PCIT Vs 3NN Corporation (Bombay High Court)
Summary: The Bombay High Court dismissed the Revenue’s appeal against 3NN Corporation, holding that notional rental income could not be assessed under Section 23(1)(a) of the Income Tax Act, 1961, for a period when the property was not legally occupiable. The assessee, a partnership firm engaged in real estate development, had completed buildings A, B and C of its residential project at Bhiwandi, Thane, on 25 October 2012. However, the occupancy certificate was issued only on 25 May 2016. For AY 2013-14, the assessee declared income of Rs. 29.86 lakh, which was assessed at Rs. 31.11 lakh under Section 143(3). The Principal Commissioner subsequently invoked Section 263, alleging that notional rental income on unsold flats and shops had escaped assessment. The High Court identified the actual controversy as the taxability of notional rent for the period from 25 October 2012 to 31 March 2013.
The Principal Commissioner observed that the assessee had disclosed sales income of Rs. 8.06 crore and closing stock of Rs. 8.13 crore. Treating the unsold properties as capable of generating rental income, the revisional authority estimated their gross annual letting value at Rs. 56.97 lakh, calculated at 7% of closing stock. After statutory deductions, the net annual value was computed at Rs. 39.88 lakh, resulting in proposed taxable notional rent of Rs. 16.61 lakh for five months. The authority relied on CIT Vs. Ansal Housing Finance & Leasing Co. Ltd. and M/s. Om Prakash & Co. to hold that the assessment order was prejudicial to the Revenue’s interests. The ITAT Mumbai, by its order dated 10 April 2019 in ITA No. 2637/Mum/2016, allowed the assessee’s appeal. Before the High Court, the Revenue questioned the Tribunal’s reliance on CIT Vs. Vegetable Products Ltd. in light of the Supreme Court’s Constitution Bench decision in M/s Dilip Kumar and Company and others.
The High Court held that the decisive consideration was not merely completion of construction but whether the premises could lawfully be occupied. Although the completion certificate was issued on 25 October 2012, the occupancy certificate was obtained only on 25 May 2016. Until then, the property was not legally occupiable. Relying on its earlier decision in Sharan Hospitality (P.) Ltd. Vs. Deputy Commissioner of Income-tax, Circle 9(3), the Court held that notional rental income could not arise during a period when the property was legally incapable of occupation. Accordingly, the Court found no merit in the Revenue’s appeal and dismissed it without any order as to costs.
Cases Discussed:
- Sharan Hospitality (P.) Ltd. Vs. Deputy Commissioner of Income-tax, Circle 9(3) — [2019] 112 taxmann.com 372 (Bombay). Relied upon by the High Court. Notional rental income cannot be charged for a period during which the property is not legally occupiable.
- CIT Vs. Ansal Housing Finance & Leasing Co. Ltd. — [2012 SCC OnLine Del 5565]. Relied upon by the revisional authority concerning the annual letting value of unsold properties held by builders. Related discussion: Notional Rental Income in Case of Builders.
- M/s. Om Prakash & Co. — [87 TTJ 183]. Cited by the revisional authority in support of taxing the annual letting value of unsold flats and shops.
- CIT Vs. Vegetable Products Ltd. — (1973) 88 ITR 192 (SC). Identified in the substantial question of law framed by the Revenue concerning the Tribunal’s reliance on the decision. Related discussion: Evolution of Strict Tax Interpretation.
- M/s Dilip Kumar and Company and others — Supreme Court Constitution Bench decision. Referred to in the Revenue’s proposed substantial question of law concerning the continued applicability of Vegetable Products Ltd.
FULL TEXT OF THE JUDGMENT/ORDER OF BOMBAY HIGH COURT
1. The above appeal has been filed by the Revenue seeking to challenge the order dated 10th April 2019 passed by the Income Tax Appellate Tribunal, Mumbai (“ITAT”) in ITA No. 2637/Mum/2016. This appeal (before the Tribunal) was filed by the Assessee challenging the order passed by the Pr. Commissioner exercising powers under Section 263 of the Income Tax Act, 1961 (“the Act”). The Assessment Year in question is 2013-14.
2. According to the Revenue, the impugned order of the ITAT gives rise to the following substantial question of law:
“On the facts and circumstances of the case and in law, whether the Hon’ble Tribunal was correct in relying on the decision of the Supreme Court in the case of CIT Vs. Vegetable Product Ltd. (1973) 88 ITR 192 (SC) without considering the fact that the said judgment was reversed by the Hon’ble Supreme Court (5 Member Bench) in the case of M/s Dilip Kumar and Company and others?”
3. Having gone through the impugned order as well as the order passed by the Pr. Commissioner exercising his revisional powers under Section 263, we find that the real issue arising in the present case is whether the Assessee was liable to pay tax on the rental income of the property from 25th October 2012 to 31st March 2013, on a notional basis under Section 23(1)(a) of the Act.
4. The facts of this case reveal that the Assessee is a partnership firm engaged in the business of building and developing immovable properties. The Assessee filed its return for Assessment Year 2013-14, declaring its total income at Rs. 29.86 Lakhs. This assessment was picked up for scrutiny and an Assessment Order was passed under Section 143(3), determining the total income of the Assessee at Rs. 31.11 Lakhs.
5. After this, for Assessment Year 2013-14, on verification of the records, the Pr. Commissioner was of the opinion that the Assessee had one residential project situated in Taluka Bhiwandi, District Thane in which buildings A, B and C were completed on 25th October 2012. The Assessee had offered income of Rs. 8.06 Crores from the sale of the flats. The Revisional Authority also noticed from the balance sheet and profit and loss account, that the Assessee had shown a closing stock of Rs. 8.13 Crores. The Revisional Authority was of the opinion that the Annual Letting Value of flats/shops built by the Assessee [who is engaged in the construction business] lying unsold, was assessable as ‘Income from House Property’ and the Assessee was liable to pay income tax on the Annual Letting Value of the unsold flats/shops. In support of the aforesaid contention, the Revisional Authority relied upon a decision of the Delhi High Court in the case of CIT Vs. Ansal Housing Finance & Leasing Co. Ltd. [2012 SCC OnLine Del 5565] and the decision of the Tribunal in the case of M/s. Om Prakash & Co. [87 TTJ 183].
6. Accordingly, the Revisional Authority came to the conclusion that the Gross Annual Value of the rent income came to Rs. 56.97 Lakhs (7% of Rs. 8.13 Crores) and after statutory deductions, the taxable Net Annual Value worked out to Rs. 39.88 Lakhs. As the project was completed on 25th October 2012, the Revisional Authority came to the conclusion that the notional rent for the five months was assessable and therefore an amount of Rs. 16.61 Lakhs remained to be assessed and taxed under the head ‘Income from House Property’. It is on this basis that the Revisional Authority held that the Assessment Order passed under Section 143(3) was prejudicial to the interest of the Revenue, which then gave the power to the Revisional Authority to invoke powers under Section 263.
7. Being aggrieved by this order of the Revisional Authority, the Assessee preferred an appeal before the ITAT, which was allowed by the impugned order.
8. From the record, we find that though the completion certificate was issued on 25th October 2012, the occupancy certificate was issued only on 25th May 2016. Until the occupancy certificate was issued, the property was not legally occupiable and hence the question of levying any notional rent under the provisions of Section 23(1)(a) could not arise. We find that this very issue has been considered by this Court in the case of Sharan Hospitality (P.) Ltd. Vs. Deputy Commissioner of Income-tax, Circle 9(3) [2019] 112 taxmann.com 372 (Bombay). Paragraph 6 of this decision reads as under:
“6. We have heard the learned Counsel appearing for the parties and perused the documents on record. It is not necessary to enter into the interpretation of Section 23(1)(c) of the Act, since this issue can be thrashed out on the facts and the first principles emerging from the statutory provisions. As noted, the facts are that though the Assessee acquired the property in question under Conveyance Deed dated 18th December, 2008, the OC for the property in question was obtained by the builder only in May, 2009. Under such circumstances, by operation of law, such property could not have been legally occupied by either the Assessee or any other person under the license given by the Assessee. It is a different matter that the Assessee did execute a lease deed putting the lessee in possession of the property on 1st April, 2009. The Assessee’s explanation is that the same was only for completing the furniture and fixtures and not for occupation for commercial use. We are not in the present Appeal concerned with the correctness of this explanation. What we are however concerned about is the fact that the Revenue wishes to tax the Assessee for the so-called occupation of the property between 1st January, 2009 to 31st March, 2009. This is the period during which the Assessee had neither occupied the property nor put lessee in possession of the property nor earned any rental income. The property was in fact during the period in question legally not occupiable nor occupied. Under the circumstances, the question of charging tax on notional rental income during such period does not arise.”
(emphasis supplied)
9. As can be seen from the aforesaid decision, until an occupancy certificate was obtained, there was no question of charging tax on rental income on a notional basis. Since the issue in the present case is squarely covered by the decision of this Court in Sharan Hospitality (P.) Ltd. (supra), we find no merit in the above appeal. The appeal is accordingly dismissed. However in the facts and circumstances of the case, there shall be no order as to costs.
10. This order will be digitally signed by the Private Secretary / Personal Assistant of this Court. All concerned will act on production by fax or email of a digitally signed copy of this order.
