Case Law Details
ACIT Vs Shoppers Buildcon Private Ltd (ITAT Ahmedabad)
Facts- The assessee is engaged in the business of construction and development of commercial and residential projects. A search u/s. 132 was conducted in the cases belonging to the Sewani Group, including the assessee, on 09.09.2015. Pursuant to the said action, a notice under Section 153A of the Act was issued to the assessee on 29.08.2016.
The assessee filed its return of income for the year under consideration on 17.10.2016 declaring a total income of Rs.80,25,440/-. During the course of search conducted at the premises of the assessee certain documents were seized and identified. The said documents contained the entries regarding the on-money received by the assessee on sale of flats from a project named ‘Krishna Venue’. After considering the explanation offered by the assessee in respect of relevant entries found reflected in the relevant seized documents and taking into consideration the details and documents available on record, the AO arrived at a conclusion that the on-money of Rs.3,03,50,000/- received by the assessee in cash pertaining to the sale of flats recognized in the year under consideration as well as the on-money of Rs.6,70,51,310/- received by the assessee as reflected in the relevant seized material pertaining to sale of flats made in other years represented the undisclosed income of the assessee. He accordingly made a total addition of Rs.9,74,01,310/- on account of on-money received by the assessee on sale of flats.
The addition of Rs.9,74,01,310/- made by the AO on account of on-money was challenged by the assessee in appeal before the learned CIT(A). The learned CIT(A) directed the AO to ensure that the on-money to the extent of Rs.6,70,51,310/- be taxed in the hands of the assessee not in the year under consideration but in the relevant years when the corresponding flats were sold and income from such sales was offered to tax. Further, with regard to addition of Rs. 3,03,50,000/-, learned CIT(A) restricted the same to Rs. 60,70,000/- being 20% net profit embedded in the on-money.
Being aggrieved by the relief allowed to the assessee, the revenue has raised the issue in appeal before Tribunal.
Conclusion- In one of such decisions rendered in the case of Neha Builders Pvt. Ltd., it was held by the Hon’ble Gujarat High Court that “if property is used as stock-in-trade, then it would become and partake character of stock and any income derived from stock would be ‘income from business’ and not ‘income from house property’”. As rightly contended by the learned Counsel for the assessee, it therefore follows that the deemed rent concept cannot be applied or invoked in case of property which is stock-in-trade of the business of the assessee and the addition made by the Assessing Officer on account of deemed rent cannot be sustained as rightly held by the learned CIT(A).
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
This appeal is preferred by the Revenue against the order of the learned Commissioner of Income-tax (Appeals)-11, Ahmedabad (“CIT(A)” in short) dated 20th August 2018 passed for Assessment Year 2016-17.
2. In Ground No.1, the Revenue has challenged the action of the learned CIT(A) in restricting the addition of Rs.9,74,01,310/- made by the Assessing Officer on account of on-money received by the assessee to Rs.60,70,000/-.
3. The assessee, in the present case, is a company which is engaged in the business of construction and development of commercial and residential projects. A search under Section 132 of the Income-tax Act, 1961 (“the Act” in short) was conducted in the cases belonging to the Sewani Group, including the assessee, on 09.09.2015. Pursuant to the said action, a notice under Section 153A of the Act was issued to the assessee on 29.08.2016. The assessee filed its return of income for the year under consideration on 17.10.2016 declaring a total income of Rs.80,25,440/-. During the course of search conducted at the premises of the assessee at Shoppers Plazza-3, CG Road, Opp. Municipal Market, Ahmedabad, certain documents were seized and identified as Annexure A-4 (Page No.74 to 82). The said documents contained the entries regarding the on-money received by the assessee on sale of flats from a project named ‘Krishna Venue’. After considering the explanation offered by the assessee in respect of relevant entries found reflected in the relevant seized documents and taking into consideration the details and documents available on record, the Assessing Officer arrived at a conclusion that the on-money of Rs.3,03,50,000/- received by the assessee in cash pertaining to the sale of flats recognized in the year under consideration as well as the on-money of Rs.6,70,51,310/- received by the assessee as reflected in the relevant seized material pertaining to sale of flats made in other years represented the undisclosed income of the assessee. He accordingly made a total addition of Rs.9,74,01,310/- on account of on-money received by the assessee on sale of flats.
4. The addition of Rs.9,74,01,310/- made by the Assessing Officer on account of on-money was challenged by the assessee in appeal before the learned CIT(A). The first contention raised on behalf of the assessee before the learned CIT(A) was that the on-money in question was utilized for making payments against the purchase of land for the project; and, since the same was already offered to tax as unexplained investment in land pursuant to the search conducted earlier in the case of the assessee, no addition could be made on account of on-money as the same would result in double addition. This contention of the assessee was not found acceptable by the learned CIT(A) as a result of the failure of the assessee to establish any direct nexus between the on-money received and the payments made towards purchase of land. The second contention raised on behalf of the assessee before the learned CIT(A) was that the on-money to the extent of Rs.6,70,51,310/- was in respect of flats which were sold by the assessee in other years and not in the year under consideration. It was contended that the said on-money thus was liable to be taxed not in the year under consideration but in the years in which the relevant flats were sold and the income from such sale was offered to tax. The learned CIT(A) found merit in this contention of the assessee and directed the Assessing Officer to ensure that the on-money to the extent of Rs.6,70,51,310/- be taxed in the hands of the assessee not in the year under consideration but in the relevant years when the corresponding flats were sold and income from such sales was offered to tax. The relevant observations/findings recorded by the learned CIT(A) to arrive at this conclusion, as contained in paragraph No.5.14 of his impugned order, are extracted below:-
“5.14 The next issue would arise is to the year in which on money of Rs. 6,70,51,310/- profit embedded on such on money would be taxed in the hands of the Appellant. It is settled legal law that on money receipts is also required to be taxed in the year in which regular receipts are recognized in books of account. It is observed that AO has taxed above on money in current assessment year on cash basis without appreciating the fact that cheque component of above referred on money is not taxed in current year but were taxed in subsequent assessment years or sales were yet not recognized by appellant in books of account. Moreover, the AO himself has taxed the on money receipt for A.Y. 2014-15 & 2015-16 to the extent sale was registered in the years relevant to these assessment year. Thus, taxing of money receipt for the unsold units is contradictory of the AO’s decision for A.Y. 2014-15 & 2015-16. Reliance is placed on decision of Hon’ble Ahmedabad ITAT in the case of Ms D.R. Construction V/s ITO (ITA No 2735/Ahd/2010) dated 08/04/2011 wherein it is held as under:
“…..15. The next issue comes as to when the income out of such receipt would accrue to the assessee. In our considered view receipt of ‘on money’ is part and parcel of money received on sale of flats by cheque. The amount received by cheque before actually transferring the flats to the purchasers will be in the nature of advance and cannot be said to have accrued to the assessee. Assessee has incurred expenditure/investment in the project in various years but income to it will accrue only when flats are sold to the buyers. Advance money received by the assessee can never be his income. It would only be a in the balance sheet as advances from the customers and will be adjusted proceeds of the flats when flats are transferred to the purchasers. Therefore, accrual of income to the assessee will not arise on the date when it receives cheque or cash sale on flats but will arise when flats are transferred to the buyers. Till then it will only be an advance. We notice that assessee has booked the flats from Asst. Year 2008-09 on wards and received advances by way of cheque. It has also received advance in cash which is now declared as ‘on money’ in the statement given by Shri Ravi Khandelwal. In a chart given before us by the assessee, names of the prospective buyers and their PANs have also been given and also the date of booking. There were 122 such buyers and from whom ‘on money’ in cash to the extent of Rs.10 crores is stated to be received. The outstanding amount against them is also shown. The area of the premises booked, rate at which it is booked and the date of booking all fall in the FY 2006-07 and 2007-08. But as per certificate of the auditor whose contents are referred to above, assessee has sold total 149 units in FY 2009-10 and 55 units in FY 2010-11 upto 15.03.2011, it has shown to have adjusted a sum of Rs.4,18,68,899/- out of Rs.10 crores against sale of 149 flats/shops and of Rs.1,82,09,630/-against sale of 55 flats/shops. The revenue is accordingly recognized only when flats/shops are sold and, therefore, both cheque portion/cash portion being the ‘on money’ would accrue to the assessee in the year when flats/shops are sold. Therefore, in no way sum of Rs.10 crores as a whole can be taxed in Asst. Year 200809 on the basis of expenditure as deemed income u/s 69C.”
Further, the decision of the Pune ITAT in ITO V/s Karda Construction Limited (ITA No 971/PN/708) dated 31st July 2012 is confirmed by Hon’ble Bombay High court in Tax Appeal No 1960 of 2012 dated 25th February 2013 wherein it is held that cash receipts are undisputedly in respect of sale of flats and same is required to be offered to tax in the year in which the fiats are sold. Thus, net profit embedded on on-money receipt is taxed in the year in which appellant has shown income in regular books of accounts. Considering such facts, addition made by AO for Rs 6,70,51,310 is deleted as sales pertaining to such on money is not taxed in regular books of account in current assessment year which is accepted by AO in assessment order. The related grounds of appeal are partly allowed. The AO is advised to ensure that the on money receipt shall be taxed for the units sold in particular assessment year, so as the income of total on money is taxed.”
5. As regards the third contention raised on behalf of the assessee before the learned CIT(A) that the on-money to the extent of Rs.3,03,50,000/- received on sale of flats during the year under consideration cannot be entirely treated as income and the same should be restricted to the net profit of such on-money representing sale value of the flats, the same was also accepted by the learned CIT(A) and the addition of Rs.3,03,50,000/- was restricted by him to Rs.60,70,000/- being 20% net profit embedded in the on-money for the following reasons given in paragraph Nos. 5.12 and 5.13 of his impugned order:-
“5.12 So far as alternate ground of appeal regarding taxing not entire on money but only profit embedded on such on money, it is observed that AO himself at page no 27 of the order at para (j) contended that documented sale price is hugely suppressed and how can the Assessee meet the cost of construction when he is selling flats at such huge discount and obviously cost is met from unaccounted money which itself suggest that there is also unexplained expenditure pertaining to such on money receipts. It is settled legal law that entire receipts or on-money cannot be income of Appellant as income embedded in such on-money alone can be axed as undisclosed income. Reliance is placed on following decisions:-
(i) Hon’ble Gujarat High Court in case of CIT vs. Panna Corporation vide Tax Appeal No. 323 of 2000 dated 16.06.2012
15. It can, thus, be seen that consistently, this Court and some other Courts have been following the principle that even upon detection of on-money receipt or unaccounted cash receipt, what can be brought to tax is the profit embedded in such receipts and not the entire receipts themselves. If that be the legal position, what should be estimated as a reasonable profit out of such receipts, must bear an element of estimation.
16. In view of the legal position that not the entire receipts, but the profit element embedded in such receipts can be brought to tax, in our view, no interference is called for in the decision of the Tribunal accepting such element of profit at Rs.26 lakhs out of total undisclosed receipt of Rs.62 lakhs. In other words, we accept the legal proposition, the Tribunal accepting Rs.26 lakhs disclosed by the assessee as profit out of total undisclosed receipt of Rs.62 lakhs, would not give rise to any question of law.
(ii) Commissioner of Income-tax v. President Industries – [2002] 124 TAXMAN 654 (GUJ.)
“Section 69B, read with section 256, of the Income-tax Act, 1961 – Undisclosed investments – Assessment year 1994-95 – Whether amount of sales by itself cannot represent the income of the assessee who has not disclosed the sales – Held, yes – During survey it was found that assessee had not disclosed certain sales in books of account – Whether Tribunal was justified in holding that unless there was a finding that investment by way of incurring cost in acquiring goods which had been sold, had been made by assessee and that had also not been disclosed, only net profits embedded in sales, and not wholesale proceeds itself, would be treated as undisclosed income of assessee – Held, Yes”
(iii) Commissioner of Income -tax v. Samir Synthetics Mill [2010] 326 ITR 410 (GUJ.)
“Where assessee could not even be able to reconcile production, sales and closing stock although specific opportunity was provided by Assessing Officer, addition was justified on account of suppression of sale consideration but only to the extent of profit.”
“’SUPREME COURT HAS DISMISSED SLP FILED BY DEPARTMENT.”
(iv) CIT versus Abhishek Corporation ITR No. 15 of 2003 where it is held that-
“It can thus be seen that consistently, this court and some other courts have been following the principle that even upon detection of on-money receipt or unaccounted cash receipt, what can be brought to tax is the profit embedded in such receipt and not the entire receipts themselves. If that be the legal position what should be estimated as a reasonable profit out of such receipt, must be an element of estimation.
16. In view of the legal position that not the entire receipts but the profit element embedded in such receipt can be brought to tax, in our view no inferences called for in the decision of the tribunal accepting such element of profit at Rs. 26 lakhs out of total undisclosed receipt of Rs. 62 lakhs. In other words, we accept the proposition, the tribunal accepting Rs. 26 lakhs, would not give rise to any question of law.”
(v) Decision of Hon’ble Gujarat High Court in case of Jay Builder vs. ACIT [2013] 33 taxmann.com 62 (Gujarat)
Section 253, read with section 69A, of the Income-tax Act, 1961 – Appellate Tribunal-Appealable orders (Aggrieved Party) – Assessee, a builder, received on-money while selling properties constructed by it-Assessing Officer taxed entire on-money received by assessee – Assessee contended before Tribunal that not entire on-money received but only profit element could be taxed in its hand -Tribunal substantially accepted contention and sustained addition at rate of 15 per cent of on-money received by assessee – Whether when assessee’s sole contention before Tribunal was substantially accepted, appeal of assessee did not survive – Held, yes (Para 3).
Considering the above facts it is held that only reasonable net profit is required to be taxed on on-money receipts reflected in loose paper referred supra.
5.13 The next issue would be what should be the reasonable net profit on on-money receipts as mentioned in loose paper found during the search. It is observed that in following cases, the Courts have held that as per general practice and trend it is reasonable to show profit @ 8% in respect of the assessee engaged only in construction business.
(i) HIGH COURT OF DELHI Commissioner of Income-tax- XII v. Subodh Gupta* [2015] 54 taxmann.com 343 (Delhi) wherein it has been held as under:
The revenue submits that section 44AD has no application as the turnover of the assessee was Rs. 18.43 crores and the said section prescribes a thumb rule or presumptive net profit rate if the turnover of an assessee is less than Rs. 40 lakhs. This is correct and has been noticed by the Commissioner (Appeals) and the Tribunal. The difficulty in the present case is that the Assessing Officer did not conduct any inquiry and ascertain the net profit rate of other comparable contractors. On the other hand, he disallowed expenditure of Rs. 10.61 crores resulting in abnormal gross profit rate of 59.60 per cent, which should not be accepted. The effect thereof was that 70 per cent of the expenditure on account of purchases worth Rs. 10.61 crores out of total purchases of Rs. 14 crores was disallowed. The appellate authorities have taken a holistic and broader view and held that as the books of account had not been produced and were not regularly maintained, the book results should be rejected. It is agreed with the revenue that the assertion of the assessee that the books of account were stolen had a hidden motive and the assertion is rather unbelievable. The assessee, therefore, must suffer adverse consequences. The only question is whether the addition made by the appellate authorities is adequate or a higher addition would be justified. As far as total turnover is concerned, same cannot be disputed as the assessee was only doing development work for the Greater Noida Authority. The total turnover is also supported by the tax at source certificate. The quantum of turnover was not adversely commented upon by the Assessing Officer. In view of the aforesaid position, revenue was directed to ascertain the gross profit or net profit rates declared and accepted by the Assessing Officer in case of other contractors engaged in similar work. The Assessing Officer has not given any comments in this regard. In these circumstances, prayer of the revenue that an order of remand may be passed cannot be accepted. The Assessing Officer in the subsequent years has accepted 8 per cent net profit, which is the figure which has been adopted by the appellate authorities in the instant case. The revenue has not been able to point out or state that the other similar contractors have a higher profit rate, than the net profit rate of S percent as held by the appellate authorities. The said rate was also applied in the assessment year 2010-11. [Para 6]
In view of the aforesaid factual position, no reason is found to interfere with the impugned order and the appeal is dismissed. [Para 70]
(ii) ITAT INDORE (SPECIAL BENCH) Arihant Builders, Developers & Investors (P.) Ltd. v. Assistant Commissioner of Income-tax* , Circle 1(1), Indore [2007J 106 ITD 10 (INDORE) (SB)
FACTS-III
The assessee-company was engaged in construction work taken on contract. The Assessing Officer found that the net profit at the rate of 0.48 per cent shown by the assessee on its gross contract receipts was low in the line of the civil construction business; the labour charges/cartages paid by it were not verifiable from the vouchers/books of account; and that it had not maintained muster roil depicting the name of the person employed for the particular work and the rate paid to them. Consequently, he rejected the books of account maintained by the assessee and by applying the net profit at the rate of 12.5 per cent on the total receipts shown by the assessee, computed its income accordingly. On appeal, the Commissioner (Appeals) upheld the impugned order.
On second appeal :
HELD-III
The assessee did not satisfy the Assessing Officer with regard to correctness of the vouchers for the purpose of claiming deduction on account of labour charges as well as cartage expenses. The onus was upon the assessee to prove the genuineness of the payments made on account of labour charges and cartage expenses, because the assessee claimed deduction of the same amount. However, the assessee did not discharge the onus of proving genuineness of the claim of the expenses. The Assessing Officer also held that the assessee had not maintained proper muster roll as to where the labourers were employed and for which particular work they were engaged. Considering the finding of the authorities below, there was no merit in the case of the assessee with regard to the rejection of the books of account with the aid of section 145(2). The orders of the authorities below, to that extent, were to be confirmed. [Para 29]
As regards the question as to whether net profit rate of 12.5 per cent applied by the Assessing Officer was justified in the matter, the assessee had shown the gross receipts of Rs. 26,74,885 and the net profit declared was at the rate of 0.48 per cent. Though it was case of the assessment year 1992-93, and the provisions of section 44AD were strictly inserted in the Act with effect from 1-4-1994, yet the same could be a guideline for the purpose of applying a particular net profit rate in the case of civil contractor even in earlier years. The assessee was also civil contractor engaged in construction work taken on contract and the gross receipts of the assessee were below Rs. 40 lakhs. Therefore, the net profit rate of 12.5 per cent applied by the authorities below in the case of the assessee was excessive and exorbitant. Accordingly, the application of net profit rate was to be modified from 12.5 per cent to 8 per cent on the gross receipt shown by the assessee. The Assessing Officer should work out the profit accordingly. [Para 30]
(iii) Decision of ITAT, Indore Bench in case of Badshah Construction Co. vs. DCIT (2003) 127 Taxman 153 (Indore) (Mag)
It is also observed that Hon’ble Gujarat High Court in case of Jay Builder vs. ACIT (2013) 33 taxmann.com 62 has upheld decision of Hon’ble Ahmedabad ITAT for taxing 15% net profit on on-money receipts. It is also observed that Appellant itself has been showing net profit around 20% in A.Y. 2014-15 to 2016-17 on turnover shown in books of account hence ratio of net profit on on-money is required to be taxed @ 20%. Considering the facts of Appellant’s case and referring to decisions referred to supra, it is reasonable to estimate net profit @ 20% on on-money receipts of Rs.3,03,50,000. Considering these facts, addition of undisclosed income in case of Appellant is restricted to Rs.60,70,000 (20% of Rs3,03.50,000). The appellant is entitled to relief of Rs2,42,80,000 (Rs.3,03,50,000 less Rs60,70.000).
6. Learned CIT(A) thus restricted the addition of Rs.9,74,01,310/- made by the Assessing Officer on account of on-money to Rs.60,70,000/- and aggrieved by this relief allowed by him to the assessee, the Revenue has raised this issue in appeal before this Tribunal.
7. We have heard the arguments of both the sides on this issue and also perused the relevant material available on record. Although learned DR has strongly relied on the order of the Assessing Officer in support of Revenue’s case on this issue and contended that the on-money of Rs.6,70,51,310/- was received by the assessee in the year under consideration as found from the relevant documents seized during the course of search, it is observed that the said on-money was received by the assessee in respect of flats sold not in the year under consideration but in other years. The income from the said flats thus was regularly assessed in the years in which they were sold as per the Revenue Recognition Method consistently followed by the assessee and accepted by the Assessing Officer; and, this being the undisputed position, we find ourselves in agreement with learned CIT(A) that the on-money to the extent of Rs.6,70,51,310/- was chargeable to tax in the hands of the assessee in the years in which the corresponding flats were sold and income from such sales was recognized and assessed. This view taken by the learned CIT(A) is duly supported by the judicial pronouncements referred to and relied upon by him in his impugned order and keeping in view the same as well as all the relevant facts of the case, we find no justifiable reason to interfere with the impugned order of learned CIT(A) on this issue.
8. As regards the balance amount of on-money to the extent of Rs.3,03,50,000/- which was received by the assessee in respect of flats sold in the year under consideration, it is observed that this amount representing undisclosed sale proceeds of the flats sold in the year under consideration was entirely treated by the Assessing Officer as the income of the assessee without giving any deduction on account of corresponding expenditure incurred by the assessee. As rightly held by the learned CIT(A) by relying upon the various judicial pronouncements including the judgments of Hon’ble Gujarat High Court, the entire receipts or on-money representing undisclosed sales proceeds of the flats cannot be the income of the assessee and only the income embedded in such on-money can be taxed as the undisclosed income of the assessee. He also relied on the observations made by the Assessing Officer himself that it was difficult to comprehend how the assessee could meet the cost of construction when he was selling flats on huge discounts, meaning thereby that the construction cost was met by the assessee even from the on-money representing unaccounted sales proceeds of the flats. As regards the net profit rate of 20% adopted by the learned CIT(A) to estimate the profit element embedded in the on-money, it is observed that the same was arrived at by the learned CIT(A) by relying on the decision of Hon’ble Gujarat High Court in the case of Jay Builder Vs. ACIT [2013] 33 taxmann.com 62 (Guj.), wherein the decision of ITAT adopting the net profit rate of 15% to estimate the income embedded in on-money was upheld by their Lordships. Keeping in view the said decision of the Hon’ble jurisdictional High Court and having regard to all the facts of the case, we are of the view that the net profit rate of 20% adopted by the learned CIT(A) to estimate the income of the assessee embedded in on-money of Rs.3,03,50,000/- is fair & reasonable and there is noting brought on record by the learned DR to dispute the same. We, therefore, find no infirmity in the order of the learned CIT(A) restricting the addition of Rs.3,03,50,000/- made by the Assessing Officer on account of on-money to Rs.60,70,000/- and upholding the same, we dismiss Ground No.1 of the Revenue’s appeal.
9. The next issue raised by the Revenue in its appeal is against the deletion by learned CIT(A) of the addition of Rs.87,40,000/- made by the Assessing Officer on account of deemed rent.
10. During the course of assessment proceedings, it was noticed by the Assessing Officer that the housing projects completed by the assessee during the year under consideration comprised of 180 units; out of which 47 units were sold and the remaining 133 unsold units were lying in the closing stock. According to the Assessing Officer, the Annual Letting Value of these unsold flats owned by the assessee were chargeable to tax in the hands of the assessee as deemed rent irrespective of the fact that the same had not been let out and remained vacant. He accordingly made an addition of Rs.87,40,000/- to the total income of the assessee on account of deemed rent for the following reasons given in his assessment order:-
“….Tax incidence did not depend on whether the assessee actually rented out with the intention of carrying on business, but on the mere factum of ownership. Decision of the Calcutta High Court, in Azimganj Estate (P) Ltd v CIT (ITA 242/2003, decided on 13-9-2011) is relied upon wherein under identical circumstances, when the builder assesse had vacant flats, which were let out, the Court held that the rental income was assessable not under the head of profits or income from business, but as property assessable under the head income from house property. Thus, as long as the assessee continued to be owner of the vacant flats, it had to be assessed under the head of income from house property; since there was no letting out, the basis of assessment had to be ALV, which was rational and scientific. In the present case, the assessee is engaged in building activities. The levy of income tax in the case of one holding house property is premised not on whether the assessee carries on business, as landlord, but on the ownership. The incidence of charge is because of the fact of ownership. In this case the intention of the assesse was to hold the properties till they were sold. The capacity of being an owner was not diminished one with, because the assessee carried on business of developing, building and selling flats in housing estates. ALV is a method to arrive at a figure on the basis of which the impost is to be effectuated. The existence of an artificial method itself would not mean that levy is impermissible. Furthermore, application of ALV to determine the tax is regardless of whether actual income is received; it is premised on what constitutes a reasonable letting value, if the property were to be leased out in the marketplace. This is basically the finding of the Hon’ble Delhi High Court in the case of Ansal Housing 8s Finance Ltd.(CIT Vs Ansal Housing Finance & Leasing Co. Ltd [2016] 72 taxmann.com 254(Delhi). The assessee objected to the addition on the ground that (a) completion certificate does not mean that the building is habitable and (b) this provision is effective from 1.4.2018. So far as whether the building is habitable or not is concerned, the BU permission is given once all basic amenities are fulfilled. Ornamentation is individual choice of the buyers and it has nothing to do with the BU Permission. Once the BU Permission is given, it means that the buyer can take possession of the units. So far as applicability of the provisions are concerned, the argument that this is effective from 1.4.2018 fails to survive because, only due to the decision of the Hon’ble Delhi High Court, this became a law. The decision of the Hon’ble Delhi High Court is the torch bearer. True, a completed case cannot be reopened on the basis of the decision of the Hon’ble Delhi High Court. But an ongoing assessment can always be guided by the above decision. Hence, both pleas of the assessee is not acceptable.
8.2 Now coming to the working of ALV, the assessee has not provided any details in the said reply. Hence, this office relies upon the decision of the Hon. Allahabad High Court in the case of Smt Radha Devi Dalmia (Smt.Radha Devi Dalmia Vs. CIT [1980] 4 taxmann 183 (All)), wherein it has been held that, the ALV is broadly 7% of the property value. The value of the property as per the balance sheet is Rs 24.14 crores. This is for 180 units. The proportionate cost for 133 units works out to Rs 17.83 crores. The ALV @ 7% works out to Rs 1.25 crores. After allowing standard deduction of 30%, an addition of Rs 87.40 lacs is being made, being deemed rent.”
11. The addition of Rs.87,40,000/- made by the Assessing Officer on account of deemed rent was challenged by the assessee before the learned CIT(A) and after considering the submissions made by the assessee as well as material available on record, the learned CIT(A) deleted the addition made by the Assessing Officer on account of deemed rent for the following reasons given in paragraph No.8.4 of his impugned order.
“8.4 On careful consideration of entire facts, the disputed issue is as to whether ALV is required to be determined in case of builder when he has unsold units at the year end. The contention of the appellant regarding amendment in provisions of section 23(5) of the Act with effect from 1st April 2018 in support of its claim is not found acceptable, as this provision is effective with effect from 1st April 2018 and the appellants case belongs to period prior to this date. Hence this contention is rejected. This issue has been decided in the following cases in details:
It is observed that Hon’ble Mumbai ITAT in the case of ITO vs Arihant Estate Pvt Limited (ITA No 6037/Mum/2016) dated 27/06/2018 has held as under:
“We have heard the rival submissions and perused the orders of the authorities below and the decisions relied upon. It is an undisputed fact that the assessees are in the business of builders, developers and construction. Both the assessees have constructed various projects and the projects were treated as stock in trade in the books of account. Flats sold by the assessees were assessed under the head ‘income from business’. There were certain unsold flats in stock in trade which the AO treated as property assessable under the head ‘income from house property’ and computed notional annual letting value on such unsold flats placing reliance on the decision in the case of Ansal Housing Finance & Leasing Co. Ltd. (supra). The action of the AO was upheld by the learned CIT(A).
8. The Hon’ble Gujarat High Court in the case of Neha Builders Pvt. Ltd. (supra) considered the question whether the rental income received from any property in the construction business can be claimed under the head ‘income from property’ even though the said property was included in the closing stock. The Hon’ble Gujarat High Court held that 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 house property. While holding so the Hon’ble High Court 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 he 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, was 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.
9. From the statement of the assessee, it would clearly appear that it was treating the property as ‘stock-in-trade’. Not only this, it will also be clear from the records that, except for the ground floor, which has been let out by the assessee, all other portions of the property constructed have been sold out. If that be so, the property, right from the beginning was a ‘stock-in-trade’,”
9. Similarly the Coordinate Bench has considered similar issue as to whether the unsold property which is held as stock in trade by the assessee can be assessed under the head ‘income from house property’ by notionally computing the annual letting value from such property and the Coordinate Bench considering the decision of the Hon’ble Delhi High Court in the case of Ansal Housing Finance & Leasing Co. Ltd. (supra) which the AO relied upon and the decision of the Hon’ble Supreme Court in the case of Chennai Properties & Investments Ltd. vs. CIT reported in 373 ITR 673, held that unsold flats which are in stock in trade should be assessed under the head ‘business income’ and there is no justification in estimating rental income from those flats and notionally computing annual letting value under Section 23 of the Act. While holding so the Coordinate Bench observed as under: –
“3. The Id. AR placed the order of Bombay Tribunal in the case of M/s Perfect Scale Company Pvt. Ltd., ITA Nos.3228 to 3234/Mum/2013, order dated 6-9-2013, wherein it was held that in respect of assets held as business, income from the same is not assessable u/s.23(1) of the IT Act.
4. On the other hand, ld. DR relied on the order of Hon’ble Delhi High Court in the case of Ansal Housing Finance & Leasing Co. Ltd., 354 ITR ISO (Delhi) in support of the proposition that even in respect of unsold flats by the developer is liable to be taxed as income from house property.
5. We have considered rival contentions and perused the record. The issue under consideration has been restored by the CIT(A) to the file of AO to compute the annual value. Recently the Hon’ble Supreme Court in the case of M/s Chennai Properties & Investments Ltd. Vs. CIT, reported in (2015) 42 SCD 651, vide judgment dated 9-4-2015 has held that where assessee company engaged in the activity of letting out properties and the rental income received was shown as business income, the action of AO treating the rental income as income from house property in place of income from business shown by the assessee was held to be not justified. The Hon’ble Supreme Court held that since the assessee company’s main object, is to acquire and held properties and to let out these properties, the income earned by letting out these properties is main objective of the company, therefore, rent received from the letting out of the properties is assessable as income from business. On the very same analogy in the instant case, assessee is engaged in business of construction and development, which is main object of the assessee company. The three flats which could not be sold at the end of the year was shown as stock-in-trade. Estimating rental income by the AO for these three flats as income from house property was not justified insofar as these flats were neither given on rent nor the assessee has intention to earn rent by letting out the flats. The flats not sold was its stock-in-trade and income arising on its sale is liable to be taxed as business income. Accordingly, we do not find any justification in the order of AO for estimating rental income from these vacant flats u/s.23 which is assessee’s stock in trade as at the end of the year. Accordingly, the AO is directed to delete the addition made by estimating letting value of the flats u/s.23 of the I.T. Act.”
10. In the case on hand before us it is an undisputed fact that both assessees have treated the unsold flats as stock in trade in the books of account and the flats sold by them were assessed under the head ‘income from business’. Thus, respectfully following the above said decisions we hold that the unsold flats which are stock in trade when they were sold they are assessable under the head ‘income from business’ when they are sold and therefore the AO is not correct in bringing to tax notional annual letting value in respect of those unsold fiats under the head ‘income from house property’. Thus, we direct the AO to delete the addition made under Section 23 of the Act as income from house property.”
6. Admittedly in this case on hand the unsold property being shops were held as stock in trade. In the circumstances, respectfully following the above decision we uphold the order of the Ld. CIT(A) and reject the ground raised by the Revenue.
7. In the result, appeal of the Revenue is dismissed. “
Similar observation has been given by Hon’ble Mumbai ITAT in the case of Runwal Construction Vs ACIT (supra) and Decision of Pune ITAT in the case of Shri Vikas K Garud Vs ITO (supra). Thus, relying upon the decisions referred supra which have duly considered the decision of Hon’ble Delhi High court relied upon by AO and decision of Hon’ble Supreme court in the case of Chennai Properties & Investments Ltd and relying upon the amendment brought by Finance Act 2017 for determining ALV of unsold units, it is held that AO is not justified in computing ALV in present case of appellant as BU permission is received only in current year. Thus, this ground of appeal is allowed.”
12. We have heard the arguments of both the sides on this issue and also perused the relevant material available on record. Even though learned DR has strongly relied on the order of the Assessing Officer in support of the Revenue’s case on this issue, it is observed that this issue is squarely covered in favour of the assessee by various judicial pronouncements relied upon by the learned Counsel for the assessee. In one of such decisions rendered in the case of Neha Builders Pvt. Ltd., reported in [2008] 296 ITR 661 (Guj.), it was held by the Hon’ble Gujarat High Court that “if property is used as stock-in-trade, then it would become and partake character of stock and any income derived from stock would be ‘income from business’ and not ‘income from house property’”. As rightly contended by the learned Counsel for the assessee, it therefore follows that the deemed rent concept cannot be applied or invoked in case of property which is stock-in-trade of the business of the assessee and the addition made by the Assessing Officer on account of deemed rent cannot be sustained as rightly held by the learned CIT(A). We, therefore, uphold the impugned order of the learned CIT(A) on this issue and dismiss Ground No.2 of the Revenue’s appeal.
13. In the result, the appeal of the Revenue is dismissed.
Order pronounced in the open Court on 27th April, 2022 at Ahmedabad.
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