Bhagwati Abhilsha Conventure Vs PCIT (ITAT Mumbai)
Summary: The appeal was filed by Bhagwati Abhilsha Conventure, a partnership firm engaged in land development and real estate construction activity, against the order of the PCIT, Mumbai-41 dated 29.03.2023 passed under Section 263 of the Income-tax Act, 1961 for AY 2018-19. The assessee had filed its return on 19.10.2018 declaring NIL income, with a loss of Rs. 6,98,087/-. The return was selected for scrutiny under CASS and assessed at the returned income under Sections 143(3), 143(3A) and 143(3B) by order dated 24.02.2021.
The PCIT noticed that the assessee had shown closing stock of Rs. 6,50,54,600/- in its Balance Sheet but had not declared deemed rental income under Section 23(5) on that amount, while the Assessing Officer had accepted the return without making an addition on that count. The PCIT therefore regarded the assessment order as erroneous insofar as it was prejudicial to the interests of the Revenue and invoked Section 263.
During the assessment proceedings, the Assessing Officer had issued a notice under Section 142(1) dated 28.01.2020. The notice sought, among other things, details of the assessee’s business premises and project-wise details of stock-in-trade as on 31.03.2018, together with rent or annual lettable value for determining income from house property. The Tribunal recorded that the assessee had properly replied to point No. 6, but, according to the record referred to in the order, no specific reply had been furnished to point No. 17 except furnishing a break-up of closing stock with details and amounts. The order also records that the assessee had confirmed that an addition on account of deemed rental income under Sections 22 read with 23(5) had been made in AY 2017-18, with no material on record confirming that the addition had been challenged before appellate forums.
The assessee’s grounds challenged the validity of the Section 263 proceedings and the PCIT’s conclusion that the assessment order was erroneous and prejudicial to the interests of the Revenue. In support, the assessee relied upon Malabar Industrial Co. Ltd. v. CIT, CIT v. Nirav Modi, Moil Ltd. v. CIT and CIT v. Gabriel India Ltd., submitting that the twin conditions for exercise of Section 263 jurisdiction had to be satisfied and that, once the Assessing Officer was satisfied about a claim on the basis of material before him, further enquiry was not necessarily required.
The assessee also referred to the Supreme Court’s order dated 14.12.2016 rejecting the Department’s Special Leave Petition against the Bombay High Court decision in CIT v. Nirav Modi, and contended that unsold flats held as stock-in-trade and used for the assessee’s business were not chargeable under Section 22. Reliance was also placed on Kolte Patil Developers Limited v. DCIT, ITA No. 2206/PUN/2016.
The PCIT, on the other hand, relied upon a series of judicial authorities concerning deemed rent and exercise of revisionary jurisdiction under Section 263, including Smt. Tara Devi Agarwal v. CIT, Rampyari Devi Saraogi v. CIT, Gee Vee Enterprises v. Additional Commissioner of Income-tax, Malabar Industrial Co. Ltd. v. CIT, Vedanta Ltd. v. CIT, ATC Telecom Tower (P.) Ltd. v. PCIT, CIT v. Bhagwan Das, Kerala State Electricity Board Ltd. v. DCIT, CIT v. Sunil Goyal and Income Tax Officer v. DG Housing Projects Limited.
The Tribunal observed that there were judicial pronouncements on both sides and that the issue was highly debatable. It noted that the assessee was a builder/developer engaged in construction, that income from sale of flats was offered as business income and that unsold flats were treated as stock-in-trade under inventories until ultimately sold. The Tribunal referred to Chennai Properties & Investments Ltd. v. CIT and the proposition concerning property used for the purposes of business.
The Tribunal then considered the statutory position concerning section 23(5). It recorded that an amendment had been brought into the statute under Section 23(5), providing that, in respect of unsold stock of properties held as stock-in-trade for the prescribed period from the date of obtaining the completion certificate, the annual value would be determined as Nil. The Tribunal stated that the specific provision had been brought into the statute from AY 2018-19 onwards.
The Tribunal thereafter distinguished the assessee’s position from the moratorium discussed in Pegasus Properties (P.) Ltd. v. DCIT. According to the order, the projects in the present case had been completed before AY 2018-19 and were shown under closing stock representing opening stock for the year. The Tribunal therefore held that the benefit of the moratorium period could not be allowed to the assessee in the circumstances of the case.
Ultimately, the Tribunal found the Assessing Officer’s order to be erroneous insofar as it was prejudicial to the interests of the Revenue and confirmed the action of the PCIT under Section 263. The assessee’s appeal was dismissed. The order was pronounced in the open court on 18.12.2023.
Cases Discussed
- Malabar Industrial Co. Ltd. v. CIT, (2000) 243 ITR 83 (SC) — relied upon by the assessee concerning the prerequisites for exercise of jurisdiction under Section 263.
- CIT v. Nirav Modi, (2017) 390 ITR 292 (Bom.) — relied upon by the assessee concerning Section 263 and the treatment of property used for the assessee’s business.
- Moil Ltd. v. CIT, (2017) 396 ITR 244 (Bom.) — relied upon by the assessee concerning the prerequisites for exercise of Section 263 jurisdiction.
- CIT v. Gabriel India Ltd., (1993) 203 ITR 108 (Bom.) — relied upon by the assessee concerning the scope of revision under Section 263 and further enquiry by the Assessing Officer.
- Kolte Patil Developers Limited v. DCIT, ITA No. 2206/PUN/2016 — referred to by the assessee on the issue of deemed annual rental value of unsold stock-in-trade.
- Smt. Tara Devi Agarwal v. CIT, [88 ITR 0323] — relied upon by the PCIT concerning the taxability issue and revisionary jurisdiction.
- Rampyari Devi Saraogi v. CIT, [67 ITR 0084] — relied upon by the PCIT concerning revisionary jurisdiction.
- Gee Vee Enterprises v. Additional Commissioner of Income-tax, (1975) 99 ITR 375 (Delhi) — relied upon by the PCIT concerning the scope of enquiry relevant to revisionary jurisdiction.
- Vedanta Ltd. v. CIT, (2021) 124 taxmann.com 435 — relied upon by the PCIT concerning the revisionary proceedings.
- ATC Telecom Tower (P.) Ltd. v. PCIT, (2017) 86 taxmann.com 97 — relied upon by the PCIT concerning Section 263.
- CIT v. Bhagwan Das, [2005] 272 ITR 367 — relied upon by the PCIT.
- Kerala State Electricity Board Ltd. v. DCIT, (2019) 111 taxmann.com 353 — relied upon by the PCIT.
- CIT v. Sunil Goyal, (2009) 176 Taxman 184 (Uttaranchal H.C.) — relied upon by the PCIT.
- Income Tax Officer v. DG Housing Projects Limited, (2012) 343 ITR 329 (Delhi) — relied upon by the PCIT concerning Section 263 proceedings.
- Chennai Properties & Investments Ltd. v. CIT, [2015] 56 taxmann.com 456 — considered by the Tribunal while examining the treatment of property used for business purposes.
- Pegasus Properties (P.) Ltd. v. DCIT Cen. Cir. 2(3), Mumbai, dated 23.12.2021, ITA No. 350-352 — considered in relation to the Section 23(5) moratorium and the applicability of the amended provision.
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT MUMBAI
This appeal by assessee is directed against the order of Ld. PCIT, Mumbai-41, dated 29.03.2023 u/s. 263 of the Income Tax Act, 1961 (in short ‘the Act’) for A.Y. 2018-19. The assessee has raised the following grounds of appeal:-
1. on the facts and in the circumstances of the case and in law, the order passed u/s. 263 of the I.T Act, 1961 is invalid and bad in law.
2. on the facts and in the circumstances of the case and in law learned P.C.I.T. erred in passing an order u/s. 263 of the I.T. Act, 1961 and that too without appreciating fully and properly the facts of the case.
3. on the facts and in the circumstances of the case and in law, the learned P.C.I.T. erred in holding that the order dated 24.02.2021 passed u/s. 143(3) of the act by the A.O. is erroneous and prejudicial to the interest of revenue although the same was neither erroneous nor prejudicial to the interest of revenue.
4. the Appellant craves leave to add, alter, amends or deletes all or any of the grounds of appeal at any time.
2. The brief facts of the case are that assessee is a partnership firm engaged in the business of land development and real estate construction activity. Assessee filed its return of income on 19.10.2018, declaring income at Rs. NIL (Loss of Rs. 6, 98,087/-). Case of the assessee was selected for scrutiny under CASS and assessed at Returned Income u/s. 143(3) r.w.s. 143(3A) and 143(3B) of the Act vide order dated: 24.02.2021. Thereafter, a notice u/s. 263 of the Act was issued by the office of Ld. PCIT, Mumbai-41 vide dated: 24.02.2023, the copy of the notice is reproduced herein below as under:
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3. As per this notice Ld. PCIT observed that assessee shown closing stock of Rs. 6, 50, 54,600/- in its Balance-Sheet for the year under consideration, however, no deemed rental income u/s. 23(5) of the Act is being declared by the assessee on this figure of Rs. 6, 50, 54,600/- and AO also accepted the return of income filed by the assessee without any addition on this count. Ld. PCIT found the same
to be erroneous in so far as prejudicial to the interest of revenue. We have gone the Order of AO, Order of the Ld. PCIT and submissions of the assessee alongwith ground of appeals raised before us judicial pronouncement placed.
4. We have gone through the notices issued by the AO during the assessment proceedings u/s. 142(1) of the Act vide dated: 28.01.2020 placed at page No. 31 to 35 of the Paper Book filed by the assessee. Vide this notice point no. 6 and 17 are relevant in the present appeal reproduced as under:
“6. Please provide the addresses of all the premises from where the business is being conducted and also the name and PAN of the person in-charge for of each of such premises.
17. With regard to the high closing stock held by you, it was seen in the Assessment proceedings during AY 2017-18 that no rent was offered by you under the head Income from House Property. You are requested to give project wise detail of stock in trade as on 31.03.2018 in a tabular form with complete address mentioned and the rent or annual letable value (if not actually on rent) to arrive at the Income from house property accrued to you during the FY 2017-18 for the purpose of bringing the same to taxation.”
5. It is observed that reply of assessee for abovementioned queries are as under vide their reply filed with paper book:
Reply to Point No. 6 “BHAGWATI ABHILASHA CONVENTURE A/35 Patil Bhuvan, N. S. B. Road, Mulund (West), Mumbai-400080, Mr. Manoj Kantilal Patel (PAN No. AAAPP4637Q)”
Reply to Point No. 17 is as under:
It is observed that assessee replied properly for point no. 6, but for point no. 17 of the notice issued u/s. 142(1) of the Act, no specific reply ever furnished except furnishing break up of closing stock with details and amount. Assessee itself confirmed that addition on account of deemed rental income u/s. 22 r.w.s. 23(5) of the Act was made in AY 2017-18 also. There is no material on record which confirms that this addition was being challenged by assessee before appellate forums.
6. As far as Grounds raised by the assessee is concerned, it pertain to action taken u/s. 263 of the Act, resultantly taxability of deemed rent u/s. 22 r.w.s. 23 of the Act. On this matter assessee relied upon following judicial pronouncements alongwith its submissions as under:
i) Malabar Industrial Co. Ltd. V. CIT (2000) 243 ITR 83(SC)
ii) CIT V. Nirav Modi (2017) 390 ITR 292(Bom)
iii) Moil Ltd. V. CIT (2017) 396 ITR 244 (Bom.)
iv) CIT V. Gabriel India Ltd. (1993) 203 ITR 108 (Bom)
In all the above cases, it has been held that the pre-requisite for the exercise of jurisdiction u/s. 263, the order of the A.O. should be erroneous in so far as it is prejudicial to the interest of the revenue. It is also held that once the A.O. is satisfied about the claim on the basis of materials before him, he need not make further enquiries in the matter.
Apart from above mentioned case laws, kind attention of your good selves is also drawn to the order dated 14/12/2016 passed by the Hon. SC rejecting Special Leave Petition filed by the department against the order dated 16/06/2016 in ITA No. 117 of 2014 [above referred – CIT V. Nirav Modi (2017) 390 ITR 292(Bom)] passed by the Hon. High court of Bombay. The closing stock consisting of 27 units of property are occupied/used for the purpose of assessee’s business and therefore, not chargeable to tax as per the provisions of Section 22 of the Act. Needless to mention that the unsold flats are held as stock in trade and therefore, no notional annual rental value on unsold flats held in stock-in-trade can be made in assessee’s hands. (Please see case law M/s. Kolte Patil Developers Limited v/s. DCIT, ITA No.2206/PUN/2016).
7. The Ld. PCIT relied upon following case laws to substantiate their view on the taxability of deemed rent on unsold stock of flats hold by assessee as under:
1. Smt. Tara Devi Agarwal v. CIT [88 ITR 0323] and also Rampyari Devi Saraogi v. CIT [67 ITR 0084]
2. Gee Vee Enterprises v Additional Commissioner of Income-tax (1975), 99 ITR 375 (Delhi),
3. Malabar Industrial Co. Ltd. vs. CIT (243 ITR 83)
4. Vedanta Ltd. vs. CIT (2021)124 taxmann.com 435
5. ATC Telecom Tower (P.) Ltd. vs. PCIT (2017) 86 taxmann.com 97
6. CIT v. Bhagwan Das [2005] 272 ITR 367.
7. Kerala State Electricity Board Ltd. vs. DCIT (2019) 111 taxmann.com 353
8. CIT vs. Sunil Goyal (2009) 176 Taxman 184 (Uttaranchal H.C.)
9. Income Tax Officer versus DG Housing Projects Limited (2012) 343 ITR 329 (Delhi)
8. We have gone through the case laws relied upon by both the parties and facts of the matter. It is observed that there are judicial pronouncements on both sides and issue is highly debatable. In that circumstance where it was specifically pointed out that assessee is a builder/developer engaged in the business of construction and income earned from sale of flats is offered to tax as business income and that the unsold flats are treated as ‘stock-in-trade’ under the head inventories till they are ultimately sold. We further rely on Chennai Properties & Investments Ltd. v. CIT [2015] 56 taxmann.com 456 wherein it was held by Hon’ble Apex Court “the charging provisions of section 22 of the Act specifically gives exemption from determination of actual value of the property which is used for the purpose of any business or provision carried on by the assessee. There is no dispute that the assessee had retained the unsold stock of flats as stock-in-trade in the capacity of builder. Hence there is no dispute that the unsold stock of flats was used only for the purpose of business of the assessee.”
9. But now there is an exception provided in charging section 22 of the Act seems to be indirectly taxed from A.Y. 2018-19 after providing the moratorium period of two years. Hence, up to A.Y. 2017-18, no addition could be made in respect of deemed rental income on unsold stock of flats lying as stock-in-trade as they are used for the purpose of business of the assessee.
10. Keeping in view the anomaly/divergent views of coordinate benches and Hon’ble High Courts on this subject an amendment has been brought in the statute in section 23(5) where in respect of unsold stock of properties held as ‘stock-in-trade’ for a period of two years from the date of obtaining completion certificate from the competent authority, the annual value of such property would be determined as ‘Nil’. In other words, there would be no addition towards deemed rental income in respect of unsold stock of properties held as ‘stock-in-trade’ for a period of two years from the date of obtaining the completion certificate from the competent authority. This specific provision has been brought in the statute from assessment year 2018-19 onwards. Hence, up to assessment year 2017-18, no addition could be made in respect of deemed rental income on unsold stock of flats lying as stock-in-trade as they are used for the purpose of business of the assessee.
11. Respectfully considered Hon’ble Apex Court In the case of Chennai Properties & Investments Ltd. v. CIT [2015] 56 taxmann.com 456 and considering specific provision has been brought in the statute from assessment year 2018-19 onwards. Hence, up to assessment year 2017-18, no addition could be made in respect of deemed rental income on unsold stock of flats lying as stock-in-trade as they are used for the purpose of business of the assessee. But, from A.Y. 2018-19 it is categorically declared taxable by the statute. In these terms, Grounds raised by the assessee is dismissed as the order of AO is found to be erroneous as amendment in the Act w.e.f. A.Y. 2018-19 was totally ignored, which is mandatory in nature now, consequently becomes prejudicial also as amount of tax is involved. As far as the issue of availability of moratorium of 2 years is concerned that speaks about 2 years from the date of completion, in this case this benefit also can’t be claimed by the assessee as, it is applicable from A.Y. 2018-19 only, i.e., completion certificates received A.Y. 2018-19 onwards only and in the case of assessee stock of real estate lying completed much before and assessee must not have shown income on the same.
12. Assessee heavily relied upon the decision of Coordinate Bench of ITAT in the case of Pegasus Properties (P.) Ltd. vs. DCIT Cen. Cir. 2(3), Mumbai dated 23rd December 2021, ITA No. 350-352. In this case, Coordinate Bench held that in respect of unsold stock of flats held as ‘stock-in-trade’ upto A.Y. 2017-18. However, the amendment has been brought in the statute in section 23(5) from AY 2018-19 providing a moratorium period of two years. Hence, no addition could be made even for AY 2018-19 also. We have gone through the decision of Coordinate Bench and relevant section (post amendment) observed that this moratorium period as discussed in section 23(5) is applicable to the projects completed in A.Y. 2018-19 and onwards. Whereas the case before us projects of the assessee completed before A.Y. 2018-19 as the same have been shown under the head closing stock (representing opening stock for the year). Hence, this benefit of moratorium period cannot be allowed to the assessee before us.
13. In view of above, we found order of the AO as erroneous in so far as prejudicial to the interest of revenue hence, action of the Ld. PCIT u/s. 263 of the Act is confirmed and appeal of the assessee is dismissed.
14. In the result, appeal of the assessee is dismissed.
Order pronounced in the open court on 18th day of December, 2023.
