ITAT Deletes Notional Addition for Unsold Flats, Section 23(5) Not Applicable to AY 2014-15

Ambuja Neotia Hotel Ventures Ltd. Vs DCIT (ITAT Kolkata)

Income Tax Appellate Tribunal (ITAT) Kolkata recently delivered a judgment concerning Ambuja Neotia Hotel Ventures Ltd. for the assessment year 2014-15. Several key issues were addressed, including disallowance under Section 14A, notional income from unsold flats, proportionate interest expenses, and unexplained expenses under Section 69C of the Income Tax Act.

Section 14A Disallowance cannot exceed Exempt Income:

Regarding Section 14A disallowance, the ITAT, citing a recent Calcutta High Court ruling in PCIT, 1, Kolkata Vs. M/s Jas Toll Road Company, held that the disallowance of expenditure related to exempt income cannot exceed the actual amount of exempt income earned during the year. In this case, the assessee had earned exempt dividend income of Rs. 3,929, and the ITAT directed the Assessing Officer (AO) to restrict the disallowance under Section 14A to this amount, overturning the CIT(A)’s confirmation of a larger disallowance.

ITAT Deletes Notional Addition for Unsold Flats, Cites Inapplicability of Section 23(5) to AY 2014-15

A significant point of contention was the addition of notional or hypothetical income from unsold flats. The AO had assessed this notional annual letting value under Sections 22 and 23 of the Act, related to house property income. The CIT(A) later categorized it under profits and gains of business or profession. The ITAT, however, noted that Section 23(5), which allows for taxing the notional annual letting value of property held as stock-in-trade, came into effect from April 1, 2018, via the Finance Act, 2017. As this provision is substantive in nature, it applies prospectively. Therefore, the ITAT, relying on a similar case, Tata Housing Development Company Ltd. Vs. PCIT, held that no such addition could be made for the assessment year 2014-15.

Disallowance of proportionate interest expenses

The ITAT also dealt with the disallowance of proportionate interest expenses. The AO had reallocated interest expenses between the leasing and real estate segments based on the value of assets in each segment, disallowing a substantial amount. The ITAT observed that the AO and CIT(A) had incorrectly considered gross interest expenses instead of netting them against interest income earned. The ITAT directed the AO to re-examine this issue, considering only the net interest expense for apportionment between segments.

Addition under Section 69C for unexplained expenses

Finally, concerning the addition under Section 69C for unexplained expenses, the AO had noted a discrepancy between the amount paid to M/s Bright Construction as claimed by the assessee and the amount acknowledged by the construction company. The assessee had subsequently provided a reconciliation statement with revised details and evidence. The ITAT, finding that these new submissions had not been considered, remanded this issue back to the AO for re-examination in light of the fresh evidence and reconciliation statement. The appeal was thus partly allowed for statistical purposes, with several key issues being remanded or decided in favor of the assessee.

FULL TEXT OF THE ORDER OF ITAT KOLKATA

This is an appeal preferred by the assessee against the order of the National Faceless Appeal Centre, Delhi (hereinafter referred to as the “Ld. CIT(A)”] dated 30.11.2023 for the AY 2014-15.

2. Ground no. 1, is general in nature and need no adjudication.

3. The issue raised in ground nos.2 and 3 is against the confirmation of disallowance of ₹35,355/- by the ld. CIT(A) as made by the ld. AO u/s 14A read with Rule 8D of the Income Tax Rules, 1963.

4. The facts in brief are that during the year the assessee has earned exempt income of Rs.3,929/- by way of dividend income which was claimed as exempt income. In the computation of income, the assessee suo moto disallowed Rs.13,355/- as expenditure incurred in relation to earning of exempt income. The ld. AO was not satisfied with the said disallowances and made the disallowance u/s 14A read with rule 8D of the Rules at Rs.4,03,502/-, which was deleted by the ld. CIT(A).

5. In the appellate proceedings, the claim of the assessee is that the suo moto disallowance was made by the assessee of ₹13,355/- should be curtailed to ₹3929/- in view of the decision of Hon’ble Calcutta High Court in case of PCIT, 1, Kolkata Vs. M/s Jas Toll Road Company in ITAT/7/2024, IA No. GA/2/2024, dated 26.02.2024, wherein it has been held that the disallowance should not exceed the amount of exempt income. Accordingly, we direct the ld. AO to restrict the disallowance to Rs.3929/-, the amount of dividend income earned during the year.The ground nos.2 and 3 is allowed.

6. Ground nos. 4 to 7 are relating to the confirmation of addition of ₹64,39,109/- by the ld. CIT(A) as made by the ld. AO on notional/ hypothetical income being the annual letting value of unsold units under the head profit and gains of the business.

7. After hearing the rival contentions and perusing the materials available on record, we find that the assessee has unsold stocks which were lying unsold and were held as stock-in-trade in assessee’s business. The ld. AO assessed notional annual letting value of unsold inventory of flats u/s 22 and 23 under the head of house property, whereas the ld. CIT(A) held that the said amount is assessable under the head profits and gains of business or profession. We note that the consequent to insertion sub-section 5 to section 23 of the Act by Finance Act, 2017, w.e.f. 01.04.2018, whereby the notional annual letting value of the property/ part of the property held as stock-in-trade has been brought to tax subject to the conditions specified in the newly inserted sub­section. The said provisions are substantive in nature and hence, would be effective prospectively. In other words, the ld. Counsel for the assessee stated that the said provisions have no applicability in the instant assessment year and no addition on account of notional rental value of flats held as stock-in-trade by the assessee could be made by the ld. AO. The case of the assessee is squarely covered by the decision of co-ordinate Bench in the case of Tata Housing Development Company Ltd. Vs. PCIT in ITA No. 3492 & 3493/MUM/2019 vide order dated 28.09.2020 for A.Ys. 2015-16 & 2014-15 respectively, wherein the case ,under similar facts and circumstances, has been decided in favour of the assessee. Accordingly, the ground is allowed and the ld. AO is directed to delete the addition. The ground nos 4 to 7 are allowed.

8. The issue raised in ground no.8 to 9, is against the order of ld. CIT(A) confirming the order of ld. AO making disallowance of Rs.3,32,64,589/-, under the head proportionate interest expenses. Having heard both the sides and perusing the materials available on record, we find that he ld. AO during the assessment proceedings found that the interest charged was Rs.4,99,33,855/- against the rental income of Rs.9,88,35,673/- which is excessive and unreasonable and accordingly, reallocated the same between the leasing segment and real estate segment on the basis of the total value of assets of the two segments as under:-

9. Consequently, the ld. AO disallowed interest to the extent of Rs.3,32,64,589/- (₹4,99,33,855/- – 1,66,69,266/-) as a deduction under the leasing segment and said amount is capitalized to WIP of real estate segment. The ld. CIT(A) confirmed the order of the ld. AO on the ground that the segmental accounts of the assessee were not reliable and basis of allocation of interest was done in manner to reduce the taxable income.

10. We note from the facts on record that during the year the assessee has earned interest income to the tune of Rs.3,65,41,376/-, which were credited to the P&L account under the head other income as per details below:-

11. Therefore, if the interest income is netted against the interest expenses, the net interest expenses would come to Rs.6,35,27,497/-(Rs.10,00,68,873/- – Rs.3,65,41,376/-). We note that the ld. AO had considered the gross interest expenses without netting which in our pinion is wrong and so has been done by the ld. CIT(A). Therefore, in our opinion net interest needs to be apportion in various segments. Accordingly, we are of the view that the issue needs to be examined at the level of the ld. AO to consider the allocation of net interest after setting all the interest income i.e. only to the interest to the tune of rs.6,35,27,497/- was to be apportioned between various segments and the interest relating to the real-estate segment has to be added to the WIP of the assessee. With these observations, the issue is restored to the file of the ld. AO for re-examination afresh in terms of our observations. Accordingly , the ground no.8 to 13 are statistically allowed.

12. The issue raised in ground no.14 to 16 is against the order of ld. CIT(A) confirming the addition of ₹65,97,435/- u/s 69C of the Act.

13. The facts in brief are that the ld. AO during the course of assessment proceedings called for the details from the assessee in respect of party wise details of certain expenses which were submitted by the assessee inter alia submitting the details of construction / Contractors Charges, infrastructure development expenses, repairs to building and repairs to others. The ld. AO on the basis of the said details furnished by the assessee noted that the assessee had paid Rs.1,30,78,197/- to M/s Bright Construction towards construction and other expenses as per the details below:-

“1. Construction Contractors Charges :₹30,30,090/-

2. Infrastructure Development Expenses: ₹3,60,907/-

3 .Repairs to Building :₹82,95,075/-

4. Repairs to Others: ₹13,92,125/-

Total : ₹1,30,7,197/-”

14 The ld. AO ,for independent verification of the transactions, issued notice u/s 133(6) of the Act to some parties including M/s Bright Construction which were replied. M/s Bright Construction stated that it had received Rs.64,80,762/- from the assessee during the year as against Rs.1,30,78,197/- claimed by the assessee. Thereafter, when confronted with these differences, the assessee furnished the re­conciliation statement with revised details and evidences which the ld. AO did not consider and added the difference u/s 69C of the Act. Considering the facts on record and after hearing the rival contentions, we are of the view that the issue requires re-examination at the end of the ld. AO in the light of the fresh evidences and reconciliation statement furnished by the assessee. Accordingly, we restore the file of the ld. AO with a direction that the re-conciliation along with the revised details may be taken into account and the issue be decided accordingly. The ground no.13 to 16 are allowed for statistical purposes.

15. In the result, the appeal of the assessee is allowed for statistical purposes.

Order pronounced in the open court on 08.01.2025.