Builders case

The Calcutta High Court in a recent judgment in the case of Azimganj Estate Pvt. Ltd. v. CIT (2013) 352 ITR 82 has held that in case of a person carrying on construction business, the rental income from unsold flat would be assessable as income from house property and not as business income.  The facts and the judgment in this case are analysed below.

The assessee-company was a property developer and builder.  In course of its business activities, it constructed a building at 7, Camac Street, Kolkata – 17, in which there were some unsold flats which were appearing as stock-in-trade.  The costs of these unsold flats as appearing in the balance-sheet was Rs. 26,09,456.

The assessee had shown rental income of Rs. 49,00,612 under the head “operating income” in the profit and loss account.  The income was received from letting out of unsold flats which were shown as stock-in-trade in the balance-sheet and meant for sale.  The assessee had shown rental income under the head “Income from house property” and, thus, claimed statutory deduction of Rs. 9,80,122 being the one-fifth on account of repairs from annual letting out value of Rs. 49,00,612.

The Assessing Officer  was of the view that since the assessee had been treating the unsold flats as stock-in-trade of its business, income from such business assets in the nature of stock-in-trade should be treated as business income and not income from house property, as claimed by the assessee.

The Assessing Officer, rejected the claim of the statutory deduction on account of repairs to the extent of one-fifth of the gross rental income.

After hearing the counsel for the parties and after going through the materials on record, the High Court found that with regard to similar rental income in respect of unsold flats, the Assessing Officer in the past treated those income as income from house property and those decisions relating to earlier assessment years had attained finality.

The moment in the proceedings under the Wealth-tax Act, the assessee contended that those unsold flats were stock-in-trade of its business and such contention was accepted by the Tribunal in the appeal preferred under the Wealth-tax Act, the Assessing Officer decided to treat the said income as income from business on the ground that the assessee itself having claimed those unsold flats as part of stock-in-trade of its business, there was no reason why the income from letting out those stock-in-trade should not be treated as income from business.

On a consideration of the entire materials on record, the Lordships of Calcutta High Court held that the Tribunal below committed a substantial error of law in reversing the order of the CIT (Appeals) and consequently the High Court restored the order passed by the CIT (Appeals).