DIMPLE ENTEPRISES,MUMBAI vs. DY CIT, CC-4(2), MUMBAI

1 ITA 477/Mum/2021 Dimple Enterprises IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “D”,MUMBAI

BEFORE SHRI AMIT SHUKLA (JUDICIAL MEMBER) AND Ms. PADMAVATHY S. (ACCOUNTANT MEMBER)

I.T.A. No.477 /Mum/2021 (Assessment year : 2016-17)

Dimple Enterprises vs DCIT, Central Circle 4(2), Mumbai Plot No.25, Girnara, B-Wing, 1st Room No.1918, 19th Floor, Air India Floor, Pali Mala Road, Pali Hill, Building, Nariman Point, Mumbai- Bndra (West), Mumbai-400 050 400 021 PAN : AAAFD1153H APPELLANT RESPONDENT

Present for the Assessee Shri Rahul Hakkani Present for the Department Smt. Mahita Nair (Sr.AR)

Date of hearing 24/08/2023 Date of pronouncement 28/08/2023

O R D E R Per Padmavathy S (AM): This appeal is against the order of Commissioner of Income-tax (Appeals) - 52, Mumbai , [ hereinafter „the Ld.CIT(A)‟] dated 28/02/2020 for A.Y. 2016-17. The assessee raised the following grounds of appeal:- “1. On the facts and circumstances of the case, and in law, the learned CIT(AJ erred upholding the assessment of the Rs. 63, 58,756/- as notional

2 ITA 477/Mum/2021 Dimple Enterprises income under section 22 of the Income-tax Act, 1961 on the unsold stock-in- trade of the Appellant 2. The learned CIT(A) ought to have appreciated that any income arising from the stock-in-trade of the Appellant ought to have been assessed under the head "Profits and Gains of Business or Profession" 3. The CIT(A) erred in upholding the computation of the Annual Letting Value of the unsold stock in trade arrived at considering the cost incurred by the Appellant on the construction of the premises. The CIT(A) ought to have appreciated that the Municipal Rateable Value of the property ought to have been considered for the purpose of determining the ALV. 4. The learned CIT(A) erred in not considering the various decisions, including the binding decision of this Hon’ble Tribunal cited by the Appellant in support of its case.”

3 ITA 477/Mum/2021 Dimple Enterprises held as inventory during the course of business and, therefore, no income under the head „Income from house property‟ could be assessed on the said unsold units. The assessee relied on the decision of the Hon‟ble Gujarat High Court in the case of CIT vs Neha Builders P Ltd 296 ITR 651 (Guj). The Assessing Officer did not accept the submissions of the assessee and held that assessee‟s case squarely covered by the decision of the Hon‟ble Delhi High Court in the case of Ansal Housing Finance & Lease Co. Ltd (supra). The Assessing Officer further held that the amended provisions of section 23 is applicable only from 01/04/2018 and, therefore, cannot be applied for the year under consideration. Accordingly, the Assessing Officer made an addition of Rs.63,58,756/- as notional income from house property by applying 8.5% on the cost of construction. Aggrieved, the assessee preferred appeal before the CIT(A). The CIT(A) upheld the decision of the Assessing Officer by relying on the order of the CIT(A) in assessee‟s own case for A.Y. 2017-18. Aggrieved, assessee is in further appeal before the Tribunal. 3. The Ld.AR submitted that it is not possible for real estate developer who wants to sell its unsold stock also to let it out since the let out property cannot be sold by the developer. Further, it is not possible for the builder to let out the property immediately after the project is complete or to sell the same as soon as the occupation certificate is obtained. The legislature has amended the provisions of section 23 where a period of 2 years is considered to be the reasonable period which is applicable from A.Y. 2018-19 whereby it is provided that the Annual Let out Value (ALV) of unsold stock should be taken as Nil for a period of 2 years from the end of the financial year in which OC is granted. The Ld.AR submitted that even the legislature has recognized the impossibility of letting out the property immediately on completion and, therefore, notified sub section (5) to section 23 and, therefore, the provisions of sections 23 and 24 should be interpreted keeping

4 ITA 477/Mum/2021 Dimple Enterprises in mind the subsequent introduction of section 23(5). The Ld.AR also submitted that sections 22 & 23 have to be interpreted reasonably and in a manner that it cause no hardship to the assessee. The Ld.AR therefore submitted that the annual value of the unsold units should be ignored or to be taken as Nil for two years from the end of the financial year in which the occupation certificate is received i.e. 30/12/2014. The Ld.AR relied on various judicial pronouncements in support of the submissions. 4. The Ld.DR, on the other hand, submitted that the issue is covered by the decision of the co-ordinate bench in the case of DCIT vs Inorbit Malls Pvt Ltd (ITA No.2220/Mum/2021 dated 11/10/2022) and that the same followed in the subsequent decision in the case of Moraj Building Concepts Pvt Ltd v DCIT in ITA Nos.420, 263 to 266/Mum/2022 dated 31/03/2023. The Ld.DR accordingly submitted that the lower authorities are correct in levying notional interest on the unsold flats after obtaining the occupation certificate by the assessee. 5. We heard the parties and perused the material on record. We notice that the co-ordinate bench in the case of Inorbit Malls Pvt Ltd (supra) has consider a similar issue and held that – 7. We have heard the rival submissions and perused the relevant finding given in the impugned orders. The main controversy as raised in ground No.1 is, whether notional income from unsold units held as stock-in-trade can be assessed under the head, “income from house property”. It has been canvassed before us that, there are divergent views on this issue, one view proposed by the judgment of Hon’ble Gujarat High Court in the case of CIT Vs. Neha Builders (Supra) which is in the favour of the Assessee, whereas the other view has been proposed in the decision of the Hon‟ble Delhi High Court in the case of the CIT Vs. Ansal Housing Financial Leasing Ltd. (Supra) which is in favor of the revenue. Therefore, judgment favorable the Assessee should be followed. 8. We have gone through the judgment in the

5 ITA 477/Mum/2021 Dimple Enterprises case of CIT vs. Neha Builders, wherein following question of law was referred to the Hon‟ble High Court:-. “Whether, on the facts and in the circumstances of the case the rental income received from any property in the construction business can be claimed under the head of 'Income from property even though they said property was included in the closing stock and expenses on maintenance were debited to the profit and loss account?" The facts in that case was that the Assessee Company was engaged in the business of construction of property and one of the building property was included the closing stock in the balance sheet drawn for the business. The Assessee has filed the revised returned submitting that a part of its property was given on rent and the income derived on that basis should be computed under the head income from house property and not business income. The Hon‟ble High Court, had noted the following facts: “Assessee Company is engaged in the business of construction of property, one of the building properties was included in the closing stock in the balance-sheet drawn for the business. The assessee filed a revised return submitting that a part of its property was given on rent and the income derived on that basis should be computed under the head "Income from house property and not as business income. The Assessing Officer, during the course of the assessment proceedings, observed that the expenses on maintenance of the property were debited to the profit and loss account and so also the building was shown as stock-in-trade, therefore, the prop would partake the character of the stock and any income derived from the stock cannot be taken to be income from the property. The Tribunal allowed the appeal observing inter alia, that any dividend received on the shares or any interest received from the bank would be taken to be income from other sources, therefore, any income derived under the head of "rent" would also become income from the property, it accordingly allowed the appeal and directed reconsideration of the matter.” 8.1 The Hon‟ble High Court, then observed and held as under; “9. From the order passed by the learned Commissioner of Income-tax 7 (Appeals), it would clearly appear that the case of the assessee was that the company was incorporated with the main object of purchase, take on lease, or acquire by sale, or let-out the buildings constructed by the assessee. The development of land or property would also be one of the businesses for which the company was incorporated”.

6 ITA 477/Mum/2021 Dimple Enterprises 10. True it is, that income derived from the property would always be termed as "income from the property", but if the property is used as "stock- in-trade", then they said property would become or par take the character of the stock, and any income, derived from the stock, would be "income" from the business, and not income from the property. If the business of the assessee is to construct the property and sell it or to construct and let-out the same, then that would be the "business" and the business stocks, which may include movable and immovable, would be taken to be "stock-in- trade", and any income derived from such stocks cannot be termed as "income from property". Even otherwise, it is to be seen that there was distinction between the "income from business" and "income from property" on one side, and "any income from other sources" The Tribunal, in our considered opinion, was absolutely unjustified in comparing the rental income with the dividend income on the shares or interest income on the deposits. Even otherwise, this question was not raised before the subordinate Tribunals and, all of sudden, the Tribunal started applying the analogy. From the statement of the assessee, it would clearly appear that it was treating the property as "stock-in-trade". Not only this, it will also be clear from the records that, except for the ground floor, which has been let out by the assessee, all other portions of the property constructed have been sold out. If that be so, the property, right from the beginning was a "stock in- trade". Agreeing with the submissions made by Mr. Naik, learned counsel for the Revenue, we hold that the Tribunal was not correct in granting the appeal of the assessee. For the reasons aforesaid, the reference deserves to be answered in favor of the Revenue. It is accordingly answered and stands disposed of No costs.” 9. Thus, there was no occasion by the Hon‟ble High Court to deal and decide the case were the property shown in the closing stock was not rented and income was to be computed on the basis of some notional rent. Albeit there was actual rent received from the property which was included in the closing stock and the controversy was, whether the rental income derived from letting out the flat is assessable under the head income from house property or business income, which Hon‟ble High Court held that it should be assessed as business income. 10. On the contrary, on this point, Hon‟ble Jurisdictional High Court in the case of Mangla Homes Pvt. Ltd. Vs. ITO, reported in (2010) 325 ITR 281(Bombay) wherein, the Hon‟ble Bombay High Court on the facts where the Assessee Company was incorporated with the object of dealing in properties and the main object of the company as contained in the memorandum of association was to carry on business of dealing and investment in properties, flats, warehouses, shops, commercial and residential houses. The ancillary object

7 ITA 477/Mum/2021 Dimple Enterprises was to carry on business of leasing, hire purchase, renting, selling, re- selling or otherwise dispose of all forms of movable or immovable properties and assets including buildings, godowns, warehouses and real estate of any kind. The Assessee claimed by the assessee that the flat could not be sold because of recession in the market and hence it let out the flats on license basis for temporary period and earned monthly rental income as license fees. The assessee treated the said rental income as income from the business. The authorities below have concurrently found in favor of the revenue that the rental income cannot be treated as income from business and treated it as "income from house property" under section 22 of the Income-tax Act. The question thus raised was whether the Tribunal is right in so concluding that the rental income is an income from house property. Hon‟ble High Court after referring to various decisions of the Hon‟ble Supreme Court held that rental income owned by the Assessee was assessable as income from house property. 11. Then, again in the case of CIT Vs. Sane & Doshi Enterprises reported in (2015) 377 165 (Bombay), Hon‟ble High Court held that rental income received from unsold portion of the property constructed by the Assessee Real Estate Developer is assessable as income from house property. The Hon‟ble Jurisdictional High Court again after analyzing the entire jurisprudence and various judgments of Hon‟ble Supreme Court, finally held that rental income received from unsold portion of property constructed by Assessee, Real Estate Developers is assessable as income from house property and not business income. The Hon‟ble High Court had further observed that the treatment given in the books of account as stock-in-trade would not therefore, alter the character or nature of the income. 12. In another case of CIT Vs. Gundecha Builders reported in (2019) 102 taxmann.com 27 (Bombay), where the Assessee was engaged in the business of development of “Real Estate Project” rental income received from unsold portion of property constructed by it was assessable tax as income from house property. 13. Thus, in all these cases there was actual receipt rental income from the unsold stock of property and the controversy of whether income is to be assets under the head income from house property or business income. Hon‟ble Bombay High Court in all the aforesaid decisions has taken a contrary view to judgment of Hon‟ble Gujarat High Court in the case of Neha Builders and held that the rent received from property held as stock-in-trade and any rent received on such unsold closing stock, then income is assessable as „income from house property‟ and not as a “business income”. 14. The aforesaid ratio and principle, either of the Hon‟ble Gujarat High Court or the Hon‟ble Bombay High Court is not applicable on the facts of

8 ITA 477/Mum/2021 Dimple Enterprises the present case, because, here in this case the Assessee had unsold units which were lying vacant and were in the possession of the Assessee Company. Assessing Officer held that these properties are liable to be taxed on notional rental income under the head „income from house property‟ on the basis of ALV. It is not a case that there is any actual receiving of rent as was the case before the Hon‟ble Gujarat High Court and Hon‟ble Bombay High Court. Had it been a case were Assessee have fetched rental income from the unsold stock, then following the principle laid down by the Hon‟ble Bombay High Court same would have been assessed under the head income from house property. 15. Now, coming to the decision of Hon‟ble Delhi High Court in the case of CIT Vs. Ansal Housing Finance & Leasing Company Ltd (Supra), one of the question of law referred before the Hon‟ble High Court was as under; “Whether the assessee was liable to pay income tax on the annual letting value of unsold flats owned by it under the head "income from house property"? 15.1 There the facts relevant to the issue raised relate to the addition on account of annual letting value (ALV) of flats, added on notional basis are that the assessee-company engages itself in the business of development of mini-townships, construction of house property, commercial and shop complexes etc. In the assessment completed for the year under consideration, the AO assessed the ALV of flats which the assessee had constructed, but were lying unsold under the head "Income from house property". The assessee however, contended that the said flats were its stock-in trade and therefore the ALV of the flats could not be brought to tax under the head "Income from house property". The AO however did not accept the stand of the assessee and therefore, added the notional value of unsold flats to the total income of the assessee. On appeal by the assessee, the CIT(A) however set aside the addition made by the AO. The revenue's appeal to the Tribunal was unsuccessful. 16. Hon‟ble Delhi High Court after referring to various judgments of Hon‟ble Supreme Court, finally observed as held in under: “In the present case, the assessee is engaged in building activities. It argues that flats are held as part of its inventory of stock-in trade, and are not let out. The further argument is that unlike in the other instances, where such builders let out flats, here there is no letting out and that deemed income which is the basis for assessment under the ALV method, should not be attributed. This Court is of the opinion that the argument, though attractive cannot be accepted. As repeatedly held, in East India, Housing & Land Development Trust's case (supra) Sultan Bros's case (supra) and Karan Pura Development Co. Ltd.'s case (supra) the levy of income tax in

9 ITA 477/Mum/2021 Dimple Enterprises the case of one holding house property is premised not on whether the assessee carries on business, as landlord, but on the ownership. The incidence of charge is because of the fact of ownership. Undoubtedly, the decision in Vikram Cotton Mills Ltd. case (supra) indicates that in every case, the Court has to discern the intention of the assessee; in this case the intention of the assessee was to hold the properties till they were sold. The capacity of being an owner was not diminished one whit, because the assessee carried on business of developing, building and selling flats in housing estates. The argument that income tax is levied not on the actual receipt (which never arose in this case) but on a notional basis, i.e. ALV and that it is therefore not sanctioned by law, in the opinion of the Court is meritless. ALV is a method to arrive at a figure on the basis of which the impost is to be effectuated. The existence of an artificial method itself would not mean that levy is impermissible. Parliament has resorted to several other presumptive methods, for the purpose of calculation of income and collection of tax. Furthermore, application of ALV to determine the tax is regardless of whether actual income is received; it is premised on what constitutes a reasonable letting value, if the property were to be leased out in the marketplace. If the Assessee's contention were to be accepted, the levy of income tax on unoccupied houses and flats would be impermissible which clearly not the case is”. 17. Though, the judgment which has been referred by the Hon‟ble Delhi High Court in the case in “East India Housing & Land Development Trust (Supra)”, “Sultan Bros” and “Karan Pura Development Company Ltd”. (Supra) wherein, in all the cases the issue whether the rental income received from the property is to be assessed as business income or income of house property. No where, the Hon‟ble Supreme Court in any of the cases which has been referred by the Hon‟ble Delhi High Court dealt with issue of notional rental income when the property held as stock-in-trade or closing stock which has not been actually let out, is liable to be taxed as income from house property. However, be that as maybe, there is no contrary decision of any other High Court and therefore, this decision Hon‟ble Delhi High Court will have both binding and persuasive value. No direct contrary decision has been brought to our knowledge of any other High Court and we have already noted above that the decision of Hon‟ble Gujarat High Court in the case of Neha Builder (supra) was not on the issue on notional rent from unsold stock. Therefore, it cannot be held that on this issue the judgment of Hon‟ble Gujarat High Court is in favor of the Assessee and therefore, the judgment of Delhi High Court in the case of Ansal Housing Finance Leasing Company Ltd (Supra) should not be followed. Thus, in our opinion this Tribunal in the case of Dimple

10 ITA 477/Mum/2021 Dimple Enterprises Enterprises vs. DCIT (Supra) as cited and relied upon by the Ld. DR has correctly appreciated this distinction. 18. One very important development took place post these judgments, that an amendment has been brought in the statute in section 23(5) which is applicable from AY 2018-2019 which reads as under, “Where the property consisting of any building or land appurtenant there to is held as stock-in trade and the property of 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 form 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.” It is trite that the said amendment has to be given effect prospectively from 01.04.2018 as mentioned in the Explanatory Notes to the provisions of the Finance Act, 2017. It is a cardinal principle of the interpretation that the normal presumption which respect to an amendment is that is applicable prospectively unless and until specifically stated otherwise. The logic behind such as interpretation is that the law should govern current activities; i.e. to say “lex prospicit non respicit”, which means that “The Law looks forward and not backward.” 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. 20. Since, even prior to the amendment, there is one High Court judgment of Hon‟ble Delhi High Court which is directly on this issue and against the Assessee, therefore same needs to be followed. Accordingly, we hold that Assessing Officer is correct in computing ALV on notional rent on unsold stock, but with following riders and directions to the AO as discussed herein after.

11 ITA 477/Mum/2021 Dimple Enterprises 21. Firstly, the flats or units on which assessee has received any advance in this year or in the earlier years but has not delivered or given final possession of the said flat/unit to the buyer, then no notional rent can be charged as it tantamount to sale. Secondly, if unit of flat is shown as work- in-progress in the books then also no notional rent can be computed. And Lastly, Ld. Assessing Officer is not justified in making estimate of 8.5% of investment as ALV which is unsustainable in view of the decision of Hon‟ble Bombay High Court in the case CIT Vs. Tip top Typography reported in 368 ITR 330, wherein, it has been held that rent should be computed at Municipal ratable value. We accordingly direct the AO to ascertain the Municipal ratable value for computing the notional rent. This is also been held by ITAT Mumbai Bench in the case of Dimple Enterprise Vs. DCIT (Supra), in the following manner:- “Now the question is of the rental value. The assessing officer has not levied the deemed rent on municipal ratable value or any nearly similar instance. The reliability of municipal ratable value has been duly upheld in several decisions. The Assessing Officer cannot make any ad hoc computation of deemed rent. Honorable Bombay High Court decision in the case of CIT vs. Tip Top Typography [2014] 48 taxmann.com 191/[2015] 228 Taxman 244 (Mag.)/[2014] 368 ITR 330 duly supports this proposition. Thus assessing officer has made an ad hoc estimate of 8.5% of investment on the plea that assessee has not been able to provide the municipal ratable value. This is not sustainable on the touchstone of Hon'ble Bombay High Court decision in the case of Tip Top Typography (supra). In our considered opinion nothing stops the assessing officer from obtaining the municipal ratable value from Departmental or government machinery. Hence we direct the assessing officer to compute the valuation of deemed rent in accordance with our observation as above and take into account the Hon'ble Jurisdictional High Court decision as above. Since we have decided the issue by duly taking note of Hon'ble Jurisdictional High Court decision and have also applied Hon'ble High Court decision, the reference to other decision in this case is not considered relevant to adjudication in this case.” 22. Thus, AO is directed to compute accordingly as per direction given above. Accordingly, ground No.1 of the revenue is partly allowed for statistical purposes.”

12 ITA 477/Mum/2021 Dimple Enterprises Hon'ble Gujarat High Court in the case of Neha Builders (supra) which the ld AR relied on in this case. Further the Hon'ble Tribunal has also held that the amendment to section 23(5) is prospective in nature and cannot be applied to assessment years prior to AY 2018-19. The facts in assessee‟s case being identical, respectfully following the above decision of the co-ordinate bench we hold that the assessing officer has correctly charged notional rent on the unsold flats held as stock in Trade. 7. We also notice that the Hon'ble Tribunal in the case of Inorbit Malls Pvt Ltd (supra) while upholding the decision of the assessing officer to levy notional rent, has given certain riders and directions (refer para 21 reproduced above) and one such direction is to hold that the assessing officer is not justified in estimating the income at the rate of 8.5% of investment as ALV and that the assessing officer should ascertain the municipal valuation for computing notional rent. In assessee's case also, we notice that the assessing officer has computed the ALV by applying the rate of 8.5% on the cost of construction i.e. investment. Therefore respectfully following the decision of the coordinate bench we direct the assessing officer to recompute the notional rent by ascertaining the Municipal rentable value. It is ordered accordingly. 8. In the result, appeal of the assessee is dismissed. Order pronounced in the open court on 28/08/2023 Sd/- sd/- AMIT SHUKLA PADMAVATHY S. JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai, Dt : August, 2023 Pavanan

13 ITA 477/Mum/2021 Dimple Enterprises प्रतितिति अग्रेतििCopy of the Order forwarded to : 1. अिीिार्थी/The Appellant , प्रतिवादी/ The Respondent. 2. आयकर आयुक्त CIT 3. 4. तवभागीय प्रतितिति, आय.अिी.अति., मुबंई/DR, ITAT, Mumbai 6. गार्ड फाइि/Guard file. BY ORDER, //True Copy// Asstt. Registrar / Senior Private Secretary ITAT, Mumbai

Initial Date 1. Draft dictated on 07/08 Sr.PS 2. Draft placed before author 08/08 Sr.PS 3. Draft proposed & placed JM/AM before the second member 4. Draft discussed/approved by JM/AM Second Member. 5. Approved Draft comes to the Sr.PS/PS Sr.PS/PS 6. Kept for pronouncement on Sr.PS 7. File sent to the Bench Clerk Sr.PS 8. Date on which file goes to the AR 9. Date on which file goes to the Head Clerk. 10. Date of dispatch of Order. 11. Dictation Pad is enclosed Yes