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Income Tax Appellate Tribunal, “D” BENCH, MUMBAI
Before: SHRI ABY T. VARKEY, JM & SHRI S. RIFAUR RAHMAN, AM
O R D E R
PER ABY T. VARKEY, JM:
This is an appeal preferred by the assessee against the order of the Ld. Principal Commissioner of Income Tax-27, [hereinafter referred to as the “PCIT”], Mumbai dated 10.03.2022 for assessment year 2017-18 passed under section 263 of the Income Tax Act, 1961 (hereinafter referred to as “the Act”).
The assessee’s main grievance is against the action of the Ld. PCIT to have invoked revisional jurisdiction u/s 263 of the Act without satisfying the condition precedents as prescribed u/s 263 of the Act.
Brief facts is that the assessee is a builder and had filed its return of income on 28.10.2017 declaring total income of Rs.6,92,50,630/-. Later, the case of the assessee was selected for scrutiny and the AO ITA Ns. 997/Mum/2022 A.Ys. 2017-18 Dhirajlal Amichand Shah after issuing notices u/s 142(1) of the Act dated 02.01.2019, 01.02.2019, 21.02.2019 and dated 27.03.2019 and after perusal of the reply dated by the assessee dated 23.08.2018 (pursuant to notice u/s 143(2) dated 09.08.2018) and reply dated 18.02.2019 and 05.04.2019, the AO had passed the assessment order u/s 143(3) of the Act dated 24.04.2019 wherein he accepted the return of income filed by the assessee. Later, the Ld. PCIT has issued show cause notice (SCN) 21.02.2022 u/s 263 of the Act conveying his proposal to invoke revisional jurisdiction against the action of AO dated 24.04.2019. Pursuant to the same, the assessee replied vide letter dated 01.03.2022 (reproduced by the Ld. PCIT in the impugned revisional order) contesting the exercise of the same. But the Ld PCIT was not satisfied with the reply of assessee and was pleased to set aside the assessment order dated 24.04.2019 holding the assessment order as erroneous as well as prejudicial to the revenue and directing the AO to make fresh assessment by taxing the annual value of the property forming part of the closing stock, under the head “Income from House Property”. The Ld. PCIT also directed in his impugned order that the annual value shall be computed as per the provision of section 23(1)(a) of the Act and deduction if any admissible u/s 24 of the Act shall be allowed while computing the income from house property. Aggrieved by the aforesaid action of the Ld. PCIT, the assesse has preferred this appeal before us wherein the assessee has challenged the invocation of the revisional jurisdiction of the Ld. PCIT u/s 263 of the Act without satisfying the condition precedent as stipulated u/s 263 of the Act.
ITA Ns. 997/Mum/2022 A.Ys. 2017-18 Dhirajlal Amichand Shah 4. Before examining the challenge raised against the jurisdiction, let us take guidance of judicial precedence laid down by the Hon'ble Apex Court in Malabar Industries Ltd. vs. CIT [2000] 243 ITR 83(SC) wherein their Lordship have held that twin conditions should be satisfied before jurisdiction u/s 263 of the Act is exercised by the Ld. CIT/PCIT. The twin conditions which need to be satisfied are that (i) the order of the Assessing Officer must be erroneous and (ii) as a consequence of passing an erroneous order, prejudice is caused to the interest of the Revenue. In the following circumstances, the order of the AO can be held to be erroneous i.e. (i) if the Assessing Officer's order was passed on assumption of incorrect facts; or assumption of incorrect law; (ii) Assessing Officer's order is in violation of the principles of natural justice; (iii) if the AO's order is passed by the without application of mind; or (iv) if the AO has not investigated the issue before him. In the circumstances enumerated above only the order passed by the Assessing Officer can be termed as erroneous for the purpose of Section.263 of the Act. It has to be borne in mind that even if the Ld. PCIT/CIT finds that the assessment order is erroneous, he cannot invoke the revisional jurisdiction u/s 263 of the Act without satisfying the requirement of second limb [i.e. the Ld. PCIT/CIT has to show that due to the erroneous assessment order, prejudice has been caused to the interest of revenue]. This essential requirement of law also has to be satisfied by Ld. PCIT/CIT before invoking revisional jurisdiction as laid down by the Hon'ble Supreme Court in the case of Malabar Industries (supra) wherein their Lordship’s held that this phrase i.e. "prejudicial to the interest of the revenue'' has to be read in ITA Ns. 997/Mum/2022 A.Ys. 2017-18 Dhirajlal Amichand Shah conjunction with an "erroneous" order passed by the Assessing Officer. The Hon’ble Supreme Court, held that for invoking powers conferred by S.263; the CIT should not only show that the AO's order is erroneous as a result of any of the situations enumerated above but CIT must also further show that as a result of an erroneous order, some loss is caused to the interest of the revenue. At this juncture, one has to understand what is prejudicial to the interest of revenue. Their Lordship explaining about this in the said judgment (Malabar supra) held that every loss of revenue as a consequence of an order of Assessing Officer cannot be treated as prejudicial to the interest of the revenue. It was further observed that when the Assessing Officer adopts one of the course permissible in law and it has resulted in loss to the revenue, or where two views are possible and the Assessing Officer has taken one view with which the Ld. CIT does not agree, it cannot be treated as an order prejudicial to the interest of the revenue unless the view taken by the Assessing Officer is unsustainable in law.
Keeping the aforesaid judicial precedent in mind, we should examine the facts of the case at hand to see whether the Ld. PCIT could have successfully invoked revisional jurisdiction u/s 263 of the Act. We note that the fault pointed out by the Ld. PCIT was about the closing stock of unsold flats [residential re-development project (“Shreeji Heights")] which was shown by the assessee at Rs.12,01,86,187/- ; but the Ld. PCIT took note of the fact that the assessee had filed occupation certificate [OC]in respect of these un- sold flats dated 11.06.2015, which means the project have been ITA Ns. 997/Mum/2022 A.Ys. 2017-18 Dhirajlal Amichand Shah completed and ready for occupation. Therefore, according to the Ld. PCIT, these flats (unsold) continue to be held by the assessee as stock- in-trade for more than one (1) year and consequently the levy of income tax on the unsold flats is to be determined in the hands of the assessee. According to Ld. PCIT, the Annual Letting Value (ALV) of the unsold flats (held as stock in trade) forming part of the inventories, should have been brought to tax as deemed rent u/s 23(1)(a) of the Act. According to the Ld. PCIT, since the value of unsold flats was to the tune of Rs.12,01,86,187/- according to him 8% thereof i.e. Rs.96,14,895/- need to be considered as deemed rent of unsold flats which was chargeable under the head ‘income from house property’. Therefore, according to the Ld. PCIT, the assessment order passed by the AO u/s 143(3) of the Act dated 24.04.2019 was erroneous as well as prejudicial to the revenue. And after hearing the assessee, the Ld. PCIT after citing the decision of the Hon’ble Delhi High Court in the case of CIT Vs. Ansal Housing Finance and Leasing Company Ltd. (354 ITR 180) was pleased to hold that the assessment order of the AO to be erroneous as well as prejudicial to the revenue and directed the AO to frame fresh assessment by taxing the annual value of the property/un-sold flats forming part of the closing stock under the head “income from house property”. This impugned action of the Ld. PCIT has been assailed by the Ld. AR on the ground that the Ld. PCIT did not had jurisdiction to rack up an issue which has already undergone inquiry in the hands of AO during the assessment proceedings. According to him, the AO have conducted inquiry into the closing stock of unsold flats and have taken a conscious view not to levy the ITA Ns. 997/Mum/2022 A.Ys. 2017-18 Dhirajlal Amichand Shah notional rent [annual letting value (ALV)]. According to the Ld. AR, the AO has carried out investigation into the closing stock which assessee had to the tune of Rs.12,01,86,187/- (un-sold flats) and after inquiring about it, the AO has taken a plausible view for not levying notional rent (ALV) on the unsold flats because the sub-section (5) was inserted in Section 23 of the Act vide Finance Act, 2017, w.e.f. 01.04.2018, so it is applicable from AY. 2018-19, which states that where the property consisting of any building or land appurtenant there to 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 upto one (1) year from the end of the financial year in which the certificate of completion of constraction of the property is obtained shall be taken to be nil;[and the period of one year has been increased by two years w.e.f. 01.04.2020]. Thus, according to Ld. AR, the law bringing to tax the stock-in-trade of unsold flats/houses as deemed annual value of flats/property came into effect from 01.04.2018 i.e. in AY. 2018-19; and the AO in the instant case has framed the assessment order on 24.04.2019 has taken note of the insertion of sub- section (5) to Section 23 of the Act (supra) and has taken a view rightly not to determine Annual Letting Value (ALV) of the unsold flats, which in any case is a plausible view. Therefore, according to the Ld. AR, the view of the AO after discharging the dual role of investigator as well as an adjudicator had taken a plausible view not to levy any ALV on the unsold flats could not have been interfered with by Ld. PCIT unless he was able to show that AO’s view on the facts of ITA Ns. 997/Mum/2022 A.Ys. 2017-18 Dhirajlal Amichand Shah the case was un-sustainable view in law. In the light of the contentions, according to Ld AR, the Ld. PCIT ought not to have interfered with the order passed by the Assessing Officer (AO) on this issue. Per- Contra, the Ld CITDR, supported the action of Ld PCIT and contended that the Ld. PCIT has rightly exercised his jurisdiction relying on the decision of the Hon’ble Delhi High Court in the case of CIT Vs. Ansal Housing Finance and Leasing Company Ltd (supra); and since proper enquiry was also not made by the AO, the Ld PCIT has enquired and thereafter, directed the AO to make addition of deemed rent of un-sold flats, which action need not be interfered by us.
Before us, the Ld. AR brought to our notice that the AO had called for details of the unsold flats (stock) which has been clearly shown in the profit and loss accounts (refer page 24 PB), as well as balance-sheet as on 31.03.2017 wherein the closing stock of unsold flats are shown at Rs.12,01,86,187/-. The Ld. AR also drew our attention to page no. 40 of the PB which is the notice u/s 142(1) of the Act dated 01.12.2019 wherein the AO has mentioned the CASS reason for scrutiny which was mentioned as “Real estate Business with high closing stock” and the AO had called for the work-in-progress (WIP) as well as break-up from all the projects and also directed assessee to explain the project wise, year wise details of computation of income as per percentage completion method; and further it is noted that pursuant to the notice, the assessee had filed all the details vide reply dated 18th Feb, 2019 along with annexure (refer page no. 43 -46 PB) and the AO vide notice dated 27.03.2019 (refer page 47 -48 PB) asked the assessee to provide the details of the occupation certificate [OC] it received and ITA Ns. 997/Mum/2022 A.Ys. 2017-18 Dhirajlal Amichand Shah the assessee had filed the reply to the notice (refer page no. 49 reply dated 05.04.2019) and the occupation certificate of flats dated 11.06.2015 is found placed at page no. 51 to 52 of the PB. Thus, we note that the AO had carried out investigation into the flats including that of unsold flats which was held as stock in trade by the assessee. Moreover it is noted that the assessee was not into the business of letting out the property for rent and its business was Real Estate Development as well as re-development. And we also note that the AO had framed the assessment order on 24.04.2019, and so it can be seen that the AO’s decision on this issue, not to tax the deemed rent on un- sold flats was after the Parliament has inserted sub-section (5) in Section 23 of the Act vide Finance Act 2017, w.e.f 01.04.2018, ie., from AY. 2018-19. And further we note that the action of AO is in consonance with the CBDT Circular No. 02/2018 (F. No. 370142/15/2017-TPL) wherein the CBDT has given explanatory notes to provisions of Finance Act, 2017 vide order dated 15.02.2018 as item no. 17, the CBDT classifies in respect of notional income for house property as under: - “17.1 Section 23 of the Income-tax Act provides for the manner of determination of annual value of house property. 17.2 Considering the business exigencies in case of real estate developers, the said section has been amended to provide that where the house property consisting of any building and 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 ITA Ns. 997/Mum/2022 A.Ys. 2017-18 Dhirajlal Amichand Shah construction of the property is obtained from the competent authority, shall be taken to be nil. 17.3 Applicability: This amendment takes effect from 1st April, 2018 and will, accordingly apply from assessment year 2018-19 and subsequent years.” 7. Since CBDT Circular/Instruction are binding on AO and Income Tax Authorities, the AO can be presumed to have taken note of CBDT classification dated 15.02.2018, while framing assessment order on 24.04.2019. Therefore, AO has rightly followed the CBDT Circular (supra) and did not determine the notional income from unsold flats held by assessee as stock-in-trade. 8. And in this context, we note that Co-ordinate Bench of this Tribunal in the case of M/s. Tata Housing Development vide order dated 28.09.2020 in (ITA. No. 3492/3493/Mum/2019) has held that sub-section (5) of Section 23 of the Act is prospective in operation (therefore applicable from AY. 2018-19) and observed as under: “We may also like to add here that sub-section (5) to Section 23 has been inserted by the Finance Act, 2017 w.e.f. 01-4-2018, whereby notional annual value of property/part of property held has stock-in-trade has been brought to tax subject to conditions specified in the newly inserted sub-section. The amendment is substantive in nature and hence, would be effective prospectively i.e. it would no application in the impugned assessment year. Thus, no addition on account of notional rental value of the flats held as stock in trade by the assessee could have been made by the Assessing Officer in the impugned assessment year. Even otherwise, sub-section (5) in section 23 was inserted by Finance Act, 2017 and is applicable only from 01.04.2018 and ITA Ns. 997/Mum/2022 A.Ys. 2017-18 Dhirajlal Amichand Shah not for the Assessment Year under consideration. Therefore, the twin condition as prescribed under section 263 are not fulfilled in respect of first issue i.e. taxability of unsold flats under the head "Income from House Property".” Similar view has been taken by the Tribunal in the case of Archie Creation vs. PCIT(supra). In the light of facts of the case and the judgements/decisions discussed above, we hold that the PCIT clearly fell in error in invoking revisonal jurisdiction u/s 263 of the Act. Consequently, the impugned order is quashed and the appeal of assessee is allowed.” 9. In the light of the above discussion, we find that AO has discharged his dual role as an investigator as well as adjudicator. As noted (supra) he has examined the relevant facts of unsold flats as well as decision not to determine ALV is in line with the CBDT Circular dated 15.02.2018 (supra) and therefore his decision cannot be held to be erroneous as well as prejudicial to the revenue. Therefore, we find the Ld. PCIT has erred in invoking revisional jurisdiction u/s 263 of the Act, only for imposing his view, which is not permissible; and so we are inclined to quash the impugned order of Ld. PCIT. 10. In the result, the appeal of the assessee is allowed. Order pronounced in the open court on this 03/02/2023. (S. RIFAUR RAHMAN) JUDICIAL MEMBER मुंबई Mumbai; दिनांक Dated : 03/02/2023. Vijay Pal Singh, (Sr. PS)