The Mumbai Bench of Income Tax Appellate Tribunal ( ITAT ) ruled in favor of Palm Grove Beach Hotels Pvt. Ltd. that unsold flats held as stock-in-trade should be treated as business stock, not income from house property.
Palm Grove Beach Hotels Pvt. Ltd., the assessee engaged in developing housing complexes, and industrial parks, and operating five-star hotels. The assessee e-filed its income tax return on 31.10.2017, declaring a total income at a loss of Rs. 1,22,20,66,420.
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The Assessing Officer ( AO ) made a disallowance of Rs. 22,59,926 under section 14A of the Income Tax Act, determining a deemed annual letting value of unsold flats held in stock as “income from house property.”
The assessee appealed to the Commissioner of Income Tax (Appeals) [CIT(A)], who reduced the annual letting value to 2.5% from 8.5% but still treated it as “income from house property.”
Aggrieved by the CIT(A) order, the assessee appealed before the Mumbai Bench, ITAT arguing that the unsold flats were held as stock-in-trade. Thus, it should be treated as business assets and not as “income from house property.”
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The assessee’s counsel relied on the Bombay High Court’s ruling in Classique Associates Ltd., which held that unsold flats treated as stock-in-trade cannot be classified as “income from house property” but as business income.
On the other hand, the revenue counsel defended the treatment of the unsold flats as generating “income from house property,” supporting the position taken by the Assessing Officer.
The two-member bench comprising BR Baskaran ( Accountant Member ) and Sunil Kumar Singh ( Judicial Member ) observed that the issue of whether unsold flats held as stock-in-trade should be treated as “income from house property” is no longer res integra.
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The tribunal referred to the Bombay High Court ruling in Classique Associates Ltd., and previous rulings of the tribunal in favor of classifying such income as business income, not property income.
The tribunal relied heavily on previous judgments, including the Gujarat High Court’s decision in Neha Builders Pvt. Ltd. and the Supreme Court’s ruling in Chennai Properties and Investments Ltd. Both courts established that if the property is part of a business’s stock-in-trade, income from such properties should be treated as business income.
Therefore, the tribunal directed the AO to treat the income from the unsold flats as business income and not as income from house property. The appeal of the assessee was allowed.
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