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Income Tax Appellate Tribunal, MUMBAI BENCH “SMC”, MUMBAI
Before: SHRI KULDIP SINGH, HONBLE & SHRI S. RIFAUR RAHMAN, HONBLEShri Ashish Kumar Deharia
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “SMC”, MUMBAI BEFORE SHRI KULDIP SINGH, HON'BLE JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, HON'BLE ACCOUNTANT MEMBER ITA NO.2735/MUM/2022 (A.Y: 2014-15) Modern Abodes Pvt. Ltd., v. Income Tax Officer – 12(3)(4) C/o. Gulabani & Co. Room No. 148, Aayakar Bhavan M.K. Road, Mumbai - 400020 506, 5th Floor Shree Prasad House 35th Road, Off. Linking Road Bandra (W), Mumbai - 400050 PAN: AAGCM1595B (Appellant) (Respondent) Assessee Represented by : Ms. Neelam Jadhav Shri Ashish Kumar Deharia Department Represented by :
Date of Hearing : 03.01.2023 Date of Pronouncement : 03.04.2023
O R D E R PER S. RIFAUR RAHMAN (AM)
This appeal is filed by the assessee against order of Learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi [hereinafter in short “Ld.CIT(A)”] dated 29.08.2022 for the A.Y.2014-15.
2 ITA NO.2735/MUM/2022 (A.Y: 2014-15) Modern Abodes Pvt. Ltd., Brief facts of the case are, assessee filed its return of income on 2. 30.09.2014 declaring total loss of ₹.12,65,200/-. The return was processed u/s. 143(1) of the Act. The case was selected for scrutiny under CASS and notices u/s. 143(2) and 142(1) of Income-tax Act, 1961 (in short “Act”) were issued and served on the assessee. In response Authorised Representative of the assessee attended and submitted the relevant information as called for.
During the course of the assessment, Assessing Officer observed that assessee is involved in buying and selling of immovable property without actually undertaking any construction activity. During the current Assessment Year assessee has not generated any income either from sale or renting of premises. He observed that the inventories as on 31.03.2013 stand at ₹.9,14,17,477/-. During the assessment proceedings, assessee submitted that it has started renting out some of the premises from the Financial Year 2014-15. Assessing Officer observed that during the current Assessment Year it was observed that assessee has received possession of certain property/bungalow plot and had neither used nor offered to earn any income under the head “income from other sources”. Accordingly, the above said property was treated as deemed to be let out and he determined the actual value of the property for the purpose of
3 ITA NO.2735/MUM/2022 (A.Y: 2014-15) Modern Abodes Pvt. Ltd., section 23(1) of the Act and determined the rent at 10% of the value in respect of the property and accordingly additions made. In this regard, assessee filed an objection letters dated 02.09.2016 and 21.10.2016 in which assessee submitted that till the occupation certificate is obtained, hence, assessee has not received the possession of the property, therefore no deemed rent can be charged on the property which has no occupation certificate.
After considering the submissions of the assessee, Assessing Officer observed that assessee has purchased the properties / plot from Financial Year 2009-10 and out of the above properties assessee has received possession of certain properties, the details are as under: -
4 ITA NO.2735/MUM/2022 (A.Y: 2014-15) Modern Abodes Pvt. Ltd., 5. Accordingly, Assessing Officer calculated the deemed rent as under:-
For the current assessment year, Assessing Officer has determined the deemed rental income for an amount of ₹.20,61,170/-.
Further, he observed that in the Profit and Loss Account assessee has earned only an amount of ₹.8,41,240/ on account of interest income from FDR against which assessee has claimed total expenditure of ₹.23,05,889/-. He observed that assessee has shown loss of ₹.12,65,200/- after claiming deduction u/s. 32 of the Act to the extent of
5 ITA NO.2735/MUM/2022 (A.Y: 2014-15) Modern Abodes Pvt. Ltd., ₹.2,72,210/-. Accordingly, notices were issued u/s. 142(1) of the Act as to explain why the above expenses should not be disallowed. In response assessee submitted vide letter dated 05.08.2016 that interest received on Fixed Deposit with IDBI Bank and the amount was to be invested in purchase of land and building, therefore it is parked in Fixed Deposit as the title of the property was not clear so the payments to the prospective seller was made later. In that process assessee has earned certain interest income.
After considering the submissions of the assessee, Assessing Officer rejected the same and observed that assessee has not carried out any business activity during the Financial Year or any earlier assessment year except acquisition of the property and maintains the property. The only income earned by the assessee during the year under consideration is the interest income from FDR which is to be taxed under the head “income from other sources”. Further, he observed that assessee has not produced any evidences to show that expenditure incurred during the year under consideration is for the purpose of business. Hence the same is not allowable u/s. 37(1) of the Act.
6 ITA NO.2735/MUM/2022 (A.Y: 2014-15) Modern Abodes Pvt. Ltd., 9. Further, Assessing Officer observed that assessee has earned income under the head “income from house property” and already assessee was granted deduction 24(1) of the Act at the rate of 30%, therefore assessee cannot claim other expenditure. Accordingly, he disallowed the business expenditure and proceeded to make the interest income earned from FDR as income chargeable to tax under the head “income from other sources”.
Aggrieved, assessee preferred an appeal before the Ld.CIT(A) and raised grounds of appeal and filed the detailed submissions through ITBA portal. After considering the submissions of the assessee, Ld.CIT(A) partly allowed the claim of the assessee on deemed rental income calculated by the Assessing Officer @10% and Ld.CIT(A) by relying on the decision of the ITO v. Chem Mech Pvt. Ltd., [(2002) 83 ITD 428 (Mumbai)] wherein it is held that the standard rent under Bombay Rental Act has to be calculated @8.5% of the total investment in the said property. Accordingly, he directed the Assessing Officer adopt the rate of 8.5% instead of 10%.
Aggrieved with the above order assessee is in appeal before us raising following grounds in its appeal: -
7 ITA NO.2735/MUM/2022 (A.Y: 2014-15) Modern Abodes Pvt. Ltd., I. No Deemed or Notional Rental Income for the properties held as Stock in Trade 1. On the facts and circumstances of the case, Property No. 1 & Property No. 2 of the Appellant was held as Stock in trade as "Inventories" for the year, hence no deemed or notional rental income can be assessed under the head Income from House Property, Hence, addition of Rs.60,000/- and Rs.12,72,949/- may directed to be deleted. 2. On the facts and circumstances of the case no addition on account of deemed rental income could be made in respect of unsold stock for AY 2014-2015. As the amendment had been brought in statute in section 23(5) from assessment year 2018-19. Hence, the direction given to take ALV is not valid in law and may be deleted. Without Prejudice to the above, "On Merits" II. No estimate addition of Rs.60.000/- for Property No. 1 under the head Income from House Property 3. The learned CIT(A) erred in directing to estimate notional rental income of Rs.60,000/- under the head income from house property for Property No. 1 without any basis, hence same may be deleted. III. No Addition can be made at 8.5% of Annual Value of the Property No.2 under the head Income from Housing Property, as the same shown under head Inventories in Balance sheet. 4. The Learned CIT (A) erred in directing to take Annual Value of the property at 8.5% of the property value as Income from House property, without appreciating that the estimate of annual value of the property at 8.5% is very high and without any basis hence direction to estimate annual value at 8.5% may be deleted. IV. No addition can be made at 8.5% of Annual Value of the Property No.3 under the head Income from House Property, as no occupancy certificate received by the appellant. 5. The Learned CIT (A) erred in directing to take Annual Value of the property No. 3 at 8.5% of the property value as Income from House property, without appreciating that, appellant has not received occupancy certificate hence property was not legally occupiable and not occupied during the year, hence direction to
8 ITA NO.2735/MUM/2022 (A.Y: 2014-15) Modern Abodes Pvt. Ltd., assessed deemed rental income at 8.5% of annual value i.e. 14,50,885/-is without any basis same may be directed to be deleted. 6. Without prejudice to the above, the annual value of the property has to be taken as per the Municipal Ratable Value of the property. Notional annual value cannot be exceed the Municipal Ratable Value. Hence, notional estimate at 8.5% of the property value at Rs.14,50,885/- may be directed to be deleted. 7. The appellant craves leave to add, amend, alter or delete the said ground of appeal.”
At the time of hearing, Ld. AR brought to our notice relevant facts relating to the case, and filed its written submissions. For the sake of clarity, it is reproduced below: - “1. The assessee company is engaged in the business of buying and selling of properties since the year 2009. The main object of the company is to purchase property develop them if required via builders/contractors, and sell at a good rate by making profits. 2. During the year the assessee company has not been able to make any sale of the properties. The Assessee Company filed its Return of Income declaring business loss at Rs.12,65,200/- the Assessee filed NIL return of income. 3. The Assessing officer has treated Property No. 1 at Palghar Wada, Property No. 2 at Thane Atlas tower Flat No.1, and Property No. 3. Kamla Space unit no. 209 at Santacruz as Deemed Rental Property and assessed income from House property at Rs.20,61,170/- (AO Page NO. 4, para 4.7) 4. The CIT(A) directed to the AO to assessed income of Property No. 1 at Rs.60,000/ and rest of two properties at 8.5% of the Property Value, which come to 27,83,834/ (CIT(A) Page No. 4, para 4.5) Propositions: I. No Deemed or Notional Rental Income for the properties shown under the head Stock in Trade. 1. Since Inception the unsold properties shown under the head "Inventories". When the properties shown as inventories in the balance sheet, then there would be no deemed rental income from
9 ITA NO.2735/MUM/2022 (A.Y: 2014-15) Modern Abodes Pvt. Ltd., the said inventories. Hence, Income assessed as Income from House Property, does not justified. 2. No addition on account of deemed rental income could be made in respect of unsold stock for AY 2014-2015. Amendment had been brought in statute in section 23(5) from assessment year 2018- 19. Hence, the direction given to take ALV is not justified and same may be deleted. 3. In the case of Pegasus Properties (P) Ltd. vs. Dy. CIT (2022] 193 ITD 514 (Mum) (Trib.) held that no addition on account of deemed rental income could be made in respect of unsold stock of flats held as 'stock-in-trade' up to A.Y. 2017-18. 4. In the case of Osho Developers, ITA No.2372 & 1860/Mum/2019, dt. 03/11/2020 (Mum) (Trib.) held in para no. 10 & 11 that unsold flats which were in stock in trade cannot be taxed as deemed rental income. 5. In the case of M/s. Sheth Developers Private Limited, ITA No.1953 & 1954 /Mum/2020, dt.27/06/2022 (Mum) (Trib.) held in para no. 3.3 & 3.4 that addition made towards deemed notional rental income in respect of unsold flats is liable to be deleted. Property No. 1 at Wada. Palghar 6. There cannot be an estimate addition of Rs.60,000/- for Property No. 1 under the head Income from House Property, there has to be some basis to calculate deemed rental income from the property which shown under the head inventories. 7. Even in earlier year, without any basis calculated the deemed rental income against the said property and, department simply following the earlier year order, restricted the rental income at Rs.60,000/- for current year. Hence, it humble submission that estimated addition for deemed rental income may be directed to be deleted. 8. In the case of Sunil Kumar vs. ACIT (2022) 194 ITD 764 (Delhi)(Trib.) held that Estimation of annual letting value, not based estimate on any reasonable working in determining annual letting value. Addition made for Income from house property was deleted. 9. Without prejudice to the above, when the Assessee held unsold property as business, then income arises from the same cannot be assessable u/s 23(1) of the Act. 10. Therefore, direction given to estimate income at Rs.60,000/- may be directed to be deleted.
10 ITA NO.2735/MUM/2022 (A.Y: 2014-15) Modern Abodes Pvt. Ltd., Property No. 2 at Atlas Tower, Thane 5. The said property shown as inventories in the balance sheet due to unsold. 6. The Assessee has tried to sale or rent the said property but it is unable to get any client due to various reasons. 7. When property shown as inventories, then there is no ground to direct the AO to assessed rental income by taking 8.5% of property value. 8. No Addition can be made as Income from Housing Property, as the properties shown under head Inventories in Balance sheet. 9. In the case of Pegasus Properties (P.) Ltd. vs. Dy. CIT (2022] 193 ITD 514 (Mum)(Trib.) held that no addition on account of deemed rental income could be. made in respect of unsold stock of flats held as 'stock-in-trade' up to A.Y. 2017-18. 10. In the case of Osho Developers, ITA No.2372 & 1860/Mum/2019, dt. 03/11/2020 (Mum) (Trib.) held in para no. 10 & 11 that unsold flats which were in stock in trade cannot be taxed as deemed rental income. 11. In the case of M/s. Sheth Developers Private Limited, ITA No.1953 & 1954 /Mum/2020, dt. 27/06/2022 (Mum) (Trib.) held in para no. 3.3 & 3.4 that addition made towards deemed notional rental income in respect of unsold flats is liable to be deleted. Property No.3 Kamla Spaces at Santacruz 12. The said property was purchased in 2013 and shown as inventories in the balance sheet due to unsold. 13. There is No Occupancy Certificate received for the said property till date. 14. No Addition can be made as Income from Housing Property, as the properties shown under head Inventories in Balance sheet. 15. No addition can be made as income from House property till the occupancy certificate received, when Property was not legally occupiable and not occupied. 16. Building would legally come into existence only on issuance of an occupancy certificate. Hence, there is no ground to make addition on notional income by way taking annual letting value of the book value of the property.
11 ITA NO.2735/MUM/2022 (A.Y: 2014-15) Modern Abodes Pvt. Ltd., 17. The honorable Jurisdiction High Court held in the case of Sharan Hospitality (P.) Ltd. v. Dy. CIT [2020] 268 Taxman 443 (Bombay)(HC) held in para no. 6 that the period during which the Assessee had neither occupied the property nor put lessee in possession of the property nor earned any rental income. The property was in fact during the period in question legally not occupiable nor occupied. Under the circumstances, the question of charging tax on notional rental income during such period does not arise. 18. In the case of Brigade Enterprises Ltd. vs. AddL CIT [2021] 279 Taxman 219 (Karnataka) (HC) held in para no. 7 held that since building would legally come into existence only on issuance of an occupancy certificate and, further, assessee had declared rental income from letting out of said building in subsequent assessment year, notional income by way of annual letting value could not be assessed on such building during year. Case laws: > If property is used as stock-in-trade, then said property would become or partake character of stock and any income derived from stock would be income from businesses and not "income from property". CIT vs. Neha Builders (2008) 296 ITR 661 (Guj)(HC)(Para 8) CIT vs. Ansal Housing Finance & Leasing Co. Ltd. (2013)354 ITR 180 (Del.)(HC) C.R. Developers Pvt. Ltd. vs. JCIT, ITA No.4277/Mum/2012 dtd.13/05/2015 Runwal Constructions v. ACIT in ITA. No. 5408 & 5409/Mum/2016 dated 22.02.2018 (Para 10) Shree Balaji Ventures vs. ITO, ITA No.1914/PUN/2018, de 19/02/2019 (Pune)(Trib.) ITO vs. Arihant Estates Pvt. Ltd. ITA No. 6037/Mum/2016 dt.27/06/2018 (Mum)(Trib.) (Para 10) 19. The CIT (A) relied on the case of ITO vs. Chem Mech Pvt. Ltd. (2003) 83 ITD 273 (Mum) (Trib.) is not applicable to the facts of the case. In that case, the assessee was engaged in the business of sale & purchases of cotton & chemicals, and the Assessee owned a house property, and same was rent out to its MD for interest free deposits at monthly rent of Rs.1,300/- The AO estimated ALV by applying interest rate @ 12% on total investment value. Whereas as Tribunal has directed to adopt fair rental value of the property.
12 ITA NO.2735/MUM/2022 (A.Y: 2014-15) Modern Abodes Pvt. Ltd., 20. Whereas in the present case the Assessee is trader engaged in the business of buying and selling of properties. Further, the intention of the Assesse was not to let out any unsold portion of property and to earn income from same. Flats were meant for sale as soon as the prospective buyers approach; hence it was not possible to let out. 21 Hence, the direction given to assessed income from House property by taking ALV at 8.5% of the Book Value of the property u/s. 23(1) may be deleted. 22. Without prejudice to above, even on rental basis the assessee cannot get more than 2% return on investment, hence the estimate of notional rent @ 8% of investment being illogical, may be directed to be deleted. 23. In view of the above, Unsold properties in stock in trade may be assessed Business Income and delete the notional basis deemed rental income u/s.23(1).
Ld. AR of the assessee reference to Ground No. 2 raised in revised grounds of appeal submitted that the amendment made u/s. 23(5) are applicable from A.Y.2018-19. Therefore, deemed rental income determined by the Assessing Officer for the current Assessment Year i.e., 2014-15 is not proper and the above amendment is not applicable in the current Assessment Year. In this regard she relied on the following case laws: -
a. Pegasus Properties (P.) Ltd. vs. Dy. CIT [2022] 193 ITD 514 (Mum Trib.) Osho Developers, ITA No.2372 & 1860/Mum/2019, dt. 03/11/2020 (Mum) (Trib.) b. c. M/s. Sheth Developers Private Limited, ITA No.1953 & 1954 /Mum/2020, dt.27/06/2022 (Mum) (Trib.) d. Sunil Kumar vs. ACIT (2022) 194 ITD 764 (DeIhi)(Trib.) Sharan Hospitality (P.) Ltd. v. Dy. CIT [2020] 268 Taxman 443 (Bombay) (HC) e. f. Brigade Enterprises Ltd. vs. Addl. CIT [2021] 279 Taxman 219 (Karnataka)(HC) g. ITO vs. Chem Mech Pvt. Ltd. (2003) 83 ITD 273 (Mum)(Trib.)
13 ITA NO.2735/MUM/2022 (A.Y: 2014-15) Modern Abodes Pvt. Ltd., 14. On the other hand, Ld.DR relied on the orders of the lower authorities.
Considered the rival submissions and material placed on record, we observe that similar issue was considered by the Coordinate Bench in the case of Pegasus Properties (P.) Ltd., v. DCIT (supra) and held as under:-
“5.11 It is not in dispute that the assessee is a builder or developer and had been showing the income derived from sale of flats as and when they are sold and the flats remaining unsold are shown as inventories in the balance sheet of the assessee as ‘stock-in-trade’. These unsold stocks when it is sold subsequently would again get taxed only under the head ‘income from business’. We find that the assessee being a builder or developer would be interested in selling those flats and earn profits out of the same. No business man would be interested in keeping the properties idle. Hence, the intention of the assessee company being a builder or developer was always to sell the same. 5.12 Since all the unsold flats are lying as ‘stock in trade’, the resultant income arising out of sale would only from income from business, We find that amendment has been brought in the statute in Section 23(5) of the Act 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 A.Y.2018-19 onwards. Hence, prior to A.Y.2018-19, there is no provision provided in the Act to tax the deemed rental income on unsold stock of properties lying as ‘stock in trade’ under the head ‘income from house property’. The provisions of Section 23(4) of the Act are meant only for properties that are held as investments and not as stock in trade. We find that decision rendered by the Hon’ble Jurisdictional High Court in the case of Mangla Homes Pvt. Ltd., reported in 325 ITR 281 would not be applicable in the instant case as the main object of that company was to make investment in properties, flats, warehouses, shops etc
14 ITA NO.2735/MUM/2022 (A.Y: 2014-15) Modern Abodes Pvt. Ltd., and let out the same and derive rental income. In any case, principle laid down in Mangla Homes Pvt. Ltd., had been subsequently reversed by the Hon’ble Supreme Court in the case of Chennai Properties and Investment Ltd., vs. CIT reported in 373 ITR 673. We also find that 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 were used only for the purpose of business of the assessee. The exception provided in charging section 22 of the Act seems to be indirectly taxed only from A.Y.2018-19 after providing the moratorium period of two years. Hence, upto 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. 5.13 We find that all the decisions relied upon by the Hon’ble Bombay High Court in Mangla Homes Pvt. Ltd., were prior to the decision of the Hon’ble High Court in the case of Chennai Properties referred to supra. This is the background in which all the Tribunal decisions had followed the decision of the Hon’ble Gujarat High Court in the case of Neha Builders reported in 296 ITR 661. We find that the issue in dispute is also covered by the decision of Pune Tribunal in the case of Kumar Properties and Real Estates Pvt. Ltd., vs. DCIT in ITA No.2977/PUN/2017 for A.Y.2013-14 dated 28/04/2021. For the sake of convenience, the entire order is reproduced hereunder:- “This appeal by the assessee is directed against the order passed by the CIT(A)-7, Pune on 01.09.2017 in relation to the assessment year 2013-14. 2. The assessee has assailed confirmation of addition of Rs.1,47,65,688/- towards deemed rental income on stock-in-trade of unsold flats/bungalows held by the assessee, as a first major issue. Succinctly, the factual panorama of the case is that the assessee has been engaged in the business of development of properties with the projects `Kumar Infinia' and `Kumar Picasso' ITA No.2977/PUN/2017 Kumar Properties and Real Estate Private Limited having certain unsold flats/bungalows for ready possession at the year end. The AO opined that the assessee ought to have offered deemed notional rental income on such vacant flats/bungalows. The assessee submitted that the flats/bungalows were its stock-in- trade, from which no income could be taxed under the
15 ITA NO.2735/MUM/2022 (A.Y: 2014-15) Modern Abodes Pvt. Ltd., head 'Income from house property'. Relying on judgment of the Hon'ble Delhi High Court in CIT Vs. Ansal Housing Finance and Leasing Company Ltd. (2013) 354 ITR 180 (Del), the AO computed the annual letting value of the unsold flats u/s.23 of the Income-tax Act, 1961 (hereinafter also called `the Act') at Rs.1,47,65,688/- and made addition for the same. The ld. CIT(A) echoed the addition, against which the assessee has approached the Tribunal. 3. We have heard the rival submissions through Virtual Court and gone through the relevant material on record. Indisputably, the assessee has been engaged in the business of development of properties. Certain flats/bungalows out of the two buildings were unsold as at the year end. The authorities below have canvassed a view that annual letting value of such unsold flats/bungalows lying as stock-in-trade at the end of the year is income chargeable to tax under the head `Income from house property'. Section 22 is the ITA No.2977/PUN/2017 Kumar Properties and Real Estate Private Limited charging section of Chapter IV-C, `Income from house property', which reads as under:- `The annual value of property consisting of any buildings or lands appurtenant thereto of which the assessee is the owner, other than such portions of such property as he may occupy for the purposes of any business or profession carried on by him the profits of which are chargeable to income-tax, shall be chargeable to income- tax under the head "Income from house property".' (emphasis supplied by us) 4. This section states that the annual value of property (buildings or land appurtenant thereto) held by the assessee as an owner shall be chargeable as `Income from house property'. However, an exception has been carved out, which provides that any such property or its part, which is occupied by the assessee for the purposes of any business or profession carried on by him, the profits of which are chargeable to income-tax, shall be excluded. Thus, in order to fall in the exclusion clause, the following conditions must be satisfied: i. The property or its part should be occupied by the assessee as an owner.
16 ITA NO.2735/MUM/2022 (A.Y: 2014-15) Modern Abodes Pvt. Ltd., ii. Any business or profession should be carried on by the assessee-owner. I ii. Occupation of the property should be for the purpose of business or profession iv. Profits of such business or profession should be chargeable to income-tax. 5. Only when the above four conditions are cumulatively satisfied that the property or its part goes outside the ken of section 22, not requiring computation of the annual letting value therefrom. Let us see if the above conditions are satisfied in the instant case ad seriatim. 6. The first condition is that the property or its part should be occupied by the assessee as an owner. The assessee is engaged in the business of developing buildings. Admittedly, the assessee is owner of the flats/bungalows lying unsold at the year end. Now the question is whether these flats etc. can be said to be `occupied' by the assessee? The term `occupy' has neither been defined in section 2 (general definitions under the Act) nor section 27 (definitions relating to income from house property). Rather it is defined nowhere in the Act. In such a scenario, we will have to understand its connotation in common parlance. The term `occupation' (in land law) has been defined in the Oxford Dictionary of Law to mean `the physical possession and control of land'. Thus, occupation of a property means having its physical possession coupled with dominion rather than the physical possession coupled with actual use. Once a property is in physical possession and control of a ITA No.2977/PUN/2017 Kumar Properties and Real Estate Private Limited person, it is said to be in his occupation, even if it is not actually used by him. Adverting to the facts of the extant case, we find it not to be a case of the AO or that of the ld. DR that the unsold flats etc. were not in the physical possession and control of the assessee. In fact, there is no one other than the assessee having physical possession and control over such flats, thereby making the assessee solely in their `occupation'. Thus the first condition is fulfilled as the flats etc. were occupied by the assessee-owner. 7. The second condition is that any business or profession should be carried on by the assessee-owner. Obviously, the assessee is engaged in the business of
17 ITA NO.2735/MUM/2022 (A.Y: 2014-15) Modern Abodes Pvt. Ltd., property development and has returned income from such business. 8. The third condition is that the occupation of the property should be for the purpose of business or profession. Crucial words used in the provision linking occupation of property with are `for the purpose of business'. If the property is occupied for the purpose of business, the condition gets satisfied. The expression `for the purpose of business' is of wide amplitude. To fall within its purport, what is essential is that there should be some nexus with the business. Even remote connection with the business satisfies the test of `for the purpose of business'. Section 37(1) of the Act, granting other deductions, also uses similar expression - `for the purposes of the business or profession'. This has been interpreted to be wider in its scope vis-à-vis the expression `for the purpose of making or earning such income' as used in section 57(iii), providing deduction under the head `Income from other sources'. Reverting to section 22, we find that the legislature has used a wider expression: `for the purpose of business' with occupation of the property rather than any narrower expression indicating that the business must be carried on from such property or something like that as a sine qua non for exception. If the intention of the legislature had been to provide exception in a limited manner, it would have used a suitable constrained expression. Coming back to the factual scenario prevailing in the instant case, we find that the purpose of occupation of the flats is to hold them either for readying them for final sale or during the interregnum from the ready stage to sale stage, which satisfies the test of `for the purpose of business'. 9. The last condition is that profits of such business or profession should be chargeable to income-tax. It is indisputable that the profits of the business of property development by the assessee are chargeable to income- tax. 10. On a bird's-eye view, we find that that flats/bungalows are occupied by the assessee owner; business of property development is carried on by the assessee; the occupation of the flats etc. is for the purpose of business; and profits of such business are chargeable to income- tax. Ergo, all the four conditions for exclusion from section
18 ITA NO.2735/MUM/2022 (A.Y: 2014-15) Modern Abodes Pvt. Ltd., 22 of the Act are cumulatively satisfied in the present case. 11. The authorities below have canvassed a view that the annual letting value of flats/bungalows is income chargeable to tax as `Income from house property' by relying on Ansal Housing Finance and Leasing Company Ltd. (supra). There is no doubt that the Hon'ble Delhi High Court in the said case has held that Annual letting value of unsold flats at the year end is chargeable to tax under the head 'Income from house property'. At the same time, we find that the Hon'ble Gujarat High Court in CIT Vs. Neha Builders (Pvt.) Ltd. (2008) 296 ITR 661(Guj) has held that income from the properties held as stock in trade can be treated as Income from business and not as `Income from house property. Our attention has been drawn towards certain Tribunal decisions including ITA No.2977/PUN/2017 Kumar Properties and Real Estate Private Limited Cosmopolis Construction, Pune vs. ITO dated 18.06.2018 (ITA NO. 230 & 231/PUN/2018), wherein, after taking note of both the above judgments and finding none of them from the jurisdictional High Court, a view has been canvassed in favour of the assessee by holding that no income from house property can result in respect of unsold flats held by a builder at the year end. Similar view has been reiterated by the Pune Bench of the Tribunal in Mahanagar Constructions VS. ITO (ITA NO.632/PUN/2018) vide its order dated 5.9.2019. 12. At this juncture, it is relevant to mention that the Finance Act, 2017 has inserted sub-section (5) of section 23 w.e.f. 01.04.2018 reading as under:- `Where the property consisting of any building or land appurtenant thereto is held as stock-in-trade and the property or any part of the property is not let during the whole or any part of the previous year, the annual value of such property or part of the property, for the period up to 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 be nil.' 13. A close scrutiny of the provision inducted by the Finance Act, 2017, transpires that where a property is held as stock-in-trade which is not let out during the year, its annual value for a period of one year, which was later
19 ITA NO.2735/MUM/2022 (A.Y: 2014-15) Modern Abodes Pvt. Ltd., enhanced by the Finance Act, 2019 to two years, from the end of the financial year in which the completion certificate is received, shall be taken as Nil. The amendment has been carried out w.e.f. 1.4.2018 and the Memorandum explaining the provisions of the Finance Bill also clearly provides that this amendment will take effect from 01.04.2018 and will, accordingly apply in relation to the assessment year 2018-19 and subsequent years. Obviously, it is a prospective amendment. The effect of this amendment is that stock-in-trade of buildings etc. shall be considered for computation of annual value under the head 'Income from house property' after one/two years from the end of the financial year in which the certificate of completion of construction of the property is obtained on and from the A.Y. 2018-19. Instantly, we are concerned with the assessment year 2013-14. As such, the amendment cannot apply to the year under consideration. In the absence of the applicability of such an amendment, no income can be said to have accrued to the assessee from unsold flats available as stock-in- trade. We, therefore, overturn the impugned order on this score and delete the addition of Rs.1.47 crore sustained in the first appeal.” 5.14 In view of the aforesaid observations and respectfully following the judicial precedents relied upon hereinabove, we hold that no addition on account of deemed rental income could be made 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 A.Y.2018-19 providing a moratorium period of two years. Hence, no addition could be made even for A.Y.2018-19 also. 5.15 Accordingly, the ground raised by the assessee for all the three years in respect of addition made on account of deemed rental income of unsold stock of flats as ‘stock in trade’ are allowed.”
Respectfully following the above said decision, we are also of the view that the assessee had kept various flats as stock in trade and they were not sold. No addition on account of deemed rental income can be made in respect of unsold stock of flats held as stock in trade up to
20 ITA NO.2735/MUM/2022 (A.Y: 2014-15) Modern Abodes Pvt. Ltd., A.Y.2017-18. In the present case the assessment involved in A.Y.2014-15, therefore the addition proposed by the Assessing Officer is directed to be deleted. Accordingly, appeal filed by the assessee is allowed.
In the result, appeal filed by the assessee is allowed.
Order pronounced in the open court on 03rd April, 2023
Sd/- Sd/- (KULDIP SINGH) (S. RIFAUR RAHMAN) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai / Dated 03/04/2023 Giridhar, Sr.PS
Copy of the Order forwarded to: 1. The Assessee 2. The Respondent. 3. The CIT(A), Mumbai. 4. CIT 5. DR, ITAT, Mumbai 6. Guard file. //True Copy// BY ORDER
(Asstt. Registrar) ITAT, Mum