Case Law Details
Pride and Expert Properties Private Limited Vs ACIT (ITAT Pune)
The ITAT, Pune in Pride and Expert Properties Pvt. Ltd. v. ACIT [ ITA No.860/PUN/2022 dated February 14, 2023] has held that the order passed by the Appellate Authority, confirming the view of the Revenue Department is not justified on the grounds that the assessee had treated its unsold flats as stock-in-trade, thereby implying, that the profits on its sale would be offered as business income as no rental income was received by the assessee and hence, Section 23 (4) of the Income Tax Act, 1961 (“the IT Act”) would not be levied on the assessee.
Facts:
Pride and Expert Properties Pvt. Ltd. (“the Appellant”) is a company engaged in the business of property development. During the course of assessment proceedings, the Appellant was asked to explain that why the deemed rent in respect of unsold flats should not been brought to tax under the head “Income from house property”. The Appellant stated that, the 15 unsold flats (“the Impugned Property”) cumulatively admeasuring 17341 sq. ft. were not sold during the Assessment Year (“A.Y”) 2017-18 and they were treated as closing stock. Further stated that, the Impugned Property was not let out and hence, no deemed rent under Section 23(4) the IT Act could be levied under the head “Income from house property”. The Revenue Department (“the Respondent”) stated that the Appellant was not in occupation of the Impugned Property, and having mere passive possession of the stock-in-trade does not qualify as own occupation for its business and hence, the provisions of Section 23(4) of the IT Act would be leviable. Subsequently, the Respondent made an addition to the extent of INR 25,20,000/- by ascertaining fair market annual letting value to the total income of the Appellant. The Appellant preferred an appeal, but it was rejected vide Order dated October 31, 2022 (“the Impugned Order”).
Being aggrieved, this appeal has been filed.
Issue:
Whether the deemed rent under Section 23(4) of the IT Act can be levied on the Impugned Property?
Held:
The ITAT, Pune in ITA No.860/PUN/2022 held as under:
- Noted that, the Appellant treated the Impugned Property as stock-in-trade which means that the profits on its sale would be offered as business income and no rental income was received by the Appellant from the Impugned Property.
- Relied on its earlier judgment in the matter of Sai Spacecon India Pvt. Ltd v. DCIT [ITA No. 2824/PUN/2017], wherein, it was noted that, no addition on account of deemed rent on unsold flats could be made in the hands of the assessee.
- Held that, the Impugned Order passed by the Appellate Authority is not justified in confirming the view of the Respondent.
Relevant Provisions
Section 23(4) of the IT Act:
“Annual value how determined
Where the property referred to in sub-section (2) consists of more than two houses-
(a) the provisions of that sub-section shall apply only in respect of two of such houses, which the assessee may, at his option, specify in this behalf;
(b) the annual value of the house or houses, other than the house or houses in respect of which the assessee has exercised an option under clause (a), shall be determined under sub-section (1) as if such house or houses had been let.”
FULL TEXT OF THE ORDER OF ITAT PUNE
This appeal by the assessee against the order dated 31-10-2022 passed by the Commissioner of Income Tax (Appeals)-11, Pune [‘CIT(A)’] for assessment year 2017-18.
2. Ground Nos. 1 to 3 raised by the assessee questioning the action of CIT(A) in confirming the order of AO on account of deemed rent u/s. 23(4) of the Act.
3. We note that the assessee is a company engaged in the business of property development. During the course of assessment proceedings, the assessee was asked to explain as to why the deemed rent in respect of unsold units should not be brought to tax under the head “Income from house property”. It was explained that the 15 unsold flats cumulatively admeasuring 17341 sq. ft. were not sold during the year under consideration and they were treated as closing stock. Further, it was contended that the said 15 unsold flats were not let out and no deemed rent u/s. 23(4) could be levied under the head “Income from house property”. The AO opined that the assessee was not in occupation of the said 15 unsold flats, having mere passive possession of the stock-in-trade does not qualify as own occupation for its business. Accordingly, the AO held deemed rent as per the provisions u/s. 23(4) of the Act is chargeable on the stock-in-trade and made addition to an extent of Rs.25,20,000/- by ascertaining fair market annual letting value to the total income of the assessee. The CIT(A) confirmed the view of AO. Aggrieved by the order of CIT(A), now, the assessee is before us.
4. The ld. AR, Shri Suhas Bora placed on record decisions in favour of the assessee and details of unsold flats, property tax receipts and copy of occupancy certificates. The ld. AR contended that the deemed rent u/s. 23(4) of the Act is not leviable and placed reliance in the case laws from pages 1 to 14 and 35 to 62 of paper book, vehemently argued that the order of CIT(A) in confirming the order of AO in determining deemed rent u/s. 23(4) of the Act under the head “Income from house property” is not maintainable.
5. The ld. DR, Shri M.G. Jasnani placed on record decision of Hon’ble Bombay High Court in the case of Gundecha Builders reported in 102 com 27 (Bombay) and the decision of ITAT, Mumbai Benches in the case of Dimple Enterprises reported in 129 taxmann.com 66 (Mumbai-Trib.) and argued that the decision of Hon’ble High Court in the said case, held that the deemed rent from unsold flats is duly leviable u/s. 23(4) of the Act on account of income from house property.
6. We have heard both the parties and perused the material available on record. We note that the Hon’ble Bombay High Court in the case of Gundecha Builders (supra) vide its order dated 31-07-2018 for A.Y. 200809 considered question of law which are reproduced in para 2 of the said decision. The relevant question of law in para 2(i) is reproduced here-in-below for ready reference :
“(i) Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in treating the income received on letting out as house property income?”
7. On plain reading of the said question of law, we note that whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in treating the income received on letting out as house property. Admittedly, the assessee therein is engaged in the business of developing real estate projects which is evident from para 3(a) of the said decision. Further, it is also noted from para 3(e) that letting of property is not the business of assessee therein. Further, the Hon’ble High Court of Bombay by placing reliance in the case of Sane & Doshi Enterprises reported in 377 ITR 165 (Bom.) dismissed the substantial question of law raised by the Revenue by holding that the said question does not give any rise to substantial question of law which is evident from para 3(f) of the said decision. It is pertinent to note that the facts in the case of Gundecha Builders (supra) before the Hon’ble High Court was that the assessee therein received rental income which was classified as income from house property which is evident from para 3(b) of the said order. There is no dispute with regard to this aspect from the ld. DR.
8. Coming to the present facts of the case the contention of assessee was that the said 15 unsold flats was not sold during the year under consideration and no rental income derived from the said unsold flats as they were not let out, hence, no deemed rent could be levied u/s. 23(4) of the Act. We note that the assessee treated the same as 15 unsold flats as stock-in-trade which means that the profits on its sale would be offered as business income and no rental income received by the assessee from such 15 unsold flats. Therefore, facts in the case of Gundecha Builders (supra) are different from the facts of the present case in hand. Thus, we reject the arguments of ld. DR of applicability of observation of Hon’ble High Court of Bombay in the case of Gundecha Builders (supra). On similar issue and same identical facts, this Tribunal in the case of Sai Spacecon India Pvt. Ltd. in ITA No. 2824/PUN/2017 held no addition on account of deemed rent on unsold flats could be made in the hands of the assessee. The relevant portion of the same are as under for ready reference :
“3. Heard both the parties and perused the material available on record. We note that the assessee is a Private Limited Company engaged in the business of Promoter, Developer, Builder and Power Generation. The AO found 37 unsold flats ready for possession and completion certificate in respect of said flats were also issued. He observed the assessee has not offered any rent income on these 37 unsold flats. The assessee claimed that the flats are stock-in-trade and the income from it is income from Business and Profession and not from House Property. The AO did not accept the submissions of the assessee and proceeded to calculate deemed rent vide its Para No. 5.4 to an extent of Rs.27,97,200/-. The CIT(A) confirmed the same. According to ld. AR that the issue is covered in favour of the assessee and the addition made by the AO as confirmed by the CIT(A) is not maintainable and the assessee recognized unsold flats as stock-in-trade. The ld. AR placed on record of order of this Tribunal in the case of Kumar Properties and Real Estate Private Limited in ITA No. 2977/PUN/2017 for A.Y. 2013-14. The Co-ordinate Bench of Tribunal vide order dated 28-04-2021 discussed the issue in detail from Para Nos. 3 to 13 of the said order and held that an exception has been carved out in section 22 of the Act that any such property or its part, which is occupied by the assessee for the purposes of any business or profession carried, the profits of which are chargeable to income-tax, shall be excluded on satisfying the conditions therein. The Co-ordinate Bench, further discussed the four conditions in Para Nos. 6, 7, 8 and 9. The first condition being that the property or its part should be occupied by the assessee as an owner. There is no material evidence to show before us that the assessee is not occupied the said unsold 37 flats. The second condition is that any business or profession should be carried on by the assessee. We note that the assessee filed return showing income from such business and also engaged in the business of property development. The third condition is that the occupation of the property should be for the purpose of business or profession wherein the assessee before us shown the said 37 unsold flats as stock in trade. The last condition is that profits of such business or profession should be chargeable to income-tax. In the present case that there is no dispute that the profits of the business of construction by the assessee are chargeable to income-tax. Therefore, in our view that the unsold 37 flats are occupied by the assessee are as owner; business of construction is carried on by the assessee; the occupation of the flats is for the purpose of business; and profits of such business are chargeable to Income-tax. Thus, in our opinion, all the four conditions provided in exclusion clause in section 22 of the Act are to be excluded, therefore, we hold that no addition on account of deemed rent on unsold 37 flats can be made in the hands of the assessee. The ld. DR did not dispute that the assessee recognized the unsold flats as stock-in-trade but however relied on the order of CIT(A). Thus, the order of CIT(A) is not justified and it is set aside. Thus, the grounds raised by the assessee are allowed.”
9. In the light of the above, we hold that the order of CIT(A) is not justified in confirming the view of AO in levying deemed rent u/s. 23(4) of the Act on account of income from house property. Thus, the grounds Nos. 1 to 3 raised by the assessee are allowed.
10. In the result, the appeal of assessee is allowed. Order pronounced in the open court on 14th February, 2023.
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