Ramani Brothers Vs DCIT (ITAT Ahmedabad)
No Notional Rent on Builder’s Unsold Stock for AY 2017-18: ITAT Deletes ₹5.79 Lakh Addition
The Ahmedabad Bench of the Income Tax Appellate Tribunal (ITAT) deleted an addition of ₹5,79,697 towards notional rental income from eight unsold flats held by a real estate developer as stock-in-trade. Deciding the appeal of Ramani Brothers vs. DCIT, the Tribunal held that the addition could not be sustained for Assessment Year 2017-18, which preceded the applicability of Section 23(5) of the Income Tax Act, 1961.
The order in ITA No. 2444/Ahd/2026, pronounced on 14 October 2026, was passed by Judicial Member Rahul Chaudhary and Accountant Member Gangadhar Panda.
Background of the Dispute
Ramani Brothers, a partnership firm engaged in building construction and development, filed its return for AY 2017-18 declaring total income of ₹1,32,49,540. Its case was selected for complete scrutiny.
During assessment, the Assessing Officer noticed that the firm had eight unsold units in its “Sarita Galaxy” project, valued at ₹1,18,30,563 as closing stock. Building-use permission for the project had been obtained during Financial Year 2013-14.
The firm had not offered any notional rent from these units under the head “Income from House Property.” In response to a show-cause notice, it explained that the flats formed part of its business inventory and that no notional rental income was taxable for the relevant year.
Assessing Officer Estimates Annual Letting Value
The Assessing Officer rejected the explanation and estimated the annual letting value at 7% of the closing stock value. After allowing the 30% standard deduction, he determined taxable house property income of ₹5,79,697.
Consequently, the assessment completed under Section 143(3) on 21 December 2019 determined total income at ₹1,38,29,240. Penalty proceedings under Section 270A were separately initiated for under-reporting of income.
The dispute before the Tribunal concerned the addition for notional rental income arising from the unsold inventory.
CIT(A) Upholds Addition Based on Ownership
The Commissioner of Income Tax (Appeals) sustained the addition. According to the appellate authority, Section 22 applied on the basis of ownership, irrespective of whether the property was classified as stock-in-trade in the books.
The CIT(A) relied on the Delhi High Court’s decision in CIT vs. Ansal Housing Finance & Leasing Co. Ltd., 354 ITR 180, to support taxation of the annual letting value of unsold flats.
The appellate authority also observed that the assessee had not produced sufficient documentary evidence showing that the Assessing Officer’s estimate of 7% was excessive or unreasonable. It rejected the assessee’s objection concerning the prospective applicability of Section 23(5).
Assessee Relies on Business Character of Flats
Before the Tribunal, the assessee submitted that the eight flats were business stock intended for sale, rather than investments held to earn rental income.
It argued that Section 23(5), inserted with effect from AY 2018-19, could not be applied retrospectively to AY 2017-18. The assessee also challenged the 7% estimate, contending that it lacked specific evidence of the flats’ actual rental value.
Reliance was placed on Galaxy Developers vs. ACIT, (2025) 174 taxmann.com 1219 (Ahmedabad Tribunal), concerning notional rent on a developer’s unsold stock for AY 2017-18.
The assessee further cited the Third Member decision in Moraj Finanz Corporation vs. DCIT, ITA No. 53/Mum/2025, dated 28 August 2026.
Precedents Support Deletion of Notional Income
The Tribunal reproduced the relevant discussion in Moraj Finanz Corporation. That decision considered the business character of unsold units and the judicial principles discussed in PCIT vs. Classique Associates Ltd. and CIT vs. Neha Builders (P.) Ltd.
The Third Member’s reasoning distinguished properties held as business inventory and noted that the units before it had never been let out or generated income.
It also addressed the insertion of Section 23(5), observing that the provision operated prospectively and did not apply to the earlier assessment year under consideration.
In Ramani Brothers, the Ahmedabad Bench relied on Galaxy Developers and Moraj Finanz Corporation to resolve the issue concerning the eight unsold flats.
Tribunal Deletes Addition and Allows Appeal
The Tribunal recorded that the flats were held as stock-in-trade and were not let out during the relevant year. Following the cited decisions, it held that their notional annual letting value could not be taxed under Section 22 for the assessment year preceding the applicability of Section 23(5).
Accordingly, it deleted the entire addition of ₹5,79,697 sustained by the CIT(A) and allowed the assessee’s appeal.
The Tribunal also condoned a 54-day delay in filing the appeal. It accepted the affidavit explaining that the assessee lacked familiarity with the income-tax portal and email access and became aware of the appellate order while renewing its digital signature. The explanation was considered sufficient and bona fide.
The ruling grants relief for AY 2017-18 on the specific facts of unsold, unlet business inventory. Its reasoning rests on the applicable assessment year, the character of the flats as stock-in-trade, and the precedents followed by the Tribunal.
Cases Discussed
- CIT Vs Ansal Housing Finance & Leasing Co. Ltd. — 354 ITR 180 (Delhi HC); relied upon by CIT(A).
- Galaxy Developers Vs ACIT — (2025) 174 taxmann.com 1219 (ITAT Ahmedabad); followed.
- Moraj Finanz Corporation Vs DCIT — ITA No. 53/Mum/2025; Third Member decision dated 28 August 2026; followed.
- PCIT Vs Classique Associates Ltd. — Bombay High Court; discussed in Moraj Finanz.
- CIT Vs Neha Builders (P.) Ltd. — (2008) 296 ITR 661 (Gujarat HC); discussed in quoted precedent.
- Chennai Properties and Investments Ltd. Vs CIT — (2015) 377 ITR 673 (SC); discussed in quoted precedent.
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT AHMEDABAD
The captioned appeal has been filed by the assessee against the order passed by the Ld. Commissioner of Income Tax (Appeals), (hereinafter referred to as “Ld. CIT(A)”), ADDL/JCIT(A), Panaji dated 25.02.2026 under Section 250 of the Income Tax Act, 1961 arising out of the Assessment Order, dated 21.12.2019 completed under Section 143(3) of the Income Tax Act, 1961 [hereinafter referred to as ‘the Act’] for the Assessment Year 2017-18.
2. The assessee has raised the following grounds of appeal:
“(1) That on facts, and in law, the learned NFAC has grievously erred in confirming the addition of Rs.5,79,697/- u/s 23(5) of the act towards notional rent in respect of unsold stock in trade of residential flats of the appellant.
(2) That on facts, and in law, it ought to have been held that the provisions of section 23(5) of the Act are not applicable to the year under consideration.
(3) The appellant craves leave to add, alter, amend any ground of appeal.”
Condonation of Delay:-
3. At the outset, the Registry has noted that the appeal is time barred by 54 days. The assessee has filed an Affidavit explaining the reasons for the delay and has submitted that the delay was neither deliberate nor due to any wilful neglect. The assessee stated that he was not conversant with the Income Tax Portal and did not know how to access the email account. The assessee got knowledge of the order when he renewed his Digital Signature in the IT Portal. Thereafter, the assessee met with the Chartered Accountant, who advised him to file the appeal before the ITAT. Thereupon, the assessee filed an appeal before the tribunal.
4. We have considered the contents of the Affidavit and the reasons stated therein. Having regard to the overall facts and circumstances of the case, we are satisfied that the assessee has shown sufficient and bona fide cause for the delay in filing the appeal. The delay is, accordingly, condoned in the interest of substantial justice and the appeal is admitted for adjudication on merits.
5. The brief facts of the case are that the assessee, a partnership firm engaged in the business of building construction and development, filed its return of income for A.Y. 2017-18 on 14.10.2017 declaring total income of Rs.1,32,49,540/-. The return was processed under section 143(1) of the Income Tax Act, 1961 (the Act), and the case was selected for complete scrutiny under CASS. During the course of assessment proceedings, the Assessing Officer noticed that the assessee had eight unsold units in its project, “Sarita Galaxy”, with a closing stock value of Rs. 1,18,30,563/-, for which the building-use permission had been obtained in F.Y. 2013-14. Since the assessee had not offered any notional rental income from the unsold units under the head “Income from House Property”, the Assessing Officer issued a show-cause notice. The assessee contended that the unsold units constituted stock-in-trade of its construction business and that no notional rental income was taxable for the year under consideration, particularly in view of the insertion of section 23(5) of the Act with effect from A.Y. 2018-19. The Assessing Officer, however, rejected the assessee’s contentions and, applying an estimated annual letting value of 7% of the closing stock, determined the income from house property at Rs. 5,79,697/- after allowing the standard deduction of 30%. Accordingly, vide assessment order passed under section 143(3) of the Act, the total income of the assessee was assessed at Rs. 1,38,29,240/- as against the returned income of Rs.1,32,49,540/-, and penalty proceedings under section 270A of the Act were separately initiated for under-reporting of income.
6. Being aggrieved by the assessment order, the assessee filed appeal before the Ld. CIT(A). The Ld. CIT(A), after considering the assessment order, written submissions filed by the assessee and the material available on record, observed that the assessee was engaged in the business of real estate development and had eight completed but unsold units held as stock-in-trade in its project “Sarita Galaxy”. The CIT(A) held that the provisions of section 22 of the Income Tax Act, 1961 were attracted on the basis of ownership of the property, irrespective of its classification as stock-in-trade in the books of account. Relying upon the decision of the Hon’ble Delhi High Court in CIT v. Ansal Housing Finance & Leasing Co. Ltd. (354 ITR 180), the CIT(A) held that the annual letting value of the unsold flats was taxable under the head “Income from House Property”. The CIT(A) further observed that the assessee had not furnished sufficient documentary evidence to establish that the annual letting value estimated by the Assessing Officer at 7% of the closing stock was excessive or unreasonable. The contention that section 23(5), inserted with effect from A.Y. 2018-19, was not applicable to the year under consideration was not accepted. Accordingly, the addition of Rs.5,79,697/- made by the Assessing Officer on account of notional rental income was upheld.
7. Being aggrieved by the appellate order, the assessee, therefore, filed appeal before us.
8. The Ld. Counsel submitted that the assessee is engaged in the business of construction and real estate development and that the eight unsold flats in the project “Sarita Galaxy” were held as stock-in-trade and not as investment for earning rental income. It was contended that, for the assessment year under consideration, i.e., A.Y. 2017-18, there was no specific provision authorising the taxation of notional rental income on unsold inventory of builders. Section 23(5) of the Income Tax Act, 1961, was inserted with effect from A.Y. 2018-19 and could not be applied retrospectively. The Ld. Counsel further submitted that the Assessing Officer had estimated annual letting value at 7% of the closing stock without any specific evidence of the actual rental value of the flats and thereby made an addition of Rs.5,79,697/- on a purely notional basis.
9. At the time of hearing, the Ld. Counsel for the assessee relied upon the decision of the Coordinate Bench in the case of Galaxy Developers vs. ACIT reported in (2025) 174 taxmann.com 1219 (Ahmedabad – Trib.), wherein it was held that notional income cannot be brought to tax under head ‘Income from House Property’ under section 22 of the Act in respect of flats head as stock-in-trade by a real estate developer for A.Y. 2017-18.
10. Further, the Counsel for the assessee has also relied on the decision of the Third Member of Mumbai Tribunal in the case of Moraj Finanz Corporation vs. DCIT in ITA No. 53/Mum/2025 for A.Y. 2010-11 order dated 28.08.2026. The observations of the Hon’ble Tribunal are held as follows:
“1. Owing to the difference of opinion between the Members of the Division Bench, the Hon’ble President of Income Tax Appellate Tribunal deemed it appropriate to nominate a Third member to adjudicate the dispute between the members constituting the bench.
2. The Hon’ble Vice President/ Third Member concurred with the view expressed by Judicial Member and ruled as under;
“11. I have considered rival submissions and perused the materials on record. There is no dispute that the unsold flats/units, which were subjected to computation of notional rent, were held as stock-in-trade by the assessee and not as owner of property. It is also a fact on record that the unsold flats/units held as stock-in-trade were not let out during the year. Thus, the assessee has not derived any financial benefit from them. It is a fact on record that while deciding the issue relating to computation of notional rent on the unsold flats/units in the order referred to above, the ITAT had directed the AO to verify the fact that as on 31.03.2010 allotment letters were issued to the buyers of the flats and then decide applicability of the ratio laid down in ‘Ansal Housing Finance and Leasing Company Ltd. (Supra). It is the case of the Department that the AO has determined ALV in respect of unsold flats/units wherein allotment letters were not issued by 31.03.2010. In my view, what is of importance is whether ALV of unsold flats/units held as stock-in-trade can at all be determined and assessed under the head Income from House Property. In this context, I deem it appropriate to refer to a decision of the Hon’ble Bombay High Court in case of PCIT vs. M/s Classique Associates Ltd., consideration by the Hon’ble High Court:
“1. Whether on the facts and circumstances of the case and in law, the Hon’ble Tribunal was justified, in not upholding the AO’s findings that the income derived by the assessee from letting out of its properties, held as stock-in-trade, represents income from house property, by relying on the decision of the Hon’ble Supreme Court in the case of Chennai Properties Pvt. Ltd. Without appreciating the facts of the case of M/s. Chennai Properties Pvt. Ltd. Are distinguishable in so far as the main object of Chennai Properties Pvt. Ltd. Was to acquire and give properties on rent, whereas, the assessee firm is engaged in development and construction of properties?
2. Whether on the facts and circumstances of the case and in law the Hon’ble Tribunal was justified in not upholding the pro- rata disallowance of Rs. 1,41,00,000/- being expenses pertaining to stock-on-lease, which was rightly made by the AO since such deduction is not allowable while computing income from house property?”
12. While answering Question No.1, the Hon’ble Jurisdictional High Court discussed and decided the issue as under:
“3. The respondent-assessee is a partnership firm and is engaged in the business of development of real estate. The questions arise out of the assessee’s return of income for the Assessment Year 2006-07. While scrutinising such return, the Assessing Officer noticed that the assessee had earned an amount of Rs.1.51 crores (rounded off) by leasing out certain flats and treated such income as the business income, in turn claiming various expenses by way of business expenditure. The Assessing Officer held that, the Income was from house property being rental income. The issue eventually reached the Tribunal. The Tribunal by the impugned judgment while confirming the view of the Commissioner of Income Tax (Appeals) and dismissing the Revenue’s Appeal, noted that the assessee was engaged in the business of real estate development. During the year under consideration, the assessee had declared total income of Rs.10.45 crores (rounded off). Only small portion of the number of units constructed by the assessee were given on lease and license basis. The Tribunal therefore held that the activity of letting out the premises on leave and license was only ancillary business of the assessee to the main business of development of real estate. The Tribunal referred to and relied upon the decision of the Division Bench of the Gujarat High Court in the case of Commissioner of Income-tax V. Neha Builders (P.) Ltd. reported in 2008 (296) ITR 661 and of the Supreme Court in the case of Chennai Properties and Investments Ltd. V/s. Commissioner of Income-Tax, reported in [2015] 377 ITR 673 to come to the conclusion that the Assessing Officer incorrectly held that the income was from house property and not business income.
4. The Tribunal, having noted the relevant facts, by placed reliance on the above decisions of the Gujarat High Court in the case of Neha Builders (supra) and of the Supreme Court in the case of Chennai Properties (supra). In Neha Builders (supra), the Division Bench of the Gujarat High Court was considering a very similar issue. While accepting the assessee’s contention in this respect, the Court held and observed as under: “8. True it is, that income derived from the property would always be termed as ‘income’ from the property, but if the property is used as ‘stock-in-trade‘, then the said property would become or partake the character of the stock, and any income derived from the stock, would be ‘income’ from the business, and not income from the property. If the business of the assessee is to construct the property and sell it or to construct and let out the same, then that would be the ‘business’ and the business stocks, which may include movable and immovable, would be taken to be ‘stock-in- trade’, and any Income derived from such stocks cannot be termed as ‘income from property Even otherwise, it is to be seen that there was distinction between the ‘income from business’ and ‘income from property’ on one side, and ‘any income from other sources’. The Tribunal, in our considered opinion, absolutely unjustified in comparing the rental income with the dividend income on the shares or interest income on the deposits. Even otherwise, this question was not raised before the subordinate Tribunals and all of sudden, the Tribunal started applying the analogy.
5. In the case of Chennai Properties (supra), the facts were that the assessee was engaged in the business of acquiring and holding properties. During the course of such business, the assessee had let out certain properties so acquired and earned income out of such activity. The Supreme Court confirmed the view of the High Court that income generated from such source was assessee’s business income and not the assessee’s house property.”
13. As could be seen from the aforesaid observations, applying the ratio laid down in the case of Neha Builders (P) Ltd. (Supra), the Hon’ble jurisdictional High Court has ultimately concluded that income derived from unsold flats/units held as stock-in-trade can be assessed as business income and not under the head. “Income from House Property“. Though, this decision was available when the appeal was decided by the Coordinate Bench in the first round, unfortunately, it was not brought to the notice of the coordinate Bench. Therefore, while deciding the issue, learned coordinate Bench did not have the benefit of the decision of the Hon’ble jurisdictional High Court. Even, in course of hearing of the appeal in the second round, the decision was not cited before the learned Members constituting the Division Bench. It goes without saying that a decision of the Hon’ble Jurisdictional High Court is binding on all subordinate courts and authorities within the territorial jurisdiction of the High Court. As discussed earlier, applying the principle laid down by the Hon’ble Jurisdictional High Court in case of CIT vs Classique Associate (Supra) income from unsold flats/units held as stock in trade cannot be assessed under the head income from house property.
14. Assessee’s case stands on a much better footing, as unlike the facts in the case of PCIT vs. Classique Associates Ltd. (Supra), in assessee’s case flats/units were never let out and the assessee did not earn any income therefrom. Thus, applying the ratio laid down by the Hon’ble Jurisdictional High Court in case of PCIT Vs. Classique Associates (Supra). I hold that there cannot be any addition under the head “Income from House Property” by notionally computing ALV of the unsold flats/units held as stock-in-trade. At this stage, I must observe, there was an amendment to Section 23 of the Act with Insertion of Section 5 by the Finance Act 2017 w.e.f. 01.04.2018 applicable to the AY 2018-19 onwards. The said provision reads as under
“(5) Where the property consisting of any building er land appurtenant thereto is held as stock in trade and the property or any part of the property is not let during the whole or any part of the previous year, the annual value of such property or part of the property, for the period up to “Itwo years) from the end of the financial year in which the certificate of completion of construction of the property is obtained from the competent authority, shall be taken to be nil]”
15. Thus, by virtue of a deeming provision, the legislature intended to bring notional rent to tax in respect of unsold flats/units held as stock in trade. However, the provision, as held in various judicial precedents, would apply prospectively and not to the assessment year under dispute.
16. In view of the aforesaid, I agree with the learned JM that the addition made under the head “Income from House Property” has to be deleted.
17. In so far as, the questions proposed by learned AM, I have already observed that while deciding the appeal in the first round, the coordinate Bench did not have the benefit of the decision of the Hon’ble jurisdictional High Court in case of ACIT vs. Classique Associates (Supra). Had the Bench been made aware of such decision of the Jurisdictional High Court, definitely it would have followed the same. Thus, in my considered opinion, there is no question of ITAT reviewing its own order. Rather, it is a case where decision of the Hon’ble Jurisdictional High Court, which is a binding precedent, is being followed.
18. In view of the aforesaid, appeal records be returned back to the Registry and the Registry is directed to place the matter before the Id. Division Bench for passing the confirmatory order, as per majority view.”
3. In view of the majority opinion, we hold that unsold flats/units held as stock in trade cannot be assessed under the head income from house property. 4. In the result, the appeal filed by the assessee is allowed.”
11. The Counsel for the assessee has pleaded that the impugned order of the Ld. CIT(A) is set-aside the matter is restored to the file of the Ld. CIT(A).
12. In response, the Ld. DR placed reliance on the observations made by the AO and the Ld. CIT(A) in their respective orders.
13. We have heard the rival submissions and perused the material available on record.
14. The issue for our consideration is whether notional rental income in respect of eight unsold flats held as stock-in-trade by the assessee, a real estate developer, could be brought to tax under the head “Income from House Property” for A.Y. 2017-18. We find that the Coordinate Bench of the Tribunal in Galaxy Developers (supra) and the Third Member decision in Moraj Finanz Corporation (supra) have held that notional annual letting value of unsold units held as stock-in-trade cannot be taxed under section 22 for the assessment year i.e. prior to the applicability of section 23(5) of the Act. Accordingly, considering that the subject flats were held as stock-in-trade and were not let out during the year under consideration, we find merit in the assessee’s contentions. The addition of Rs.5,79,697/- made on account of notional rental income and sustained by the Ld. CIT(A) is, therefore, deleted. The ground raised by the assessee is allowed.
15. In the result, the appeal of the assessee is allowed.
This Order pronounced in Open Court on 14/10/2026
