Varun Developers Vs ACIT (ITAT Pune)
Summary: The Pune Bench of the Income Tax Appellate Tribunal allowed the appeal of M/s Varun Developers, a firm engaged in construction and real estate development, against an addition of ₹7,98,000 made towards TaxGuru discussion of deemed rental income on unsold flats for Assessment Year 2016–17. The assessee had filed its return on 19 September 2016 declaring income of ₹93,03,425. During scrutiny assessment, the Assessing Officer noticed nine flats in closing stock, of which one was rented and eight remained vacant. Taking the rental income from the occupied flat as a reference, the Assessing Officer determined deemed rental income from the remaining eight flats under Sections 22 and 23(4), after allowing deduction under Section 24(a). The Assessing Officer also disallowed a deduction of ₹1,58,60,755 claimed under Section 80-IB(10). On appeal, the CIT(A)/NFAC allowed the Section 80-IB(10) deduction but sustained the addition relating to deemed rental income.
The assessee argued that the eight unsold flats were held as stock-in-trade in its real estate development business and were kept vacant to facilitate their sale whenever buyers became available. It maintained that these properties were business inventory rather than investments held for earning rental income and consequently should not attract taxation under the head Income from House Property for the assessment year concerned. Alternatively, the assessee argued that the annual value should be treated as nil under Section 23(1)(c), since the flats had remained vacant throughout the year, and disputed the Assessing Officer’s estimated rental valuation. The assessee relied on Pride Purple Properties v. DCIT, ITA No. 481/PUN/2022, dated 12 April 2023, and referred to the Delhi High Court decision in CIT v. Ansal Housing & Construction. The Revenue supported the addition and relied on Dimple Enterprises v. DCIT, 154 taxmann.com 653 (Mumbai Tribunal).
The Tribunal examined Sections 22 and 23 of the Income-tax Act, particularly Section 23(5) applicable from AY 2018-19. It observed that Section 23(5), inserted by the Finance Act, 2017 with effect from 1 April 2018, was prospective and could not be applied to Assessment Year 2016–17. The Tribunal considered that, under the statutory position applicable to the year in dispute, the annual value of unsold flats held as business stock-in-trade could not be assessed as deemed rental income in the circumstances of the case. It followed the Pune coordinate bench’s ruling in Pride Purple Properties, which had deleted a comparable addition for Assessment Year 2014–15. The Tribunal also considered the Revenue’s reliance on Dimple Enterprises but held that the decision did not support the Revenue’s position in the present appeal.
Accordingly, the ITAT directed the Assessing Officer to delete the entire addition of ₹7,98,000 and allowed the assessee’s appeal. The decision establishes the Tribunal’s position that Section 23(5) could not be retrospectively invoked to compute deemed rental income on unsold flats held as stock-in-trade for Assessment Year 2016–17. The Tribunal’s conclusion was confined to the assessment year and circumstances before it; the taxation of unsold inventory for subsequent years remains subject to the applicable statutory provisions, including Section 23(5) and its conditions. The order was pronounced on 10 September 2024.
Cases Discussed
- CIT v. Ansal Housing & Construction, 72 taxmann.com 254 (Delhi)
- Pride Purple Properties v. DCIT, ITA No. 481/PUN/2022, order dated 12 April 2023
- Dimple Enterprises v. DCIT, 154 taxmann.com 653 (Mumbai – Trib.)
FULL TEXT OF THE ORDER OF ITAT PUNE
This appeal filed by the assessee is directed against the order dated 19.02.2024 passed by Ld CIT(A)/NFAC for the assessment year 2016-17.
2. The appellant has raised the following grounds of appeal :-
“1] The learned CIT(A) erred in confirming the addition of Rs.7,98,000/- on account of deemed rent in respect of unsold units u/s 22 r.w.s. 23(4) in respect of the unsold units held as stock in trade by the assessee firm in the various projects developed by the assessee firm.
2] The learned CIT(A) erred in holding that these unsold units were not occupied by the assessee for the purposes of its business by the assessee firm and hence, the annual value of such unsold units was chargeable to tax as income from house property u/s 22 of the Act.
3. The learned CIT(A) failed to appreciate that the assessee firm had held the unsold units as its stock in trade and hence, since these units were occupied by the assessee for its business purposes, there was no reason to tax the annual value of such unsold units u/s 22 of the Act as income from house property.
4. Without prejudice to the above grounds, the assessee submits that assuming without admitting that the income of such unsold units was taxable as Income from House Property u/s. 22, it is submitted that the unsold units were vacant for the entire year and accordingly, the income thereon was to be considered at Rs. Nil in view of the provisions of section 23(1)(c) and hence, the entire addition made by the learned A.O. may kindly be deleted.
5. Without prejudice to the above grounds, the assessee submits that the net annual retable value adopted by the learned A.O. is on an adhoc basis and the same should be substituted by the municipal retable value determined for the various units by the local authorities.
6. The appellant craves leave to add, alter, amend or delete any of the above grounds of appeal.”
3. The facts of the case, in brief, are that the assessee is a firm engaged in construction activities as a Promoter and Builder. The assessee has e-filed its return of income for assessment year 2016-17 on 19-09-2016 declaring total income of Rs.93,03,425/-. The said return was selected for scrutiny and accordingly a notice u/s 143(2) & 142(1) of IT Act was issued and served on the assessee. During the course of assessment proceedings, the Assessing Officer found that the assessee claimed deduction u/s 80IB(10) of the IT Act and as the similar claim was rejected in the earlier years in assessee’s own case, therefore, after considering the reply of the assessee, the Assessing Officer rejected the said claim made by the assessee u/s 80IB(10) of the IT Act for this year also and a sum of Rs.1,58,60,755/- was added back to the income of the assessee.
3.1 The Assessing Officer also found that the assessee was holding closing stock of 9 units/flats at the end of the assessment year 2016-17. Out of these 9 flats, rental income was found to be shown for 1 flat only and for remaining 8 vacant flats held in closing stock no rental income was disclosed by the assessee under the head “Income from house property”. The Assessing Officer therefore asked the assessee to explain why deemed rental income as per section 22 r.w.s. 23(4) of the IT Act on the closing stock of completed units/flats as per the Balance Sheet should not be added to your total income. In reply, the assessee submitted that all these flats/units are held as stock in trade to be sold as and when customer is available therefore they are required to be kept vacant to take the opportunity of sale as and when arise. They are not held by firm as “house property” but they are held as “stock in trade”. But the Assessing Officer did not accept the reply of the assessee and determined deemed rental income as per the provisions of section 22 r.w.s. 23(4) of the IT Act. On the basis of rent shown by the assessee for the other flat in the same project, the Assessing Officer determined deemed rental income of Rs.7,98,000/- after allowing deduction u/s 24(a) of the IT Act and added back the same to the income of the assessee. The Assessing Officer determined deemed rental income on unsold flats/units held in stock in trade and passed the assessment order u/s 143(3) of the IT Act vide order dated 20-11-2018.
4. Aggrieved with the above assessment order, the assessee preferred first appeal before the ld. CIT(A)/NFAC. The ld. CIT(A)/NFAC after considering the reply of the assessee allowed the deduction as claimed by the assessee u/s 80IB(10) of the IT Act, but sustained the addition in respect of deemed rental income of Rs.7,98,000/- from unsold flats held as stock in trade vide order dated 19-02-2024.
5. Being aggrieved with the decision of ld. CIT(A)/NFAC, the assessee preferred second appeal before this Tribunal.
6. LD AR submitted before us that the grounds raised in this appeal relates to addition of Rs.7,98,000/- on the ground of deemed rental income in respect of unsold flats/units held as stock in trade u/s 22 r.w.s. 23(4) of the IT Act. It was submitted before us that ld. CIT(A)/NFAC erred in holding that these unsold units were not occupied by the assessee for the purposes of its business and hence the annual value of such unsold units was chargeable to tax as “Income from house property” u/s 22 of the IT Act. Alternately, it was also submitted that the unsold units were vacant for the entire year and accordingly the income thereon was to be considered at Rs.Nil in view of the provisions of section 23(1)(c) of the IT Act. It was further submitted by LD AR that the case of CIT vs. Ansal Housing & Construction, 72 taxmann.com 254 (Delhi) is challenged before the Hon’ble Supreme Court. LD AR also placed reliance on the decision passed by the Co-ordinate Bench of this Tribunal in the case of Pride Purple Properties vs. DCIT in ITA No.481/PUN/2022 order dated 12-04-2023. On the basis of above, LD AR requested the Bench to delete the addition of Rs.7,98,000/- made by the A.O. and sustained by ld. CIT(A)/NFAC.
7. LD DR supported the orders passed by subordinate authorities and requested to confirm the same. The ld. DR further relied on the decision of the Co-ordinate Bench of Mumbai Tribunal in case of Dimple Enterprises vs. DCIT, 154 taxmann.com 653 (Mumbai – Trib.).
8. We have heard the ld. Counsel from both the sides and perused the material available on record as well as case laws furnished by both the parties. We find that the Assessing Officer made addition under the head “Income from house property” on unsold stock of flats held as stock in trade, as per the provisions of section 22 r.w.s. 23(4) of the IT Act, in the light of judgement of the Hon’ble Delhi High Court in the case of Ansal Housing & Construction (supra), wherein, the Hon’ble High Court held that vacant flats/units held as stock in trade by a builder are liable to be taxed under the head “Income from house property” and deemed rental income on these units are chargeable to tax even if not actually let out by the builder. We further find that against this judgment, the SLP has been filed before the Hon’ble Apex Court. It is an admitted fact that the flats were occupied by the builder for the purposes of business carried on by him and income of which is chargeable to tax. Therefore, in the light of section 22 of the IT Act only that property which is not occupied for the business shall be chargeable to tax u/s 22 of the IT Act. For the sake of convenience, sections 22 and 23 of the IT Act are reproduced as under :-
“22. Income from house property.
‘ The annual value of property consisting of any buildings or lands appurtenant thereto of which the assessee is the owner, other than such portions of such property as he may occupy for the purposes of any business or profession carried on by him the profits of which are chargeable to income-tax, shall be chargeable to income-tax under the head “Income from house property”.
23. [ Annual value how determined.
(1) For the purposes of section 22, the annual value of any property shall be deemed to be-
i. the sum for which the property might reasonably be expected to let from year to year; or
ii. where the property or any part of the property is let and the actual rent received or receivable by the owner in respect thereof is in excess of the sum referred to in clause (a), the amount so received or receivable; or
iii. where the property or any part of the property is let and was vacant during the whole or any part of the previous year and owing to such vacancy the actual rent received or receivable by the owner in respect thereof is less than the sum referred to in clause (a), the amount so received or receivable:
Provided that the taxes levied by the local authority in respect of the property shall be deducted (irrespective of the previous year in which the liability to pay such taxes was incurred by the owner according to the method of accounting regularly employed by him) in determining the annual value of the property of that previous year in which such taxes are actually paid by him.
Explanation. – For the purposes of clause (b) or clause (c) of this sub-section, the amount of actual rent received or receivable by the owner shall not include, subject to such rules as may be made in this behalf, the amount of rent which the owner cannot realise.
(2)Where the property consists of a house or part of a house which-
i. is in the occupation of the owner for the purposes of his own residence; or
ii. cannot actually be occupied by the owner by reason of the fact that owing to his employment, business or profession carried on at any other place, he has to reside at that other place in a building not belonging to him, the annual value of such house or part of the house shall be taken to be nil.
(3)The provisions of sub-section (2) shall not apply if,- the house or part of the house is actually let during the whole or any part of the previous year; or
any other benefit therefrom is derived by the owner.
(4) Where the property referred to in sub-section (2) consists of more than one house-
i. the provisions of that sub-section shall apply only in respect of one of such houses, which the assessee may, at his option, specify in this behalf;
ii. the annual value of the house or houses, other than the house in respect of which the assessee has exercised an option under clause (a), shall be determined under subsection (1) as if such house or houses had been let.]
(5) Where the property consisting of any building or land appurtenant thereto is held as stock-in-trade and the property or any part of the property is not let during the whole or any part of the previous year, the annual value of such property or part of the property, for the period up to [two years] from the end of the financial year in which the certificate of completion of construction of the property is obtained from the competent authority, shall be taken to be nil.]”
[Sub-section (5) of section 23 inserted w.e.f. 1.4.2018]
9. The Assessing Officer calculated deemed rental income on the vacant flats held as stock in trade u/s 22 r.w.s. 23(4) of the Act. From perusal of both the above sections, it is apparent that from assessment year 2018-19 the Legislature showed its intention to tax the deemed rental income from the property held as stock in trade and prior to that no such wording was used in section 23 of the IT Act, which clearly shows that it was never the intention of the Legislature to tax the deemed rental income from property held as stock in trade. It is only from assessment year 2018-19 that a new section 23(5) was inserted which permits the Assessing Officer to calculate the deemed rental income of the property held as stock in trade even if such property is not let during the whole or any part of the previous year. Therefore, we are of the considered opinion that for assessment year 2016-17 there was no such provision which empowers the Assessing Officer to calculate the deemed rental income/annual value of the property which was held as stock in trade by the builder. In the light of section 22, it is clear that if the property was held as stock in trade i.e. for the purposes of business of the assessee, the annual value of such property shall not be chargeable to income tax under the head “Income from house property”. Therefore, no annual value or deemed rental income can be determined of such property for the purposes of income tax prior to assessment year 2018-19. The intentions of the Legislature are very much clear because they introduced section 23(5) w.e.f. assessment year 2018-19 only and nowhere it was mentioned that it has been retrospectively made applicable. When the operation of this section was not made retrospective, it is very much clear that the annual value/deemed rental income of property held as stock in trade can be calculated and shall be chargeable to income tax only w.e.f. assessment year 2018-19 and not prior to that. In support of this contention, ld. AR produced before us a copy of the decision passed by the Co-ordinate Bench of this Tribunal in the case of Pride Purple Properties (supra), wherein, the appeal of the assessee is allowed by the Tribunal by observing as under :-
“6. In context of impugned AY 2014-15, we note that the Finance Act, 2017 introduced sub-section (5) to section 23 providing that where a property held as ‘stock in trade’ is not let out during the year, its annual value, after a period of one year or as revised to two years, shall be considered for the purposes of inclusion under the head ‘Income from House property. This amendment has been brought out w.e.f. 01-04-2018. Thus, this provision manifestly does not apply to the impugned AY 2014-15, therefore we are of the considered view that the impugned addition of Rs.2,52,000/- made and as sustained in the first appeal, is not called for, thus is directed to be deleted.”
10. However, the decision of the Co-ordinate Bench of the Mumbai Tribunal in the case of Dimple Enterprises (supra) relied on by ld. DR does not support the case of the Revenue. Therefore, respectfully following the above decision of the Co-ordinate Bench of this Tribunal in the case of Pride Purple Properties (supra), we hold that the annual value/deemed rental income cannot be calculated for property held as stock in trade by the assessee for assessment year 2016-17, hence, we direct the Assessing Officer to delete the addition of Rs.7,98,000/- made on account of deemed rental income u/s 22 r.w.s. 23(4) of the IT Act in respect of unsold units/flats held as stock in trade. Therefore, the grounds of appeal filed by the assessee are allowed.
11. In the result, the appeal filed by the assessee stands allowed.
Order pronounced on 10th September, 2024.
