Case Law Details
ACIT Vs Akarshan Estate Pvt. Ltd. (ITAT Delhi)
The Revenue filed an appeal before the Income Tax Appellate Tribunal (ITAT), Delhi Bench, against the order of the Commissioner of Income Tax (Appeals)/National Faceless Appeal Centre dated 04.07.2025 for Assessment Year 2018-19. The dispute arose from the assessment order passed under Sections 143(3) read with 144B of the Income-tax Act, 1961.
The assessee, a real estate developer, had developed a commercial project known as “M2K Corporate Park” located in Sector-51, Gurgaon. For Assessment Year 2018-19, it filed its return declaring a total income of Rs. 1,01,70,868. The case was selected for complete scrutiny to examine issues relating to disallowance under Section 40A(7), unsecured loans, investments/advances/loans, and stock valuation.
During assessment proceedings, the Assessing Officer observed that the assessee had converted commercial units measuring 1,84,294.33 square feet from stock-in-trade into investment property. According to the Assessing Officer, while 1,02,572 square feet had actually been let out, generating rental income of Rs. 5,51,62,000, the entire area could have earned rent amounting to Rs. 9,91,11,118. Based on this reasoning, the Assessing Officer added Rs. 4,39,49,118 as notional rent and completed the assessment by determining the total assessed income at Rs. 3,39,36,490.
The assessee challenged the addition before the CIT(A), who partly allowed the appeal. The CIT(A) examined the documentary evidence and found that the total built-up area of the project was 2,75,444 square feet. Out of this, 91,149.67 square feet had been sold, while the remaining 1,84,294.33 square feet, initially held as stock-in-trade, had been converted into investment property on 01.01.2018.
The CIT(A) observed that 1,02,572 square feet had been let out during the relevant financial year, with rental income of Rs. 5,51,62,000 duly offered to tax. Additionally, 33,031 square feet had been partially leased during the year, and the corresponding rental income had also been disclosed. Consequently, only 48,692 square feet remained vacant.
The appellate authority held that Section 23(5) specifically provides relief from notional rent in respect of properties held as stock-in-trade. Therefore, no notional rent could be charged for the period during which the property retained the character of stock-in-trade. Since the conversion into investment property took place on 01.01.2018, any notional rent could only be computed for the subsequent three-month period from January to March 2018.
The CIT(A) further found that the Assessing Officer had incorrectly assumed a vacant area of 81,722 square feet without conducting proper verification or providing a rationale. The appellate authority noted that the assessee had furnished lease agreements, profit and loss statements, and tenancy records substantiating its claim regarding the actual vacant area. It was also observed that the Assessing Officer had not provided the assessee an opportunity to rebut the adverse conclusions, which constituted a breach of the principles of natural justice.
For determining the annual letting value for the post-conversion period, the CIT(A) adopted a monthly market rent of Rs. 50 per square foot based on comparable lease transactions within the same premises. Applying this rate to the verified vacant area of 48,692 square feet, the monthly notional rent was computed at Rs. 24,34,600. For the three-month period from January to March 2018, the total notional rent was determined at Rs. 73,03,800.
The CIT(A) also held that once income was assessed under the head “Income from House Property,” the standard deduction under Section 24(a) was mandatory. Accordingly, a deduction of 30% amounting to Rs. 21,91,140 was allowed. As a result, the taxable notional income was restricted to Rs. 51,12,660.
The ITAT upheld the findings of the CIT(A). The Tribunal held that the appellate authority had correctly applied Section 23(5) while determining the annual letting value of the vacant area after the conversion of the asset from stock-in-trade to a capital asset. It further observed that the CIT(A)’s findings were based on proper appreciation of facts relating to the built-up area and the extent of vacancy.
Finding no reason to interfere with the CIT(A)’s order, the ITAT dismissed the Revenue’s appeal.
FULL TEXT OF THE ORDER OF ITAT DELHI
This captioned appeal has been filed by the Revenue against the order of the learned CIT(A)/NFAC Delhi dated 04.07.2025 arising out of the assessment order under section 143(3) r.w.s.144B of the Income-tax Act, 1961 (hereinafter referred as ‘the Act’) passed on 23.04.2021 by the Assessing Officer, ITO, DEL-W-(49)(5) concerning Assessment Year (A.Y.) 2018-19.
2. Brief facts of the case are that the assessee is a company/real estate developer and it has developed/constructed a commercial project name “M2K Corporate Park” in sector-51, May Field, Gurgaon. The assessee had filed its return of income on 31.10.2018 for A.Y. 2018-19 declaring total income of Rs. 1,01,70,868/-. Accordingly, the case was selected for complete scrutiny under the CASS to examine the issues of (i) disallowance u/s 40A(7), (ii) unsecured loan, (iii) investment/advances/loan, (iv) Stock valuation. Subsequently, several notices u/s 143(2)/142(1) of the Act/show cause notices were issued from time to time.
3. The AO noticed that the assessee had converted the entire commercial units of 184294.33 Sq. as its investment but let out 102572 Sq. for a rent of Rs. 5,51,62,000/- whereas the entire area of 184294.33 Sq. Ft. could have been let out for Rs. 9,91,11,118/-. After considering the details of the assessee, the AO completed the assessment proceedings u/s 143(3) r.w.s 144B the Act on 23.04.2021 with the addition of Rs. 4,39,49,118/- on account of notional rent Et determined total assessed income of Rs. 3,39,36,490/-.
4. Aggrieved, assessee was in appeal before the learned CIT(A)/NFAC who allowed the appeal. The Revenue is now aggrieved, and is now in appeal before us with the following grounds:
“1. On the facts and in the circumstances of the case, the Ld. CIT(A) erred in deleting the addition/disallowance of f4,39,49,118/- on the account of notional rent without properly appreciating the facts of the case.
2. On the facts and the circumstances of the case, the Ld. CIT(A) has erred in deleting the addition/ disallowance of f 4,39,49,118/ – on account of notional rent without properly appreciating the provisions of section 22 Et 23 of the IT Act 1961.
3. The Ld. CIT(A) has failed to consider that the assessee had in fact leased out part of the premises and earned rental income therefrom, which proves that the unsold portion was also capable of generating rental income.
4. The appellant craves leave to add, alter or amend any/all of the grounds of appeal before or during the course of the hearing of the appeal.”
5. The Id AR relied on the orders of the CIT(A) and relied upon the following judgments:
A. Premsudha Exports (P.) Ltd. vs. ACIT, ITAT Mumbai Bench ‘C’
B. Shakuntala Devi vs. DDIT, ITAT, Bangalore Bench
C. Indu Chandra vs. Dy. CIT, ITAT Lucknow Bench
D. DLF Office Developers vs. ACIT, ITAT, Delhi Bench ‘I’
E. Kamal Mishra vs. ITO, ITAT, Delhi Bench ‘I’
6. Per contra, the Id DR relied on the order of the AO and the provisions of section 23(1)(c) provides for taxation of notional rent.
7. We have heard the rival submissions and perused the material available on record. We find that the learned CIT(A)/NFAC partly decided the issue in favour of the assessee by observing as under:
“After examining the submission as well as evidence filed by the appellant during the assessment as well as appellate proceedings, it is seen that the appellant is a real estate developer engaged in the construction and development of commercial space. The appellant developed a commercial project named “M2K Corporate Park” located at Sectior-51, Gurgaon Et the Occupancy Certificate was received on 21.10.2016. During the year under consideration, the appellant had converted its balance unsold inventory (stock-in-trade) into capital investment on 01.01.2018. On verification of the relevant details/documents, it reveals that the actual vacant areas was only 48,692/- sq. ft., as opposed to the figure of 81,722/ -. It is also observed that an area of 1,02,572/- sq. ft. was let out during the financial year and the appellant offered the corresponding rental income of Rs. 5,51,62,000/- in its books of account. Further, 33,031 sq. ft. was actually let out for part of the year and the rental income from this portion was duly accounted for in the Profit Et Loss Account. Apart from, it is noticed from the details/document, I find that the total builtup area of the project developed by the appellant amounted to 2,75,444 square feet. Out of this, a portion measuring 91,149.67 square feet was sold to customers in the ordinary course of business and the remaining portion, aggregating to 1,84,294.33 square feet, which was originally held as stock-in-trade (inventory) was subsequently converted into an investment property by the appellant. It is a fact that in the commercial leasing market that there exists a significant difference in the rental valuation between bare shell spaces and fully furnished or well-fitted out commercial premises.
In view of the above facts, it is clearly established that the appellant was entitled to the benefit of sub-section (5) of Section 23 of the I.T. Act, which specifically provides that no notional rent is to be charged on properties held as stock-in-trade.
Accordingly, for the period ending 31.03.2018, the deeming fiction of notional rent is not applicable. However, the Assessing Officer (AO) failed to appreciate or apply the provision of Section 23(5) in its correct legal context and erroneously proceeded to compute notional rent for the entire year, without apportioning between the periods during which the property was held as stock-in trade and when it was converted into a capital asset.
It is further submitted that the appellant had duly converted the unsold inventory into a capital asset on 01.01.2018. Therefore, even if any deemed rental income were to be computed, it could only be done for the post-conversion period. The AO’s omission to consider the statutory exemption available under Section 23(5) renders the addition legally untenable and liable to be deleted.
The AO has incorrectly presumed a vacant area of 81,722 sq. ft. without conducting any independent inquiry, verification, or providing a rationale for such estimation. In contrast, the appellant furnished comprehensive documentary evidence, including lease agreements, profit and loss statements, and tenancy records, to substantiate that out of the total built-up area, 1,02,572 sq. ft. was already let out, generating rental income of Rs. 5,51,62,000/ -, which was duly disclosed and offered to tax.
In addition, a further 33,031 sq. ft. was under partial lease arrangements, and the income from this portion was also reported in the return of income. As such, only 48,692 sq. ft. remained vacant during the relevant period.
The AO’s estimation is thus based on a mathematically erroneous and inflated figure, leading to an arbitrary and excessive computation of deemed rent. Moreover, the AO failed to issue any show-cause or seek a rebuttal from the appellant before drawing adverse conclusions, which is a breach of principles of natural justice. This reinforces that the addition is not supported by facts or law and deserves to be set aside.
Upon a careful review of the facts and appellant submissions, it is observed that the conversion of stock-in-trade into investment property occurred on 01.01.2018. Consequently, any notional rent can be computed only for the balance three-month period of the financial year — i.e., January to March 2018. This is consistent with the position that notional rent under section 23(1)(a) is applicable only to investment properties and not to stock-in-trade within the exempt period defined under section 23(5).
To compute the appropriate annual letting value (ALV) for the vacant portion of the property during this three-month post-conversion window, the following parameters are applied:
Vacant Area: 48,692 sq. ft. (as per verified records and tenant schedules) Estimated Market Rent: 50 per sq. ft. per month (based on actual lease transactions of similar units in the same premises)
Accordingly, the computation of notional rent is as follows:
Monthly Notional Rent = 48,692 sq. ft. x 50 = 24,34,600
Total Notional Rent for 3 Months (Jan-Mar 2018) = 24,34,600 x 3 = 73,03,800
The above computation of deemed rent is commensurate with the rent received by the appellant during the assessment proceedings as per the available agreements as submitted during the assessment proceeding. The deemed rent is similar to income earned for the 9 months reflects reasonable expected rental potential of bare shell commercial premises, and avoids arbitrary estimation.
Further, the appellant stated that while computing the income from house property standard deduction was not allowed and hence it is entitled to claim the deduction of Section 24(a) of the Income-tax Act which provides for a standard deduction of 30% from the annual value of property assessed under the head “Income from House Property”. This deduction is mandatory in nature and is intended to account for repair and maintenance expenses, regardless of whether they are actually incurred.
In the present case, the Assessing Officer failed to apply this statutory deduction while computing the taxable notional rental income. Once a notional annual value is determined, the deduction under Section 24(a) must be applied automatically.
Accordingly, applying the statutory deduction to the notional rent of as stated hereinabove of Rs. 73,03,800 results as follows:
A. Net Taxable Notional Rent = Rs. 73,03,800
B. Standard Deduction (30%) = Rs. 21,91,140
C. Taxable House property Income (A-B)= Rs.51,12,660
Thus the assessing officer is directed to restrict the additions so made to the tune of Rs. 73,03,800/- and allow standard deduction as per the provisions Section 24(a) of the Income-tax Act of Rs. 21,91,140/- thus restricting it to Rs. 51,12,660/- under the head Income from House Property.
These grounds of appeals are partly allowed.”
8. We are of the considered view that the CIT(A) has rightly invoked the application of the provisions of section 23(5) for the purpose of determining the ALV of the vacant area post conversion of asset from `stock-in-trade’ to ‘capital asset’. The decision of the CIT(A) is reasonable and appreciative of correct facts as far as the area of the built-up area for which notional rent is determined. We therefore, find no reason to interfere with the decision of the CIT(A). The ground is dismissed.
9. In the result, appeal filed by the Revenue in ITA No.6019/Del/2025 is dismissed.
Order pronounced in the open court on 05.06.2026
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