Pegasus Properties (P.) Ltd. Vs DCIT (ITAT Mumbai)
Income Tax Appellate Tribunal (ITAT), Mumbai Bench, has dismissed an appeal filed by M/s Pegasus Properties (P.) Ltd. for the assessment year 2015-16. The appeal, directed against an order dated March 16, 2021, passed by the Commissioner of Income Tax (Appeals) (CIT(A))-48, Mumbai, was not decided on its merits but was instead deemed “infructuous” by the Tribunal due to a procedural issue.
The core of the dispute involved several additions made by the Assessing Officer (AO) to the total income of Pegasus Properties, subsequently upheld by the CIT(A), amounting to Rs. 1,66,26,648. The primary point of contention, forming a significant portion of the grounds of appeal, was an addition of Rs. 92,09,165 on account of “deemed rental income” from unsold flats/units held by the company as stock-in-trade.
Dispute Over Deemed Rental Income on Unsold Flats
Pegasus Properties, a company engaged in the business of builders and developers of residential property, challenged the notional addition under the head “Income from House Property” (IFHP) under Section 23(4) of the Income Tax Act. The company argued that such an addition was erroneous for several reasons:
- Nature of Income: The assessee contended that income, if any, derived from the sale or exploitation of stock-in-trade should properly be chargeable to tax under the head “Income from Business and Profession” (IFBP). It was argued that there is no concept of “notional income” within the IFBP framework.
- Business Purpose Exemption: The company maintained that unsold flats, held as inventory in its construction business, should be considered as property occupied for the purpose of the assessee’s own business. Therefore, by virtue of the exemption provided in Section 22 of the Act, the annual value of such flats should not be brought to tax under IFHP.
- Legislative Intent: The assessee asserted that there was no corresponding section or legislative intent to tax notional rent on stock-in-trade as IFHP during the assessment year in question.
- Valuation of Deemed Rent: Pegasus Properties also disputed the method of computing the deemed notional rent, arguing that the AO erred by not taking the assessable value (rateable value) as per Municipal Authority for the purpose of computing deemed notional rent as per Section 23 of the Act. The company also challenged the AO’s arbitrary consideration of a fair market rent at Rs. 12 per square foot without cogent material.
- Vacancy Allowance and Habitable Condition: Further, the assessee argued that no vacancy allowance was granted for the unsold stock-in-trade, which remained vacant throughout the year. It was also submitted that the entire stock-in-trade was not in a habitable condition, questioning the very premise of its potential for rental income.
- Completion Certificate Issue: A minor point was raised regarding the completion certificate being obtained mid-month, suggesting that a flat could not be let out for a partial month immediately upon completion, thus rendering notional addition for such a period inappropriate.
Judicial Precedents Cited by Assessee
