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Income Tax Appellate Tribunal, MUMBAI BENCH “B”, MUMBAI
Before: SHRI KULDIP SINGH & SHRI GAGAN GOYAL
PER GAGAN GOYAL, A.M: This appeal by assessee is directed against the order of Ld. PCIT, Mumbai- 41, dated 29.03.2023 u/s. 263 of the Income Tax Act, 1961 (in short ‘the Act’) for A.Y. 2018-19. The assessee has raised the following grounds of appeal:-
on the facts and in the circumstances of the case and in law, the order passed u/s. 263 of the I.T Act, 1961 is invalid and bad in law.
2. on the facts and in the circumstances of the case and in law learned P.C.I.T. erred in passing an order u/s. 263 of the I.T. Act, 1961 and that too without appreciating fully and properly the facts of the case.
3. on the facts and in the circumstances of the case and in law, the learned P.C.I.T. erred in holding that the order dated 24.02.2021 passed u/s. 143(3) of the act by the A.O. is erroneous and prejudicial to the interest of revenue although the same was neither erroneous nor prejudicial to the interest of revenue.
4. the Appellant craves leave to add, alter, amends or deletes all or any of the grounds of appeal at any time.
The brief facts of the case are that assessee is a partnership firm engaged in the business of land development and real estate construction activity. Assessee filed its return of income on 19.10.2018, declaring income at Rs. NIL (Loss of Rs. 6, 98,087/-). Case of the assessee was selected for scrutiny under CASS and assessed at Returned Income u/s. 143(3) r.w.s. 143(3A) and 143(3B) of the Act vide order dated: 24.02.2021. Thereafter, a notice u/s. 263 of the Act was issued by the office of Ld. PCIT, Mumbai-41 vide dated: 24.02.2023, the copy of the notice is reproduced herein below as under:
As per this notice Ld. PCIT observed that assessee shown closing stock of Rs. 6, 50, 54,600/- in its Balance-Sheet for the year under consideration, however, no deemed rental income u/s. 23(5) of the Act is being declared by the assessee on this figure of Rs. 6, 50, 54,600/- and AO also accepted the return of income filed by the assessee without any addition on this count. Ld. PCIT found the same to be erroneous in so far as prejudicial to the interest of revenue. We have gone the Order of AO, Order of the Ld. PCIT and submissions of the assessee alongwith ground of appeals raised before us judicial pronouncement placed.
We have gone through the notices issued by the AO during the assessment proceedings u/s. 142(1) of the Act vide dated: 28.01.2020 placed at page No. 31 to 35 of the Paper Book filed by the assessee. Vide this notice point no. 6 and 17 are relevant in the present appeal reproduced as under:
“6. Please provide the addresses of all the premises from where the business is being conducted and also the name and PAN of the person in-charge for of each of such premises.
With regard to the high closing stock held by you, it was seen in the Assessment proceedings during AY 2017-18 that no rent was offered by you under the head Income from House Property. You are requested to give project wise detail of stock in trade as on 31.03.2018 in a tabular form with complete address mentioned and the rent or annual letable value (if not actually on rent) to arrive at the Income from house property accrued to you during the FY 2017-18 for the purpose of bringing the same to taxation.”
It is observed that reply of assessee for abovementioned queries are as under vide their reply filed with paper book:
Reply to Point No. 6 “BHAGWATI ABHILASHA CONVENTURE A/35 Patil Bhuvan, N. S. B. Road, Mulund (West), Mumbai-400080, Mr. Manoj Kantilal Patel (PAN No. AAAPP4637Q)”
Reply to Point No. 17 is as under:
It is observed that assessee replied properly for point no. 6, but for point no. 17 of the notice issued u/s. 142(1) of the Act, no specific reply ever furnished except furnishing break up of closing stock with details and amount. Assessee itself confirmed that addition on account of deemed rental income u/s. 22 r.w.s. 23(5) of the Act was made in AY 2017-18 also. There is no material on record which confirms that this addition was being challenged by assessee before appellate forums.
As far as Grounds raised by the assessee is concerned, it pertain to action taken u/s. 263 of the Act, resultantly taxability of deemed rent u/s. 22 r.w.s. 23 of the Act. On this matter assessee relied upon following judicial pronouncements alongwith its submissions as under:
i) Malabar Industrial Co. Ltd. V. CIT (2000) 243 ITR 83(SC) ii) CIT V. Nirav Modi (2017) 390 ITR 292(Bom) iii) Moil Ltd. V. CIT (2017) 396 ITR 244 (Bom.) iv) CIT V. Gabriel India Ltd. (1993) 203 ITR 108 (Bom) In all the above cases, it has been held that the pre-requisite for the exercise of jurisdiction u/s. 263, the order of the A.O. should be erroneous in so far as it is prejudicial to the interest of the revenue. It is also held that once the A.O. is satisfied about the claim on the basis of materials before him, he need not make further enquiries in the matter.
Apart from above mentioned case laws, kind attention of your good selves is also drawn to the order dated 14/12/2016 passed by the Hon. SC rejecting Special Leave Petition filed by the department against the order dated 16/06/2016 in of 2014 [above referred - CIT V. Nirav Modi (2017) 390 ITR 292(Bom)] passed by the Hon. High court of Bombay. The closing stock consisting of 27 units of property are occupied/used for the purpose of assessee's business and therefore, not chargeable to tax as per the provisions of Section 22 of the Act. Needless to mention that the unsold flats are held as stock in trade and therefore, no notional annual rental value on unsold flats held in stock-in-trade can be made in assessee's hands. (Please see case law M/s. Kolte Patil Developers Limited v/s. DCIT, ITA No.2206/PUN/2016).
The Ld. PCIT relied upon following case laws to substantiate their view on the taxability of deemed rent on unsold stock of flats hold by assessee as under:
1. 1. Smt. Tara Devi Agarwal v. CIT [88 ITR 0323] and also Rampyari Devi Saraogi v. CIT [67 ITR 0084] 2. Gee Vee Enterprises v Additional Commissioner of Income-tax (1975), 99 ITR 375 (Delhi), 3. Malabar Industrial Co. Ltd. vs. CIT (243 ITR 83) 4. Vedanta Ltd. vs. CIT (2021)124 taxmann.com 435 5. ATC Telecom Tower (P.) Ltd. vs. PCIT (2017) 86 taxmann.com 97 6. CIT v. Bhagwan Das [2005] 272 ITR 367.
7. Kerala State Electricity Board Ltd. vs. DCIT (2019) 111 taxmann.com 353 8. CIT vs. Sunil Goyal (2009) 176 Taxman 184 (Uttaranchal H.C.) 9. Income Tax Officer versus DG Housing Projects Limited (2012) 343 ITR 329 (Delhi)
We have gone through the case laws relied upon by both the parties and facts of the matter. It is observed that there are judicial pronouncements on both sides and issue is highly debatable. In that circumstance where it was specifically pointed out that assessee is a builder/developer engaged in the business of construction and income earned from sale of flats is offered to tax as business income and that the unsold flats are treated as 'stock-in-trade' under the head inventories till they are ultimately sold. We further rely on Chennai Properties & Investments Ltd. v. CIT [2015] 56 taxmann.com 456 wherein it was held by Hon’ble Apex Court “the charging provisions of section 22 of the Act specifically gives exemption from determination of actual value of the property which is used for the purpose of any business or provision carried on by the assessee. There is no dispute that the assessee had retained the unsold stock of flats as stock-in-trade in the capacity of builder. Hence there is no dispute that the unsold stock of flats was used only for the purpose of business of the assessee.”
But now there is an exception provided in charging section 22 of the Act seems to be indirectly taxed from A.Y. 2018-19 after providing the moratorium period of two years. Hence, up to A.Y. 2017-18, no addition could be made in respect of deemed rental income on unsold stock of flats lying as stock-in-trade as they are used for the purpose of business of the assessee.
Keeping in view the anomaly/divergent views of coordinate benches and Hon’ble High Courts on this subject an amendment has been brought in the statute in section 23(5) where in respect of unsold stock of properties held as 'stock-in-trade' for a period of two years from the date of obtaining completion certificate from the competent authority, the annual value of such property would be determined as 'Nil'. In other words, there would be no addition towards deemed rental income in respect of unsold stock of properties held as 'stock-in-trade' for a period of two years from the date of obtaining the completion certificate from the competent authority. This specific provision has been brought in the statute from assessment year 2018-19 onwards. Hence, up to assessment year 2017-18, no addition could be made in respect of deemed rental income on unsold stock of flats lying as stock-in-trade as they are used for the purpose of business of the assessee.
Respectfully considered Hon’ble Apex Court In the case of Chennai Properties & Investments Ltd. v. CIT [2015] 56 taxmann.com 456 and considering specific provision has been brought in the statute from assessment year 2018-19 onwards. Hence, up to assessment year 2017-18, no addition could be made in respect of deemed rental income on unsold stock of flats lying as stock-in-trade as they are used for the purpose of business of the assessee. But, from A.Y. 2018-19 it is categorically declared taxable by the statute. In these terms, Grounds raised
by the assessee is dismissed as the order of AO is found to be erroneous as amendment in the Act w.e.f. A.Y. 2018-19 was totally ignored, which is mandatory in nature now, consequently becomes prejudicial also as amount of tax is involved. As far as the issue of availability of moratorium of 2 years is concerned that speaks about 2 years from the date of completion, in this case this benefit also can’t be claimed by the assessee as, it is applicable from A.Y. 2018-19 only, i.e., completion certificates received A.Y. 2018-19 onwards only and in the case of assessee stock of real estate lying completed much before and assessee must not have shown income on the same.
12. Assessee heavily relied upon the decision of Coordinate Bench of ITAT in the case of Pegasus Properties (P.) Ltd. vs. DCIT Cen. Cir. 2(3), Mumbai dated 23rd December 2021, ITA No. 350-352. In this case, Coordinate Bench held that in respect of unsold stock of flats held as ‘stock-in-trade’ upto A.Y. 2017-18. However, the amendment has been brought in the statute in section 23(5) from AY 2018-19 providing a moratorium period of two years. Hence, no addition could be made even for AY 2018-19 also. We have gone through the decision of Coordinate Bench and relevant section (post amendment) observed that this moratorium period as discussed in section 23(5) is applicable to the projects completed in A.Y. 2018-19 and onwards. Whereas the case before us projects of the assessee completed before A.Y. 2018-19 as the same have been shown under the head closing stock (representing opening stock for the year). Hence, this benefit of moratorium period cannot be allowed to the assessee before us.
13. In view of above, we found order of the AO as erroneous in so far as prejudicial to the interest of revenue hence, action of the Ld. PCIT u/s. 263 of the Act is confirmed and appeal of the assessee is dismissed.