SEZ Lease Rentals Are Business Income, Not House Property: ITAT Mumbai

ACIT Vs K Raheja Corp Private Limited (ITAT Mumbai)

SEZ Lease Rentals Are Business Income, Not House Property: ITAT Rejects Revenue’s Repeated Challenge Against K Raheja

The Mumbai ITAT reaffirmed that lease rentals from SEZ/IT Parks are taxable as “business income” and not as “income from house property”, while also holding that in abated Section 153A assessments, an assessee is entitled to make fresh beneficial claims even if a different stand was taken in the original return.

K Raheja Corp had originally offered rental income from its IT parks under the head “house property”, but in returns filed pursuant to Section 153A search proceedings, claimed the same as “business income”. The Revenue objected by relying upon the Supreme Court ruling in Sun Engineering Works, arguing that fresh claims cannot be raised in post-search proceedings.

Rejecting the Department’s stand, the Tribunal held that once assessments abate under Section 153A, the return filed pursuant to notice under Section 153A substitutes the original return and the entire assessment becomes open. Therefore, legitimate fresh claims are permissible. The ITAT relied heavily on Bombay High Court rulings in B.G. Shirke Construction Technology Pvt. Ltd. and JSW Steel Ltd., clarifying that the restriction laid down in Sun Engineering Works applies to reassessment proceedings under Section 147 and not to abated Section 153A proceedings.

On merits, the Tribunal relied upon CBDT Circular No. 16/2017, which expressly clarifies that income from letting out premises in an Industrial Park/SEZ along with amenities is assessable as profits and gains of business. The Tribunal also noted that the Department itself had accepted this position in the assessee’s own subsequent assessment years.

The ITAT further granted relief on several connected issues, including:

• Deletion of notional ALV additions on unsold flats/units held as stock-in-trade for pre-AY 2018-19 years, holding that Section 23(5) cannot be retrospectively applied;
• Restricting Section 14A disallowance to exempt income earned; and
• Holding that Section 14A disallowance cannot automatically be imported into MAT computation under Section 115JB.

Accordingly, the Revenue’s appeals were dismissed and the assessee’s cross-objections were allowed.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

Captioned appeals by the Revenue and cross objections by the assessee, arise out of three separate orders of learned Commissioner of Income Tax (Appeals), Mumbai, pertaining to the assessment years (A.Y. for short) 2014-15, 2015-16 and 2016-17.

ITA Nos. 6203/Mum/2025 (A.Y. 2014-15) & 6972/Mum/2025 (A.Y. 2016-17)

2. Since, these appeals stand at par, they are taken up together. The first issue which arises for consideration in terms with ground nos. 1 & 2 in both the appeals, relates to the proper head of income under which the lease rental income received by the assessee can be assessed.

3. Briefly, the facts relating to this issue are, the assessee is a resident corporate entity stated to be engaged in various activities including the business of development of real estate, lease of properties, etc.

4. For the assessment years under dispute, the assessee had filed its returns of income u/s. 139(1) of the Act. The assessee had developed Information Technology (IT) Parks at Pune and Hyderabad named ‘Commerzone’. The concerned IT parks are also recognized as Special Economic Zone (SEZ)/Industrial Parks under the respective SEZ schemes. During the assessment years under dispute, the assessee had derived two streams of income from IT parks:

i) Rent from lease of space;

ii) Rent from lease of furniture and fit-out and facility management charges towards maintenance and upkeep of premises let out.

5. So far as income at Item no.(i) is concerned, in the returns of income filed u/s. 139(1) of the Act, the assessee had offered them as ‘income under the head house property’. Subsequently, on 30.11.2017, a search and seizure operation u/s. 132 of the Act was carried out in case of the assessee. On the date of search and seizure operation, assessments for the impugned assessment years had not been completed. In other words, on the date of search, the assessments abated. As a result of search and seizure operation, proceedings u/s. 153A of the Act were initiated against the assessee. In response to the notice issued u/s. 153A of the Act, the assessee filed its return of income for the impugned assessment years, wherein, in a departure to its earlier stand, it treated the lease rentals from IT parks as income under the head ‘business and profession’. While completing the assessment u/s. 143(3) r.w.s. 153A of the Act, the A.O. rejected such change of stand by the assessee raising two objections. Firstly, the assessee in a return filed in pursuance to notice issued u/s. 153A of the Act cannot raise a fresh claim to its benefit. In this context, the A.O. relied upon the decision of Hon’ble Supreme Court in case of CIT v. Sun Engineering Works (P) Ltd. [1992] 198 ITR 297 (SC) and some other decisions. Without prejudice, he held that lease rentals were derived out of letting out of the properties, hence, it has to be assessed under the head ‘income from house property’. Accordingly, he rejected assessee’s claim.

6. The assessee contested the aforesaid decision of the A.O. in appeals preferred before the first appellate authority.

7. While deciding the issue, ld. First appellate authority, firstly, held that since it is a case of abated assessment, the A.O. has full power to not only examine the materials found as a result of search and seizure operation, but also all other issues not connected to the search and seizure operation, as the entire assessment is open before the A.O. Secondly, he held that since the entire assessment is open before the A.O., the assessee can make a fresh claim in a return filed in pursuance to notice issued u/s. 153A of the Act. He held that the ratio laid down by the Hon’ble Supreme Court in the case of Sun Engineering Works (P) Ltd. (supra) would not apply as in contradistinction the case of reopening u/s. 147 of the Act, which is for assessing the escaped income, the assessment u/s. 153A of the Act, where the proceedings have abated, is like a fresh assessment. Thus, he held that the assessee can raise a fresh claim in the return filed u/s. 153A of the Act. Secondly, he held that in terms with Circular No. 16 of 2017 issued by the Central Board of Direct Tax (CBDT), the lease rental received from the IT Parks recognized as SEZ is assessable under the head ‘income from business and profession’. Thus, he allowed assessee’s claim.

8. Before us, ld. DR, strongly relied upon the reasoning of the A.O. and submitted that once the assessee itself has recognized the income under the head ‘income from house property’, it cannot be permitted to change the head of income.

9. Per contra, ld. Counsel appearing for the assessee strongly relied upon the observations of the first appellate authority. Further, he submitted that the issue is no more res integra in view of the ratio laid down in the following decisions:

a) ACIT vs. Gigaplex Extate Pvt. Ltd. (in ITA No. 2506/Mum/2021 vide order dated 31.01.2023)

b) DCIT vs.Mindscpase Business Park Pvt. Ltd. (in ITA No. 433 & 434/Mum/2022 vide order dated 29.08.2022)

10. We have considered rival submissions in light of the judicial precedents cited before us and perused the materials on record. As could be seen from the discussions made herein before, there are two aspects to the issue. Firstly, whether in a proceeding u/s. 153A of the Act, the assessee can make a fresh claim beneficial to it and, secondly, whether the lease rental from IT parks should be assessed under the head ‘income from business and profession’. As discussed earlier, on the date of search, the assessments for the impugned assessment years had abated. Therefore, the A.O. was free to make assessment by considering both materials found as a result of search and seizure operation as also all other materials. In other words, the entire assessment for the year under consideration was open before the A.O. Therefore, when the assessee files a return in response to notice issued u/s. 153A of the Act, it substitutes the return filed u/s. 139(1) of the Act, as the A.O. for all practical purposes is to make a fresh assessment. Therefore, the assessee can raise fresh claim in a return filed u/s. 153A of the Act in departure to the earlier return filed u/s. 139(1) of the Act. The argument of the department that in terms with the ratio laid down by the Hon’ble Supreme Court in the case of Sun Engineering Works (P) Ltd. (supra), the assessee cannot take benefit out of proceedings u/s. 153A of the Act, in our view, is unacceptable considering the fact that in case of Sun Engineering Works (P) Ltd. (supra), the issue was whether in a proceeding initiated u/s. 147 of the Act to assess escaped income, the assessee can raise a fresh claim beneficial to it. In that perspective, the Hon’ble Supreme Court held that since the proceedings for reopening of assessment u/s. 147 of the Act is simply for the purpose of assessing the escaped income, the assessee cannot turn the proceedings to its benefit. Whereas, presently, we are dealing with a case of abated assessment where the entire assessment is open before the A.O. Therefore, the A.O. can examine all the issues without restricting himself in assessing the undisclosed income as per the seized material.

11. In case of Gigaplex Extate Pvt. Ltd. (supra), while considering similar argument advanced by the department, the co-ordinate bench has held as under:

7. We have heard both the parties and perused the records. At the outset, the Ld. AR of the assessee brought to our notice that this issue is no longer res-integra. According to the Ld. AR, during the search operation on 30.11.2017, the assessee’s sister concern namely viz M/s. Mind space Business Park Pvt. Ltd. was also searched and pursuant to which the assessment proceedings u/s 153A of the Act, was also initiated against that assessee (M/s. Mindspace Business Park Pvt. Ltd. for AY. 2015-16 & AY. 2016-17) and like in the present assessee’s case on the date of search these assessment years were abated assessments; and that assessee (M/s. Mindspace) was also letting out premises situated at SEZs and offering the rental income under the head “house property” and pursuant to the notice u/s 153A of the Act while filing the return of income had claimed the rental income under the head “Income from Business and Profession”. The AO did not accept the claim made by the assessee by changing the head of income and assessed it under the income from “house property” as similarly done in the present assessee’s case. This action of AO was challenged before the Ld. CIT(A) in (M/s. Mindspace case) wherein the Ld. CIT(A) taking note of the CBDT Circular No. 16/2017 dated 25.04.2017 which clarified that the income arising from letting out of premises/developed space along with amenities in an Industrial Park/SEZ need to be charged to tax under head “Profit and Gains from Business”, was pleased to allow the claim of that assessee. Aggrieved, the revenue preferred an appeal before this Tribunal and the Tribunal upheld the action of Ld. CIT(A) by passing the order in M/s. Mindspace Business Park Pvt. Ltd (ITA. No.433 & 434/Mum/2022 for AY. 2015-16 and AY. 2016-17) dated 29.08.2022. We note that similar grounds were raised by the revenue as raised before us in these appeals and the Tribunal while upholding the action of Ld. CIT(A) held as under: –

“12. Aggrieved by the above order of Ld.CIT(A), Revenue preferred appeal before us raising following common grounds in its appeals. Grounds raised for the A.Y. 201516 are reproduced below: –

“1. The Ld. CIT(A) erred in considering lease rentals income earned by the appellant as income under the Profit or Gains from Business and Profession (Profit and Gain from Business and Profession) as against Income from House Property as claimed in its Return of Income filed u/s 139(1) of the Act.

2. The Ld. CIT(A) erred in not considering the decision held by Hon’ble Apex Court in CIT v. Sun Engineering Works (P) Ltd. and by the Hon’ble Bombay High Court in K. Sudhakar S. Shanbhag v, ITO with regard to the fact that assessee can’t seek relief not claimed earlier during post search assessment as per section 153A of the Act. 3. The Ld. CIT(A) erred in partly allowing the appeal of the assessee on the ground of depreciation on assets without considering the fact that in post search assessment proceedings, an assessee can neither claim nor be allowed a deduction that was not claimed in the original return.”

13. At the time of hearing Ld DR brought to our notice the findings of assessing officer and submitted that the assessee cannot the change the head of income for the lease rentals earned under the head income from Business and Profession while filing the return of income u/s 153A instead of income under the head House Properties as declared in the original return of income filed u/s 139 of the Act. He submitted that the Ld CIT(A) while adjudicating failed to consider the decision of Hon’ble Supreme Court in the case of Sun Engineering Works (P) Ltd (supra) and Hon’ble Bombay High Court decision in the case of K Sudhakar S Shanbhag (supra). Similarly, he submitted that the assessee cannot claim or allowed to claim the depreciation of assets that was not claimed originally in the return of income in the subsequent proceedings u/s.153A of the Act. Therefore, he vehemently supported the findings of assessing officer.

14. Ld. Counsel for the assessee reiterated the submissions made before the Ld.CIT(A). Ld. AR submitted that the years under consideration i.e A.Y. 2015-16 and A.Y. 2016-17 represent abated years. He submitted the below chart with the relevant dates:

15. Ld AR submitted that from the above table, it can be concluded that during the years under consideration, proceedings under section 143(3) of the Act were initiated but the same were never completed on account of search action under section 132 of the Act. Accordingly, the years under consideration represents abated years. Ld. AR of the assessee submitted that the said fact was also acknowledged by the Assessing Officer in the assessment orders for A.Y.2015-16 and A.Y.2016-17.

16. With respect to the legal position, Ld. AR placed reliance on the judgement of Hon’ble Bombay High Court in the case of Commissioner of Income Tax v. B.G. Shirke Construction Technology P. Ltd [(2017) 395 ITR 371 (Bom)], wherein, it was held that in case of an abated assessment year, once the return is filed under section 153A of the Act, the return filed under section 139 of the Act is replaced by it and the entire assessment proceedings will be conducted by the revenue considering the return filed under section 153A of the Act only. Accordingly, all the provisions which are applicable to the return filed under regular course will be applicable to the return filed under section 153A of the Act.

17. Further, Ld AR brought to our notice the decision of Hon’ble Bombay High Court in case of Pr.CIT v. JSW Steel Limited [(2020) 422 ITR 71 (Bom)], wherein, Hon’ble Bombay High Court revisited the issue as to whether in case of an abated year, the assesse is allowed to raise fresh claim, which was not raised in the original return of income. While adjudicating the matter, Hon’ble Bombay High Court held that in accordance with second proviso to section 153A of the Act, once the assessment got abated, it is open for both assessee and revenue to make claims for allowance or disallowances as the case maybe. It has been held that once the assessment gets abated, the original return loses its originality and the subsequent return filed under section 153A of the Act takes place of the original return. Accordingly, all the egitimate claims would be open to the assessee to raise in the return filed under section 153A (1) of the Act.

18. Further, in respect of the judgment of Hon’ble Apex Court in the case of CIT v. Sun Engineering Works Pvt Ltd relied by the department as mentioned in Ground No. 2 of grounds of appeal, Ld AR submitted that the said decision was relied by the department before the Hon’ble Bombay High Court in the case of CIT v. B.G. Shirke Construction Technology P. Ltd [(2017) 395 ITR 371 (Bom)]. While adjudicating the matter, the Hon’ble Bombay High Court has held that the department has misplaced its reliance, as the judgement of Hon’ble Apex Court in Sun Engineering was restricted to the order passed under section 147/148 of the Act only.

19. Ld. AR further submitted that although, the department has not challenged the merits of the case but for the sake of completeness it is submitted that the merits are covered by the CBDT Circular No.16/2017 dated 25.04.2017. In the instant circular, it has been clarified that the income arising from letting out of premises/ developed space along with amenities in an Industrial Park/SEZ will be charged to tax under head “Profit and Gains from Business”

20. Further, with respect to Ground No. 3, wherein the department has contested the Ld. CIT(A)’s jurisdiction in respect to the claim of depreciation, Ld AR submitted that once the years under consideration are held as “abated years”, it becomes open for an assessee to make a fresh claim which needs to be considered on merits. Thus, the Ld.CIT(A) was well within his jurisdiction while allowing the assessee the claim of depreciation. However, he submitted that the said ground is consequential to the adjudication of the other grounds raised by the revenue.

21. Considered the rival submissions and material placed on record. We observe that the assessee is earning income from the let of out of the premises situated in the SEZs and offered to tax in the original return of income filed by the assessee under the head income from House property. However, subsequent to the Search, while filing the return u/s 153A, it changed the head of income to declare the income from let out of premises under the head Income from Business and Profession. This action of the assessee was rejected by the Assessing Officer that the assessee cannot claim new benefit in the revised proceedings u/s 153A of the Act. However, Ld CIT(A) decided the issue in favour of the assessee considering the fact on record that the assessment years under consideration are abated, therefore, the assessee can claim fresh or modified claim. After considering the submissions of both counsels, we observe that this issue is well settled and the Hon’ble Bombay High Court held in the case of B.G. Shirke Construction Technology P Ltd (supra) that in the case of abated assessments the return filed u/s 153A replaces the return filed u/s 139 of the Act, for the sake of clarity, it is reproduced below: “10. The reliance on the decision of the Apex Court in Sun Engineering Works (P.) Ltd. (supra) by the Revenue is misplaced. The above case dealt with re-opening of an assessment under Section 147 of the Act. It was in that context that the Apex Court observed that the Order passed under Section 147/148 and the Assessing Officer is primarily restricted to such income which has escaped assessment and does not permit reconsideration of issue which are concluded in the earlier assessment years in favour of the Revenue.

11. In the present facts for the subject assessment years it is an undisputed position that the pending assessment before the Assessing Officer consequent to return filed under Section 139(1) of the Act for the subject Assessment years had abated. This was on account of the search and as provided in second proviso to Section 153A(1) of the Act. The consequence of notice under Section 153A(1) of the Act is that assessee is required to furnish fresh return of income for each of the six assessment years in regard to which a notice has been issued. It is this return which is filed consequent to the notice which would be subject of assessment by the Revenue for the first time in the case of abated assessment proceedings. Consequent to notice under Section 153A of the Act the earlier return filed for the purpose of assessment which is pending, would be treated as non est in law. Further, Section 153A(1) of the Act itself provides on filing of the return consequent to notice, the provision of the Act will apply to the return of income so filed. Consequently, the return filed under Section 153A(1) of the Act is a return furnished under Section 139 of the Act. Consequently, the assessee-assessee is being assessed in respect of abated assessment for the first time under the Act. Therefore the provisions of the Act which would be otherwise applicable in case of return filed in the regular course under Section 139(1) of the Act would also continue to apply in case of return filed under Section 153A of the Act and the case laws on the provision of the Act would equally apply.”

22. We observe that similar view was expressed by Hon’ble Bombay High Court while adjudicating similar issues in the case of JSW Steel Ltd (supra) and held as under: –

“13. In the present case, search was conducted on the assessee on 30-11-2010. At that point of time assessment in the case of assessee for the assessment year 2008-09 was pending scrutiny since notice under section 143(2) of the Act was issued and assessment was not completed. Therefore, in view of the second proviso to section 153A of the said Act, once assessment got abated, it meant that it was open for both the parties, i.e. the assessee as well as revenue to make claims for allowance or to make disallowance, as the case may be, etc. That apart, assessee could lodge a new claim for deduction etc. which remained to be claimed in his earlier/regular return of income. This is so because assessment was never made in the case of the assessee in such a situation. It is fortified that once the assessment gets abated, the original return which had been filed looses its originality and the subsequent return filed under section 153A of the said Act (which is in consequence to the search action under section 132) takes the place of the original return. In such a case, the return of income filed under section 153A(1) of the said Act, would be construed to be one filed under section 139(1) of the Act and the provisions of the said Act shall apply to the same accordingly. If that be the position, all legitimate claims would be open to the assessee to raise in the return of income filed under section 153A(1). 16. From the above we conclude that in view of the second proviso to section 153A(1) of the said Act, once assessment gets abated, it is open for the assessee to lodge a new claim in a proceeding under section 153A(1) which was not claimed in his regular return of income, because assessment was never made/finalised in the case of the assessee in such a situation.”

23. With regard to submissions made by the Ld DR that the Ld CIT(A) has ignored the decision of Sun Engineering Works (P) Ltd decision, we observe that the Hon’ble Bombay High Court already considered the above decision in the case of B.G Shirke Construction (supra) in the Para No.10 of the decision (refer para no 22 above). It held that the stand of the revenue is misplaced as the issue is relating to the assessment u/s.147/148 of the Act, the same cannot be applied for the issue under consideration. Therefore, the submissions made by the Ld.DR are substantially answered.

24. Considering the above discussion, we are inclined to dismiss the grounds raised by the revenue in the appeal filed for the AY 2015-16. The issues raised in the appeal for the AY 2016-17 are mutandis mutatis, we are inclined to dismiss the grounds raised in that appeal as well.

25. In the result, appeals filed by the Revenue are dismissed.”

8. Moreover it has been brought to our notice that the revenue had challenged similar issue before the Hon’ble Bombay High Court in the case of CIT-II, Pune Vs. Magarpatta Township Development and Construction Co. Ltd., (ITA. No. 318 of 2015) wherein the Hon’ble High Court by order dated 19.11.2017 framed the relevant question of law as under: –

“(b) Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in holding that income derived from letting out of the premises of the I. T. Park was to be assessed as ‘Business Income’ when the true character of the income derived is income from property?”

9. And the Hon’ble High Court noted as under: –

“4. Reg. Question No.2

(a) Mr. Tejveer Sing, learned Counsel appearing for the revenue states that he is not pressing this question in view of the CBDT Circular No. 16 of 2017 dated 25th April, 2017. The above circular has clarified that income arising form the letting out of the premises in an Industrial Park/SEZ, are to be charged under the head “Profits and gains of business” and not under the head “Income from House Property”. It further directs the department to withdraw/not press any appeal, filed, seeking to tax income from letting out of the premises in an Industrial Park under the head “income from house property”.

(b) In view of the above, as the question is not being pressed, no occasion to consider the same arises.”

10. Since the Ld. CIT-DR could not point out any change in facts or law, respectfully following the Order of this Tribunal in assessee’s own case DCIT Vs. Mindspace Business Park Pvt. Ltd. (supra) and the Hon’ble Bombay High Court in the case of CIT-II Pune Vs. Magarpatta Township Development and Construction Co. Ltd. (supra), we uphold the action of the Ld. CIT(A) and dismiss the ground nos. 1 & 2 of the revenue; coming to ground no. 5, (depreciation on assets) . First of all, we note that assessee has not contested the 17 ITA No.2506/Mum/2021 1181/Mum/2022 A.Y. 2016-17 & 2017-18 Gigalplex Estate Pvt. Ltd. direction/decision of Ld. CIT(A) on this issue by filing a crossappeal/Co, so we have to examine the action of Ld. CT(A) in the light of the ground no. 5 raised by the revenue. Having gone through the ground against the action of Ld. CIT(A), we are of the opinion that since we upheld the action of Ld. CIT(A) allowing the assessee to change the head of income in an abated assessment year pursuant to a notice of AO u/s 153A of the Act, (ie. change of rental income from “income from house property” to ‘income from business profession’), the AO is directed to re-compute the depreciation claimed by the assessee treating AY. 2016-17 as the first year in which the claim has been made and for that adopt the original cost of asset for computing the profit arising out of this business. And the AO is directed to compute the depreciation claimed by the assessee in accordance to the law. And since there is no change in law or facts, the reasoning given (supra) for AY. 2016-17 will apply mutatis mutandis for AY. 2017-18.

12. In cany case of the matter, as rightly observed by the first appellate authority, the change of head cannot be considered as a fresh claim by the assessee, as income has already been offered to tax, though, under a different head.

13. Identical view has been expressed by the bench in case of Mindscpase Business Park Pvt. Ltd (supra). Thus, we hold that the contentions of the department that the assessee cannot raise a fresh claim in the return filed in pursuance to notice u/s. 153A of the Act, is unacceptable. Now adverting back to the merits of the issue, undisputedly, in the return filed u/s. 153A of the Act, the assessee has treated the lease rental income from IT park as income under the head ‘business and profession’. While doing so, the assessee has relied upon the CBDT Circular No. 16 of 2017. At this stage, it is necessary to take note of the said Circular.

“CIRCULAR NO.16/2017 [F.NO.279/MISC./ 130/2015/ITJ], DATED 25-4-2017

The issue whether income arising from letting out of premises/developed space along with other amenities in an Industrial Park/SEZ is to be charged under head ‘Profits and Gains of Business’ or under the head ‘Income from House Property’ has been subject matter of litigation in recent years. Assessees claim the letting out as business activity, the income arising from which to be charged to tax under the head ‘Profits and Gains of Business’, whereas the Assessing Officers hold it to be chargeable under the head ‘Income from House Property’. 2. The matter has been considered by the Board. Income from the Industrial Parks/SEZ established under various schemes framed and notified under section 80-IA(4)(iii) of the Income-tax Act, 1961 (‘Act’) is liable to be treated as income from business provided the conditions prescribed under the schemes are met. In the case of Velankani Information Systems Pvt Ltd., [2013] 35 taxmann.com 1 (Karnataka) the Hon’ble Karnataka High Court observed that any other interpretation would defeat the object of section 80-IA of the Act and government schemes for development of Industrial Parks in the country. SLPs filed in this case by the Department have been dismissed by the Hon’ble Supreme Court. In a subsequent judgment dated 30-4-2014 in ITA No. 76 & 78/2012 in the case of CIT v. Information Technology Park Ltd., [2014] 46 taxmann.com 239 (Karnataka) the Karnataka High Court has reaffirmed its earlier views. It has held that, since the assessee-company was engaged in the business of developing, operating and maintaining an Industrial Park and providing infrastructure facilities to different companies as its business, the lease rent received by the assessee from letting out buildings along with other amenities in a software technology park would be chargeable to tax under the head “Income from Business” and not under the head “Income from House Property”. The judgment has been accepted by the Board. 3. In view of the above, it is now a settled position that in the case of an undertaking which develops, develops and operates or maintains and operates an industrial park/SEZ notified in accordance with the scheme framed and notified by the Government, the income from letting out of premises/developed space along with other facilities in an industrial park/SEZ is to be charged to tax under the head ‘Profits and Gains of Business’. 4. Accordingly, henceforth, appeals may not be filed by the Department on the above settled issue and those already filed may be withdrawn/not pressed upon. 5. The above may be brought to the notice of all concerned.”

14. As could be seen from the aforesaid CBDT Circular, after taking note of the legal position arising out of various judicial precedents, the CBDT has issued instructions to treat the income from industrial parks/SEZs as income under the head ‘business’, rather than ‘income from house property’. In fact, the CBDT has instructed the department not to contest such issue by filing any fresh appeal and withdraw the appeals already filed on the issue. In our considered opinion, the aforesaid Circular issued by CBDT since, simply clarifies the legal position, it will apply retrospectively. Further, the materials available on record suggest that while deciding the appeal arising out of original assessment completed u/s. 143(3) of the Act in A.Y. 2015-16 in assessee’s case, the ITAT had directed the A.O. to consider assessee’s claim of taxability of rental income received from IT parks under the head ‘income from business and profession’. While giving effect to the order of the Tribunal, the A.O. examined the issue independently and accepted assessee’s claim in the order passed u/s. 143(3) of the Act r.w.s. 254 of the Act with the following observations:

“9. The under-signed has carefully perused the arguments raised by the assessee and finds them to be in order. As submitted by the assessee, there was a significant dispute with respect to the head of income under which lease rentals from developing and operating of IT Parks/ Industrial Parks/SEZ ought to be assessed. Such a controversy has been put to rest by the CBDT Circular 16/2017 and various Hon’ble Supreme Court decisions as have been cited above. The core issue here is to ascertain the nature of receipt of income for the assessee. For that one has to closely look into the activity being carried out. When the company is incorporated to carry out leasing business and it does develop complex structures which are operated in the IT Park then the income therefrom is in the nature of adventure for trade which ought to be taxed under the head “Income from Business & Profession”.

10. Further, the department has accepted such a stand in the assessee’s own case in AY 2018-19 & AY 2020-21 as well as it’s group companies case in AY 2018- 19. Thus, to maintain consistency with the department’s stand and owing to the nature of the activity carried out by the assessee, the lease rentals from the IT Park are being assessed to tax under the head “Income from Business & Profession.TM

Accordingly, we request your Honor to adjudicate Ground No. 2 in favor of the appellant and direct the Ld. AO to assess the rental income from IT Park under the head PGBP.

15. As could be seen from the aforesaid observations of the A.O. in A.Y. 2015-16, not only assessee’s claim was accepted in the said assessment year, but even in A.Ys. 2018-19 and 2020-21 in scrutiny assessments, the A.O. has accepted assessee’s claim and assessed the lease rental income from the IT parks under the head ‘income from business and profession’. In view of the aforesaid, we do not find any infirmity in the decision of learned first appellate authority on this issue. Accordingly, grounds are dismissed.

16. The next common issue arising in the appeals relates to disallowance u/s. 14A read with Rule 8D, both under the normal provisions as also u/s. 115JB of the Act. While the A.O. has computed disallowance by adopting the methodology prescribed under Rule 8D, while deciding the appeals, ld. First appellate authority has directed the A.O. to restrict the disallowance to the exempt income earned in the respective assessment years while computing income under the normal provisions. So far as adjustment to book profit u/s. 115JB of the Act, ld. First appellate authority has held that the provisions of section 14A cannot be imported to section 115JB of the Act for making adjustment to book profit. However, he has held that in terms with Explanation 1, direct expenses for earning exempt income can be disallowed. Accordingly, he has restricted the disallowance to that extent.

17. Having considered rival submissions and perused the materials on record, we find that identical issue has been decided in assessee’s case in A.Ys. 2012-13 and 2015-16. Since, the view expressed by learned first appellate authority is in conformity with the settled legal position, we uphold the decision by dismissing the grounds.

18. In ground no. 6 of ITA Nos. 6203/Mum/2025, the department has challenged partial relief granted by ld. First appellate authority in the matter of addition on account of deemed annual letting value of unsold flats/units.

19. Briefly the facts are, in course of assessment proceedings, the A.O. noticed that though the assessee was in possession of some unsold stock of flats/units, however, it has not offered income towards the ALV of such flats /units. Accordingly, he proceeded to compute ALV in terms with section 23(1)(a) of the Act. While doing so, he estimated the deemed ALV @ 8.5 % of the cost of construction of the property. In this context, he also referred to sub section (5) of section 23 of the Act introduced to the statute vide Finance Act, 2017. While deciding the issue in appeal, ld. First appellate authority granted partial relief to the assessee. However, in principle, he agreed with the A.O.’s decision to compute deemed ALV @ 8.5% of the cost of construction.

20. Having considered rival submissions and perused the materials on record, we find, identical issue has been decided in assessee’s own case in A.Ys. 2012-13 and 2015­16 vide order dated 25.10.2021 in ITA No. 7109/Mum/2018 and others. Therefore, we respectfully follow the decision of the co-ordinate bench and hold that no addition on account of deemed ALV can be made. Further, as discussed earlier, the A.O. has compute the deemed ALV at the rate of 8.5% of the cost of construction by referring to section 23(5) of the Act, which came to the statute from A.Y. 2018-19. In this context, we refer to the following observations of the co-ordinate bench in case of Dosti Realty Limited vs. Dy. CIT [2025] 177 taxmann.com 317 (Mum-Trib.) :

9.4. Ld. Counsel for the assessee referred to the decision of Coordinate Bench of ITAT, Mumbai in the case of Smt. Vrinda Sharad Bal (supra) to point out that decision of Hon’ble High Court of Bombay in Classique Associates (supra) was referred to in para-4. Further, decision of Hon’ble High Court of Delhi in the case of Ansal Housing and Finance and Leasing Company (supra) was also dealt with in para-5. Coordinate Bench also took note of the amendment made by the Finance Act, 2017 w.c.f. 01.04.2018 to sub-section 23 by insertion of sub-section (5) which is reproduced as under:

“(5) Where the property consisting 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 one year 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 nil.”

9.5. The effect of the above stated amendment in which it was noted that in order to give relief to Real Estate Developers, section 23 has been amended w.e.f. AY 2018-19 (FY 2017-18). By this amendment, it is provided that if the assessee is holding any house property as his stockin-trade which is not let out for the whole or part of the year, the annual value of such property will be considered as Nil for a period up to one year now two years from the end of the financial year in which a completion certificate is obtained from the competent authority.

9.6. After considering all these judicial precedents and amendments to law, Coordinate Bench gave its finding by holding that since the assessee is a builder and developer and the year under consideration is Assessment Year 2014-15 and the issue is in respect of taxability with regard to unsold flats, in view of the amendment to section 23 by insertion of sub-section (5) w.e.f. 01.04.2018, assessment of unsold inventory to be assessed as income from house property is not applicable to the impugned Assessment Year 2014-15.

9.7. Ld. Counsel thus, asserted that case of the assessee falls on the similar factual pattern, where year under consideration is Assessment Year 2015-16 and the issue relates to taxability of unsold shops/flats on which Id. Assessing Officer has adopted 8.5% of the value to arrive at annual lettable value to tax it under the head ‘income from house property’. He also referred to the decision of Co-ordinate Bench in the case of Dy. CIT v. Inorbit Malls (P) Ltd. [IT Appeal No. 2220 (Mum) of 2021, dated 11-10-2022] wherein it dealt with the decision of Ansal Housing Finance (supra) and made an observation that view of Hon’ble Delhi High Court is too harsh an interpretation. Further, to distinguish, it was pointed out by the Id. Counsel that in the order of Inorbit Malls, there was discussion on the decision of Hon’ble jurisdictional High Court in the case of Classique Associates Lid (supra) though dated 28.01.2019. Relevant para 19 from the said order is extracted below for ready reference:

19. Now, that specific provision has been brought in the statute which provides that, if building or land held as stock in trade and the property has not been let out during the whole or any part of the previous year, then annual value of such property after the period of one year (which was increased 2 years), shall be computed as income from house property and up to period of one year /two years income shall be taken to be ‘nil’. Thus, when specific provision has been brought with the effect from 01.04.2018 which cannot be applied retrospectively, then in our humble opinion it cannot be imputed that ALV of the flats held as stock in trade should be taxed on notional basis prior to AY 2018-19. Without any legislative intent or specific provision under the Act, such notional or deeming income should not be taxed as cardinal principle, because assessee is not aware that any hypothetical income is to be shown when he has not received any real or actual income. In our view of Hon’ble Delhi High Court is too harsh an interpretation.”

9.8. We find that assessee has reported this stock of completed but unsold shops in the inventories in its audited financial statements at Rs. 1,04,67,564/- which is an undisputed fact. Further, assessee is a builder and developer engaged in the business of real estate. The case of assessee draws force from the decision of Hon’ble Jurisdictional High Court of Bombay in the case of Classique Associates (supra) followed by the Coordinate Bench as stated above. Respectfully, following the above judicial precedents and the position of law as applicable to the assessment years prior to the amendment effective from Assessment Year 2018-19. the addition made by the id. Assessing Officer does not survive. However, it is worth mentioning that the position would be different for years when the amendment to section 23(5) became effective from Assessment Year 2018-19 when legislature in its wisdom brought the income to be taxed under the head ‘income from house property. Accordingly, ground raised by the assessee is allowed.

21. Respectfully following the aforesaid decision of the co-ordinate bench, we hold that the addition made on account of deemed ALV on purely estimate basis relying upon the provisions of section 23(5) of the Act cannot be sustained. Hence, even the additions partially sustained by ld. First appellate authority has to be deleted. Accordingly, we direct the A.O. to delete the entire additions in both the A.Ys. under dispute.

22. In the result, the appeals are dismissed.

CO Nos. 15 & 38/Mum/2026 (A.Ys. 2014-15 & 2016-17)

23. The only issue raised in the cross objections relates to the addition on account of deemed ALV partially sustained by ld. First appellate authority. While deciding ground no. 6 of ITA Nos. 6203/Mum/2025, in the foregoing paragraphs we have held that no addition on account of deemed ALV can be made. Hence, cross objections are allowed.

ITA No. 6971/Mum/2025 (A.Y. 2015-16)

24. We have heard the parties and perused the materials on record. At the outset, ld. Counsel appearing for the assessee submitted that the appeal itself is infructuous as the additions made by the A.O. in the impugned assessment order are replica of the additions made in the original assessment completed u/s. 143(3) of the Act, which were subject matter of appeals before the Tribunal. He submitted that the Tribunal had granted relief by deleting all the additions. Thus, he submitted, taking note of such fact, the first appellate authority while deciding the appeal of the assessee against the order passed u/s. 143(3) r.w.s. 153A of the Act, has given consequential effect.

25. The ld. DR could not controvert the aforesaid factual position.

26. Having perused the materials on record, we find that while deciding the appeal of the assessee, the first appellate authority has held as under:

6. Appellate Decision:

6.1 The contentions of the appellant have been duly considered along with judicial pronouncements. Also, I have considered the Assessment order.

6.2 Based on the submission, it’s important to highlight the following: In the appellants case, for the captioned AY, the assessment order passed under Section 143(3) of the Act, dated 12.10.2017, wherein the following disallowances have been made:

1.1. An amount of Rs. 6,36,04,825/- has been disallowed under Section 14A of the Act read with Rule 8D, being expenditure incurred in relation to exempt income. In respect of normal income as well as income computed u/s 115JB of the Act.

2. An amount of Rs. 2,09,73,057/-has been added to the House property Income on account of Deemed to be let out property u/s 22 of the Act.

6.3  The appellant, aggrieved by the assessment order appealed to the CIT(A). Accordingly, CIT(A) passed the order dated 26.03.2019 wherein following additions were adjudicated as below:-

1. Addition of Rs. 2,09,73,057/- to the House property Income on account of Deemed to be let out property u/s 22 of the Act was upheld.

2. The addition under Section 14A read with Rule 8D of the Act, was restricted upto the extent of exempt income earned by the appellant and the said disallowance was deleted under MAT provisions.

6.4 Aggrieved by the CIT(A) order, the appellant approached the Hon’ble ITAT Mumbai. In its order dated 25.10.2021, the Hon’ble ITAT Mumbai granted relief on the following grounds:

1. The addition under Section 14A read with Rule BD of the Act, was restricted upto the extent of exempt dividend income earned by the appellant under normal provisions.

1. The addition under Section 14A was deleted under MAT provisions.

2. Deletion of the disallowance of Rs. 2,09,73,057/- on account of Deemed to be let out property u/s 22 of the Act

3. The additional ground of appeal, w.r.t the taxability of lease rental income from SEZ/ IT Park were allowed to be taxed under the head PGBP instead of IFHP on account of Circular No. 16 of 2017.

6.5 Pursuant to the Hon’ble ITAT Mumbai order, an order u/s 143(3) r.w.s. 254 of the Act dated 30.03.2023 was passed, wherein the AO has made the following adjustments:

1. Allowed the stand change of lease rental income from IFHP to PGBP,

2. Restricting the disallowance u/s 14A r.w.r BD of the Act while computing income under Normal Provisions to Rs 1,43,78,946.

3. Deleted the disallowance under Section 14A read with Rule 8D in the computation of income under Section 115JB; and

4. Deleting addition u/s 22 of the Act of Rs 2,09,73,057.

7. Ground No. 1

1. This ground is general in nature and does not require any separate adjudication. Accordingly, this ground is dismissed.

8. Ground No. 2

This ground pertains to the change in stand by the appellant, contending that the lease rental income should be assessed under the head “Income from Business and Profession” instead of “Income from House Property,” in light of CBDT Circular No. 16 of 2017, which supports the treatment of lease rentals as business income. The said ground is no longer the grievance of the appellant because of the order passed u/s 143(3) r.w.s. 254 of the Act dated 30.03.2023 by the Ld. AO, pursuant to the directions given by Tribunal vide order dated 25.10.2021. Therefore, this ground does not require any separate adjudication. Accordingly, this ground is dismissed.

9. Ground No.3

This ground is consequential in nature as the issue has already been adjudicated in appellants own case for AY 2014-15. AY 2014-15 is held as the first year for the claim of depreciation and thus the present ground is consequential in nature and does not require separate adjudication. This ground is hereby partly allowed.

10. Ground No. 4

No separate adjudication is needed for this ground in view of discussion made above.

11. Ground No. 5

This ground relates to the levy of interest under section 234C of the Act. The AO is hereby directed to recompute the interest as per the provisions of the Act. Accordingly, ground No.5 of the appeal is allowed for statistical purposes.

12. Ground No.6

This ground relates to initiation of penalty u/s 274 r.w.s. 271(1)(c) of the Act. Since the penalty proceedings have only been initiated and no penalty as such has been levied, therefore, this ground is premature. The assessee is however free to approach the Competent Authority as and when any penalty is levied against him. Consequently, this ground is rejected being premature and is accordingly dismissed.

27. As could be seen from the aforesaid observations, the additions made in the assessment order passed u/s. 143(3) r.w.s. 153A of the Act were mere repetitions of additions made in the original assessment order passed u/s. 143(3) of the Act. The assessee has got the desired relief by virtue of the order passed by the Tribunal in appeal arising out of the original assessment. Therefore, ld. CIT(A) has given only consequential effect. Hence, in our view, the present appeal of the department has been rendered infructuous. Accordingly, we dismiss the appeal.

28. In the result, the appeals of the department are dismissed, whereas cross objections are allowed.

Order pronounced in the open court on 30^th April, 2026