee was carrying business of construction and builder and development of project and had finished units in three projects. In the course of assessment, the AO added a sum under the head of income from house property on account of deemed income from unsold unit/flats that was closing stock of assessee, in view of provisions u/s 22 & 23 of the Income tax Act

Aggrieved by the action of CIT(A) confirming the Assessing Officer’s order, the assessee approached the Tribunal contending that the AO had wrongly assessed notional income in its hands. 

The Coram found that there was no justification in estimating rental income from them and notionally computing annual letting value (ALV) u/s 23

“If business of assessee was to construct property and sell it or to construct and let it out, then that would be business and business stocks that might include movable and immovable property. It would be taken to be stock-in-trade and any income derived from such stocks could not be termed as income from house property,” found the ITAT. 

The Gujarat High Court in case of CIT vs Neha Builders Pvt. Ltd 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, noted the Tribunal. 

The Tribunal further went on to note that income derived from property would always be termed as ‘income’ from the property, but if the property was used as ‘stock-in-trade’, then the property would become or partake character of stock. 

Any income derived from the stock would be ‘income’ from business and not income from the property, said the Tribunal. 

In instant case, assessee was engaged in business of construction and development that was its main object. Flats that could not be sold at end of the year were shown as stock in trade. 

Therefore, reiterating that estimating deemed income by AO for these flats as income from house property was not justified, the ITAT concluded that flats not sold were assessee’s stock-in-trade and income arising on their sale was liable to be taxed as business income.

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