ITAT Mumbai Dismisses Revenue Appeal on Deemed Rent

ACIT Vs Haware Constructions Pvt. Ltd. (ITAT Mumbai)

The Income Tax Appellate Tribunal (ITAT), Mumbai Bench, has dismissed an appeal filed by the Assistant Commissioner of Income Tax (ACIT) against Haware Constructions Pvt. Ltd. for the Assessment Year 2014-15. The Revenue’s appeal challenged the decision of the National Faceless Appeal Centre (NFAC), which had deleted additions made by the Assessing Officer (AO) concerning deemed rental income on unsold flats and a disallowance under Section 14A of the Income Tax Act, 1961.

Deemed Rental Income on Unsold Stock-in-Trade

The first ground of appeal by the Revenue contested the NFAC’s decision to delete the addition of Rs. 1,35,22,019/-, which the AO had made as “deemed income from house property” on unsold flats and shops held as stock-in-trade. The AO had applied Section 22 read with Section 24(b) of the Act, computing an 8.5% deemed annual value on the cost of construction of Rs. 22,72,60,825/-, followed by a 30% standard deduction.

The Revenue argued that the NFAC erred by considering the amendment made vide sub-section (5) inserted after sub-section (4) of Section 23 by the Finance Act, 2017, effective from April 1, 2018. The Revenue contended that this amendment was prospective and not applicable for AY 2014-15.

The NFAC, in deleting this addition, had relied on the assessee’s own case for AY 2009-10 and AY 2010-11 (ITA No. 3172/Mum/2016 and ITA No. 4539/Mum/2017 respectively), where the ITAT had previously ruled on similar issues in favor of Haware Constructions.

Section 14A Disallowance

The second ground of appeal challenged the NFAC’s deletion of a disallowance of Rs. 31,80,888/- made by the AO under Section 14A read with Rule 8D(1)(iii). This disallowance was made despite the assessee’s contention that no exempt income was earned during the year. The Revenue’s argument was based on CBDT Circular No. 5/2014, which, according to them, clarified that disallowance under Section 14A read with Rule 8D applies even when no exempt income is earned.

The NFAC had deleted this disallowance by following the decision of the jurisdictional Bombay High Court in Kohinoor Projects Pvt. Ltd. (2020) 121 taxmann.com 177 (Bom) and the Delhi High Court in PCIT vs. Man Infra Projects Ltd. (ITA No. 259 of 2017 dated 09.04.2019). These judicial precedents generally hold that no disallowance under Section 14A can be made if no exempt income is earned.

ITAT’s Decision

The ITAT, after reviewing the AO’s order, the NFAC’s order, and the cited case laws, found no perversity in the NFAC’s decision. It upheld the deletion of both additions.

Furthermore, the ITAT observed that the tax effect involved in the appeal was below the monetary limit prescribed by the CBDT in Circular No. 3/2018 dated August 20, 2018. Since the issues were not covered under any of the exceptions listed in paragraph 10 of the said circular, the appeal by the Revenue was deemed not maintainable on this ground as well.

In conclusion, the ITAT dismissed the Revenue’s appeal. The order was pronounced in open court on October 6, 2022.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

This appeal by the Revenue is directed against the order of National Faceless Appeal Centre, Delhi [hereinafter referred to as [‘NFAC’] dated 24.11.2021 passed under section 250 of the Income Tax Act, 1961 (hereinafter referred to as [‘the Act’] for the Assessment Year (AY) 2014-15. The Revenue has raised the following grounds of appeal:

“(i) “Whether on the facts and circumstances of the case and in law, the ld. CIT(A) erred in delaying the deemed income from house property held as stock in trade, which is not let out for the whole or part of the year, by considering the amendment made vide sub-section (5) inserted after sub-section (4) of Section 23 by the Finance Act, 2017 w.e.f. 01.04.2018, without appreciating that the amendment is applicable from the A.Y. 2018-19 and is not retrospective?”

(ii) “Whether on facts and circumstances of the case and in law, the ld. CIT (A) erred in deleting the disallowance made by the AO u/s 14A r.w.s 8D without appreciating that CBDT vide Circular No. 5/2014 has clarified that rule 8D r.w.s 14A of the Act provides for disallowance of the expenditure even where tax payer in a particular year has not earned any exempt income?”

(iii) The appellant prays that the order of the CIT (Appeals) on the above ground be set aside and that of the AO be restored.”

2.  Brief facts of the case are that the assessee-company is engaged in the business activities of building, developing and civil construction e-filed its return of income on 28.11.2014 declaring total loss of Rs. (-) 3, 64, 67,270/- . During the year assessee has derived income from house property, business and profession and income from other sources.

3. During the year under consideration AO observed that assessee company has declared income from the business of building and developing by following completed project method. For the year under consideration the assessee company has offered income from projects completed during the year as well as income arising from the sale of unsold flats and shops of projects completed on the previous year. Consequently, the flats and shops which remained unsold at the end of the FY were shown under the head inventory as closing stock. The details of the same are as under:

AO issued a show cause notice to the assessee for applying section 22 r.w.s. 24(b) i.e. deemed annual value @8.5% of the cost of construction of the property as per Bombay rent control act after deduction u/s 24b @30% on the annual value.

4. The deemed annual value u/s 22 on the cost of construction of Rs 22,72,60,825/- comes to Rs 1,93,17,170/-. Standard deduction u/s 24b @30% comes to Rs. 57, 95,151/-. Accordingly, the total income from house property as per AO is Rs. 1, 35, 22,019/-(Rs.193, 17,170- Rs. 57, 95,151). In response to this show cause assessee filed its reply but not found to be satisfactory by the AO and he made an addition of Rs 1, 35, 22,019/-.

5. During the year under consideration AO examined the applicability of Sec. 14A. In response to AO’s query assessee filed its reply but the same was not accepted by the AO and he made an addition of Rs 31,80,888/- u/s 14A r.w.r 8D(1)(iii). Aggrieved with this order of AO assessee preferred an appeal to the Ld. CIT (A)-24 Mumbai.

6. CIT(A) (NFAC) vide his order dated 24.11.2021 deleted both the additions made by the AO. While deciding the matter relating to addition under section 22 amounting to Rs. 1,35,22,019/-, Ld. CIT(A) considered ITA No. 3172/Mum/2016 and ITA No. 4539/Mum/2017 in assessee’s own case for AY 2009-10 and 2010-11 respectively.

7. As far as addition under section 14A is concerned, Ld. CIT(A) followed the decision of Hon’ble Jurisdictional High Court in the case of Kohinoor Projects Pvt. Ltd. (2020) 121 com 177 (BOM) & PCIT vs. Man Infra Projects Ltd. ITA No. 259 of 2017 dated 09.104.2019, High Court of Delhi.

8. Relying upon assessee’s own appeal in ITAT with reference to addition made under section 22 of the Act and Kohinoor Projects Pvt. Ltd. (supra) with reference to addition made under section 14A, Ld. CIT(A) deleted both the additions. We have gone through the order of AO, order of Ld. CIT(A), case laws cited by the assessee and relied upon by the Ld. CIT(A) while deciding the issue. We did not find any perversity in the order of Ld. CIT(A), hence, we are not inclined to interfere with the same.

9. Further, we have gone through the CIRCULAR NO. 3/2018 dated 11.07.2018 [F.NO.279/MISC.142/2007-ITJ (PT)]. As the tax effect involved is below the monetary limit prescribed by the CBDT as mentioned in Circular (supra) and also since the issues involved are not covered under any of the exceptions under para- 10 of clause (a) to (f), further appeal by Revenue is not admissible. On this ground also appeal of Revenue is not maintainable, hence dismissed.

10. In the result, appeal filed by the Revenue is dismissed.

Order pronounced in the open court on 6^th day of October, 2022.