ITAT Upholds Tax on Unsold Inventory as 'Income from House Property,' Directs Recalculation of ALV Based on Market Rates [Read Order]

The Ahmedabad Bench of the Income Tax Appellate Tribunal (ITAT) has upheld the taxability of unsold flats held as stock-in-trade under the head "Income from House Property," while remanding the matter back to the Assessing Officer to reassess the Annual Lettable Value (ALV) based on prevailing market rates.

The assessee, Sabarmati Capital One Limited, is a real estate company engaged in the business of constructing and selling residential and commercial units. During the assessment proceedings for the year 2015–16, the Assessing Officer noticed that the company held several unsold flats and shops as stock-in-trade. Although the assessee had shown these properties in its books, it had not offered any notional income from them.

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Relying on provisions under Section 23(5) of the Income Tax Act and referring to earlier judgments, the Assessing Officer brought a notional rental income to tax under the head "Income from House Property."

In its defence, the assessee contended that since the flats and shops were part of its business stock and not let out, no income could be presumed. The assessee further argued that these properties were not earning any rent and thus should not attract tax on notional basis.

The Commissioner of Income Tax (Appeals) upheld the AssessingOfficer’s view and noted that even if the properties were held as stock, the law permits taxation of notional rental income based on their ALV. The CIT(A) observed that the law was settled through several judicial pronouncements and the ALV had to be considered even if the property was not let out.

Before the ITAT, the assessee relied on various High Court decisions and reiterated that stock-in-trade should not be taxed under “Income from House Property.” However, the Tribunal noted that the Gujarat High Court had already ruled in favour of notional rent being taxable for unsold inventory held as stock-in-trade in earlier years. The bench comprising Waseem Ahmed (Accountant Member) and T.R. Senthil Kumar (Judicial Member) held that the notional rent on unsold flats and shops was rightly taxed under “Income from House Property.” However, it directed the Assessing Officer to recompute the ALV based on actual prevailing market rent, after giving proper opportunity to the assessee to submit relevant data.

The Tribunal thus partly allowed the appeal, keeping the taxation head unchanged but allowing fresh determination of the rental value.

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