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2025 (5) TMI 1952 - AT - Income TaxIncome from House Property in respect of unsold flats held as stock-in- trade - deemed rental income attributed to 16 flats held by the assessee as unsold closing stock in its real estate project Galaxy Opal - whether notional income can be brought to tax under the head Income from House Property u/s 22 in respect of flats held as stock-in-trade by a real estate developer for A.Y. 2017 18? AO treated the unsold flats as taxable on the reasoning that the assessee is the owner of the flats they are complete and capable of being let out and they were not used for any business or professional purposes during the relevant year and applied a notional Annual Letting Value (ALV) at 7% of the book value of the unsold units and taxed the resulting figure under section 22 allowing standard deduction of 30% u/s 24. HELD THAT - It is an admitted position that the assessee is a real estate developer the 16 flats in question were constructed in earlier years and remained unsold as on 31.03.2017. These flats were consistently shown in the balance sheet as part of stock-in-trade and not as capital or investment assets. The assessee had not earned any actual rental income from the said flats and the assessee s business is to construct and sell flats not to hold and let out properties. Therefore the flats form part of circulating capital employed in the business of real estate development and represent inventory in the normal course of trade. This aspect is crucial in interpreting the scope of section 22 vis- -vis business use. The third condition of section 22 that the property is not used for the purposes of business or profession is not satisfied in the present case. Though the flats were not sold during the year they were retained in the business stock and intended for sale which constitutes active business use. Thus as per statutory provisions of section 22 and 23 the legislative scheme the nature of the asset as stock-in-trade and the binding and persuasive judicial precedents the addition made by the AO and sustained by the CIT(A) is directed to be deleted. Related grounds of the assessee are allowed. Disallowance on Account of Stamp Duty Registration and Vakil Fees - HELD THAT - As stamp duty and registration charges incurred by the assessee for execution of the registered Power of Attorney are genuine incurred in the normal course of business and directly relatable to the acquisition of land parcels. The vakil fees though paid in cash are nominal in nature and supported by signed internal vouchers and such legal expenses are consistent with standard commercial practices in real estate transactions. AO in our view erred in disallowing the entire differential cost solely for want of external vouchers without appreciating the nature of the documents the purpose of the transaction and the consistency in accounting treatment. CIT(A) too fell in error in mechanically sustaining the disallowance without due consideration of the contemporaneous evidence placed on record through the paper book. We therefore direct that the disallowance in all. Decided in favour of assessee.
1. ISSUES PRESENTED and CONSIDERED
The core legal questions considered by the Tribunal in this appeal are: (a) Whether notional rental income can be taxed under the head "Income from House Property" in respect of unsold flats held as stock-in-trade by a real estate developer for the assessment year 2017-18, prior to the insertion of section 23(5) of the Income Tax Act, 1961; (b) Whether expenses incurred towards stamp duty, registration fees, and vakil fees amounting to Rs. 10,30,580/- related to land purchases under unregistered agreements can be disallowed on the ground of lack of documentary evidence and unverifiability. 2. ISSUE-WISE DETAILED ANALYSIS Issue (a): Taxability of Notional Rent on Unsold Flats Held as Stock-in-Trade Relevant Legal Framework and Precedents: Section 22 of the Income Tax Act charges to tax the annual value of property consisting of buildings or land appurtenant thereto owned by the assessee, except where such property is occupied for business or profession. The three conditions for applicability are: (i) property must be a building or land appurtenant thereto; (ii) assessee must be owner; and (iii) property must not be used for business or profession. Section 23(5) was inserted by the Finance Act, 2017, effective from AY 2018-19, to specifically address taxation of notional rent on unsold flats held as stock-in-trade, providing limited relief by exempting such income for a period of one year post-completion. Judicial precedents relied upon include the binding decision of the Hon'ble Gujarat High Court in CIT v. Neha Builders Pvt. Ltd., which held that if property is held as stock-in-trade, income derived therefrom is business income and not income from house property. Other decisions cited include Pegasus Properties (P.) Ltd., Varun Developers, DCIT v. Neepa Real Estates, Vyapti Infrabuild Pvt. Ltd., DCIT v. Ganga Developers, Othello Developers, DCIT v. Zen Matrix (P) Ltd., and Takshashila Realities (P) Ltd., which support the view that unsold flats held as stock-in-trade do not attract tax under section 22. The Revenue relied on the Delhi High Court decision in CIT v. Ansal Housing & Construction Ltd., which held that annual letting value of unsold flats is taxable under section 22. However, that case concerned unsold flats treated as fixed assets rather than stock-in-trade and did not consider the binding authority of Neha Builders. Court's Interpretation and Reasoning: The Tribunal noted that the assessee is a real estate developer and the unsold flats were held as stock-in-trade, consistently shown as such in the balance sheet. The flats were not used for letting but were part of circulating capital intended for sale, thus constituting active business use. The Tribunal emphasized that the third condition of section 22 (property not used for business) is not satisfied here, as the property was clearly used in the business of development and sale. The insertion of section 23(5) from AY 2018-19 signals that prior to this, no tax charge under section 22 existed for such stock-in-trade properties. The Tribunal distinguished the Ansal Housing decision on facts and held that the binding jurisdictional High Court ruling in Neha Builders prevails. Key Evidence and Findings: The unsold flats were valued at Rs. 2,23,24,485/- and 16 flats remained unsold as on 31.03.2017. The assessee did not earn any actual rental income, and the flats were held as stock-in-trade. The AO computed notional rent at 7% of book value and added Rs. 10,93,898/- under income from house property. The Tribunal found that the flats were used in business as inventory and thus not liable to tax under section 22 for notional rent. Application of Law to Facts: The Tribunal applied the statutory conditions of section 22 and concluded that the third condition is not met. The property was used for business, and the legislative intent before section 23(5) insertion did not contemplate taxing such stock-in-trade under house property. The Tribunal accordingly set aside the addition. Treatment of Competing Arguments: The Tribunal rejected the Revenue's reliance on Ansal Housing, noting factual differences and the binding nature of Neha Builders. The Revenue's argument that section 23(5) merely clarified existing law was not accepted, as the provision's prospective nature indicated no prior charge existed. Conclusion: The addition of Rs. 10,93,898/- as notional rent on unsold flats held as stock-in-trade is deleted. Issue (b): Disallowance of Expenses towards Stamp Duty, Registration Fees, and Vakil Fees Relevant Legal Framework and Precedents: Expenses incidental to acquisition of trading stock, including stamp duty, registration fees, and legal fees, are allowable as part of the cost of stock if genuinely incurred and properly accounted for. The onus lies on the assessee to substantiate such expenses, but once recorded in books and explained, the Department must prove otherwise to disallow. Court's Interpretation and Reasoning: The Tribunal examined the ledger entries, registered Power of Attorney (POA) documents, signed vouchers for vakil fees, and contemporaneous accounting treatment. The POA was registered, and the expenses related to legal formalities necessary due to defects in title preventing formal sale deed registration. The Tribunal held that such expenses are standard commercial practice and form part of capital cost of land acquisition. The absence of original receipts after a decade does not justify disallowance where the assessee provided credible contemporaneous documentary evidence. Key Evidence and Findings: The assessee produced ledger copies, registered POA documents evidencing stamp duty and registration payments, and signed vouchers for vakil fees. The expenses were incurred in FY 2010-11 but reflected in the year under appeal due to accounting treatment. The AO disallowed Rs. 10,30,580/- for lack of external documentary evidence, but the Tribunal found the explanation and evidence sufficient. Application of Law to Facts: The Tribunal applied the principle of business realism and accepted the ledger and registered documents as credible proof. It emphasized that the Department did not establish that expenses were fictitious or unrelated to business. Treatment of Competing Arguments: The Revenue's objection on lack of external vouchers was rejected as unreasonable given the nature of transactions and passage of time. The Tribunal noted the CIT(A) erred in mechanically sustaining disallowance without proper consideration of the evidence. Conclusion: The disallowance of Rs. 10,30,580/- towards stamp duty, registration fees, and vakil fees is deleted. 3. SIGNIFICANT HOLDINGS "The third condition of section 22 that the property is 'not used for the purposes of business or profession' is not satisfied in the present case. Though the flats were not sold during the year, they were retained in the business stock and intended for sale, which constitutes active business use." "The Finance Act, 2017 inserted section 23(5) with effect from 01.04.2018 (i.e., A.Y. 2018-19). This insertion of section 23(5) by Parliament clearly indicates that prior to A.Y. 2018-19, the legislature did not treat such unsold stock-in-trade as taxable under the head 'Income from House Property'." "The binding jurisdictional High Court ruling in CIT v. Neha Builders Pvt. Ltd. must prevail over the Delhi High Court decision in Ansal Housing & Construction Ltd., which is distinguishable on facts." "Expenses incurred towards stamp duty, registration fees, and vakil fees forming part of the capital cost of land acquisition, supported by registered POA documents and contemporaneous ledger entries, are allowable even if original receipts are not available after many years." "The Assessing Officer and CIT(A) erred in disallowing the entire amount solely on the ground of absence of external documentary evidence without appreciating the nature of the documents and consistent accounting treatment." Final determinations: (i) The addition of Rs. 10,93,898/- as notional rent on unsold flats held as stock-in-trade under section 22 is deleted for AY 2017-18; (ii) The disallowance of Rs. 10,30,580/- towards stamp duty, registration fees, and vakil fees is deleted.
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