Bhgawati Abhilasha Con Venture Vs ACIT (ITAT Mumbai)
Prospective amendment to section 23(5) cannot be applied to AY 2017-18 — no notional rental income on unsold flats held as stock-in-trade.
Summary: In Bhagawati Abhilasha Con Venture Vs ACIT, ITA No. 1698/Mum/2023, the ITAT Mumbai considered the addition of ₹31,56,978 as deemed rental income on unsold flats held as stock-in-trade by a real estate/construction business for AY 2017-18. The Tribunal noted its earlier decision in the assessee’s own case, holding that no deemed notional rental value could be assessed on unsold stock-in-trade for AY 2017-18 because the amendment to section 23(5) of the Income Tax Act, 1961, introducing such treatment, applied from 01.04.2018, relevant to AY 2018-19 onwards. The Tribunal also considered CIT v. Neha Builders Pvt. Ltd., 296 ITR 661 (Guj.), followed by Mumbai Tribunal decisions, including C.R. Development Pvt. Ltd. v. JCIT (OSD) and Runwal Constructions v. ACIT, while noting the contrary Delhi High Court decision in CIT v. Ansal Housing Finance & Leasing Company Ltd., 354 ITR 180 (Del.). In view of conflicting decisions, the Tribunal noted adoption of the assessee-favouring view following CIT v. Vegetable Products Ltd., 88 ITR 192 (SC), and directed deletion of the ₹31,56,978 addition. The appeal was allowed and the order was pronounced on 21.08.2026.
Core Issue. The core issue was whether a real-estate developer could be assessed to tax on notional/deemed rental income in respect of unsold flats held as stock-in-trade during AY 2017-18. The assessee was engaged in the business of real estate/construction and the unsold flats were held as stock-in-trade. The Revenue treated such flats as yielding deemed rental income and made an addition of ₹31,56,978. The question before the Tribunal was whether the deeming provision introduced through section 23(5) could be applied to AY 2017-18, when the amendment itself came into effect only from 01.04.2018.
Facts. The assessee was engaged in the real-estate/construction business and had certain completed but unsold flats which were reflected as stock-in-trade. For AY 2017-18, the AO made an addition of ₹31,56,978 towards deemed rental income in respect of these unsold flats. The assessee challenged the addition before the CIT(A), but the appeal was dismissed.
Before the ITAT, the assessee pointed out that an identical issue had arisen in its own case for AY 2018-19 in proceedings under section 263. In that matter, the Tribunal, while dealing with the issue, had recognised that the amendment to section 23(5) bringing unsold stock-in-trade within the scope of deemed rental income was applicable from 01.04.2018, i.e. from AY 2018-19. Consequently, the amendment could not be applied retrospectively to AY 2017-18. The assessee also relied upon the decisions of the Mumbai Tribunal in Bengal Shapoorji Housing Development Pvt. Ltd. and Neepa Real Estate (P) Ltd.
AO and CIT(A) Finding. The AO treated the unsold flats held as stock-in-trade as liable to deemed rental taxation and made an addition of ₹31,56,978. The CIT(A)-NFAC upheld the assessment and dismissed the assessee’s appeal. Thus, the Revenue’s approach effectively treated the unsold flats as capable of generating taxable notional rental income even for AY 2017-18.
ITAT Finding. The Tribunal examined the amendment to section 23(5) and noted that the provision enabling assessment of deemed rental value in respect of unsold stock-in-trade was brought into the statute with effect from 01.04.2018. The Tribunal therefore held that the amendment was applicable from AY 2018-19 onwards and could not be applied to AY 2017-18.
The Tribunal also referred to its earlier order in the assessee’s own case arising from proceedings under section 263 for AY 2018-19. Although the Tribunal had upheld the PCIT’s jurisdiction under section 263 on the ground that the AO had not brought the deemed rental value to tax for AY 2018-19, it specifically recognised that the amended section 23(5) operated only from AY 2018-19. Consequently, there could be no deemed rental income assessment on the unsold stock-in-trade for AY 2017-18.
Conflicting High Court Decisions. The Tribunal noted that the issue had witnessed conflicting judicial views. The Gujarat High Court in CIT v. Neha Builders Pvt. Ltd., 296 ITR 661 (Guj.), had held, in substance, that where properties were held as stock-in-trade by a real-estate developer, the income from such properties had to be considered in the context of the assessee’s business and there could not be a separate notional rental value under the house-property provisions.
This principle was consistently followed by the Mumbai ITAT in C.R. Development Pvt. Ltd. v. JCIT (OSD), ITA No. 4277/Mum/2012, and Runwal Constructions v. ACIT, ITA No. 5408/Mum/2016.
However, the Tribunal also took note of the contrary decision of the Delhi High Court in CIT v. Ansal Housing Finance & Leasing Co. Ltd., (2013) 354 ITR 180 (Del.), which was decided against the assessee and supported taxation of notional rental income.
Principle Applied to Resolve Conflict. In view of the conflicting High Court decisions, the Mumbai Tribunal followed the settled principle laid down by the Supreme Court in CIT v. Vegetable Products Ltd., (1973) 88 ITR 192 (SC), namely that where two reasonable views are possible on interpretation of a taxing provision, the view favourable to the assessee should be adopted.
Accordingly, the Tribunal preferred the line of reasoning favourable to the assessee, particularly the decision of the Gujarat High Court in Neha Builders, which had been consistently followed by the Mumbai Tribunal in similar cases.
Cases Relied Upon. The Tribunal relied upon and considered the following decisions:
1. CIT v. Neha Builders Pvt. Ltd., 296 ITR 661 (Guj.) — no notional rental value on property held as stock-in-trade.
2. C.R. Development Pvt. Ltd. v. JCIT (OSD), ITA No. 4277/Mum/2012 — Mumbai ITAT followed Neha Builders.
3. Runwal Constructions v. ACIT, ITA No. 5408/Mum/2016 — Mumbai ITAT followed the assessee-favourable view.
4. CIT v. Ansal Housing Finance & Leasing Co. Ltd., (2013) 354 ITR 180 (Del.) — contrary view of Delhi High Court.
5. CIT v. Vegetable Products Ltd., (1973) 88 ITR 192 (SC) — where conflicting reasonable views exist, the view favourable to the assessee should be adopted.
6. Bhagwati Abhilasha Conventure v. PCIT, Mumbai-41, ITA No. 1698/Mum/2023, order dated 18.12.2023 — assessee’s own case concerning the operation of section 23(5).
7. DCIT v. Bengal Shapoorji Housing Development Pvt. Ltd., ITA No. 4369/Mum/2019, order dated 23.03.2021 — Mumbai ITAT decision concerning unsold flats held as stock-in-trade.
8. DCIT v. Neepa Real Estate (P) Ltd., reported in (2024) 116 ITR (Trib.) 247 (Mumbai).
Outcome. The Mumbai ITAT deleted the addition of ₹31,56,978 towards deemed rental income on the unsold flats held as stock-in-trade for AY 2017-18 and allowed the assessee’s appeal.
The Tribunal’s decision is significant because it establishes that the amendment introducing deemed rental taxation of unsold stock-in-trade operates prospectively from AY 2018-19 and cannot be used to tax notional rental income for AY 2017-18. Further, where conflicting High Court decisions exist, the Tribunal followed the assessee-favourable principle approved by the Supreme Court in Vegetable Products. Thus, for AY 2017-18, unsold flats held by a real-estate developer as stock-in-trade could not be subjected to deemed rental income merely on the basis of notional annual value.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
This appeal is filed by the assessee against the order of the learned CIT(A)-NFAC, Delhi, dated 16.10.2025 for the assessment year 2017-18.
2. The assessee has raised the following grounds of appeal:
“1. On the facts and in the circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals) erred in dismissing the appeal against the assessment order dated 24.03.2023 for AY2017-18.
2. On the facts & in the circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals) erred in upholding the Addition of Rs.31,56,978/- on account of Deemed rental income i.r.o. finished stock in trade as per assessment order for AY2017-18.
3. On the facts & in the circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals) erred in not fully and properly appreciating the facts and submissions.”
2. Ld. Counsel for the assessee, at the outset, submitted that the addition was made on account of deemed rental income on unsold flats, which were shown as stock-in-trade by the assessee, is in the business of real estate/construction. Ld. Counsel for the assessee further submitted that in assessee’s own case for the assessment year 2018-19, the issue came up for consideration pursuant to the proceedings u/s 263 of the Act by the learned CIT, holding that the assessment framed u/s 143(3) for the assessment year 2018-19 is erroneous and prejudicial to the interests of the Revenue for the reason that the Assessing Officer did not bring to tax the notional deemed rental income as per the provisions of section 23(5) of the Act. Ld. Counsel for the assessee submitted that the Tribunal in ITA No.1698/Mum/2023, vide order dated 18.12.2023, considering the submissions of the assessee and various decisions, though agreeing with the contention of the assessee that there cannot be any deemed notional rental value assessable in respect of unsold stock-in-trade for Assessment Year 2017-18. However, by virtue of the amendment to the provisions of section 23(5) of the Act, the unsold stock-in-trade also attracts deemed rental income from 01.04.2018 relevant to assessment year 2018-19 onwards. Ld. Counsel therefore submitted that until the assessment year 2017-18, no deemed rental value can beassessable on the unsold stock-in-trade of the assessee. Reliance was placed on the decisions of the Coordinate Benches in the case of DCIT vs. M/s Bengal Shapoorji Housing Development Pvt. Ltd. in ITA No. 4369/Mum/2019, dated 23.03.2021 and DCIT vs. Neepa Real Estate (P) Ltd. reported in (2024) 116 ITR (Trib) 247 (Mumbai).
3. Heard rival contentions, perused the orders of the authorities below. On perusal of the order of the Tribunal, it is observed that the aforesaid issue as to whether there can be a deemed notional rental value assessable on the unsold stock-in-trade of the assessee u/s 23(5) of the Act was addressed holding that for the assessment year 2017-18 there cannot be any deemed notional rental value on the unsold stock-in-trade of the assessee. The Tribunal held that by virtue of the amendment of section 23(5) of the Act, which was brought into the statute from 01.04.2018 for assessing the deemed rental value on unsold stock-in-trade applies only from the assessment year 2018-19 onwards. Therefore, while disposing of the appeal against the order passed by the learned PCIT for the assessment year 2018-19, though the Tribunal held that the Ld. PCIT is right in holding that the order passed by the Assessing Officer is erroneous and prejudicial to the interests of the Revenue fothe reason that no deemed rental value was assessed by Assessing Officer on the unsold stock-in-trade for Assessment Year 2018-19, the Tribunal observed that since the provisions of section 23(5) of the Act are not applicable for the assessment year 2017-18, deemed rental value on the unsold stock-in-trade of the assessee cannot be assessed for Assessment Year 201718.
4. The view of the Tribunal that there cannot be any notional rental value on the unsold stock-in-trade of the assessee was upheld by the Hon’ble Gujarat High Court in the case of CIT vs. Neha Builders Pvt. Ltd. as reported in 296 ITR 661 (Guj.), which decision was consistently followed by the Mumbai Bench of the Tribunal in C.R. Development Pvt. Ltd. vs. JCIT (OSD), ITA No.4277/Mum/2012, and Runwal Constructionsvs. ACIT in ITA No. 5408/Mum/2016. We are also aware of the decision of the Hon’ble Delhi High Court in the case of CIT vs. Ansal Housing Finance & Leasing Company Ltd., (2013) 354 ITR 180 (Del), which was held against the assessee.
However, in view of the conflicting decisions, the Coordinate Benches, following the decision of the Hon’ble Supreme Court in the case of Commissioner of Income-Tax vs. Vegetable Products Ltd. (1973) 88 ITR 192 (SC), the decision in favour of the assessee was adopted.
5. Thus, in view of the above discussion, we direct the Assessing Officer to delete the addition made in respect of deemed rental income on the unsold flats held in stock-in-trade by the assessee for Assessment Year 2017-18. The grounds raised by the assessee are allowed.
6. In the result, the appeal of the assessee is allowed.
Order pronounced in the open court on 21/08/2026
