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Facts
The assessee, a partnership firm engaged in real estate, declared a total income of Rs. 1,77,94,590/- for AY 2017-18. The Assessing Officer (AO) added deemed rental income on unsold inventory flats and interest on fixed deposits, increasing the total income. The CIT(A) upheld the AO's additions.
Held
The Tribunal held that deemed rental income on unsold inventory flats, which are stock-in-trade, cannot be added as income from house property, following various High Court and Tribunal precedents. Regarding the interest on fixed deposits, the Tribunal restored the issue to the CIT(A) for a fresh adjudication after granting an opportunity to the assessee to present evidence.
Key Issues
Whether deemed rental income on unsold stock-in-trade flats is taxable as house property income; and whether interest on fixed deposits earned on maintenance charges is taxable.
Sections Cited
143(2), 142(1), 23(4), 22, 234, 234B
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, PUNE BENCH “A”, PUNE
Before: SHRI R. K. PANDA & Ms. ASTHA CHANDRA
Assessment year : 2017-18 Khinvasara Chavan ACIT, Circle – 5, Pune Shop No.1 & 2, Vijay Apartments, Vs. 22, Mukund Nagar, Pune – 411037 PAN: AACFK3473H (Appellant) (Respondent) Assessee by : Shri Rohan R Potdar Department by : Shri Aviyogi Ambadkar, Addl.CIT Date of hearing : 30-03-2026 Date of pronouncement : 30-03-2026 O R D E R PER R.K. PANDA, VP:
This appeal filed by the assessee is directed against the order dated 18.08.2025 of the Ld. CIT(A) / NFAC, Delhi relating to assessment year 2017-18.
Facts of the case, in brief, are that the assessee is a partnership firm and engaged in the business of promoter and builders. It filed its return of income on 15.10.2017 declaring total income of Rs.1,77,94,590/-. The case was selected for scrutiny under CASS. Accordingly, the Assessing Officer issued statutory notice u/s 143(2) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’). Thereafter, notice u/s 142(1) of the Act along with a questionnaire was issued.
During the course of assessment proceedings the Assessing Officer asked the assessee to explain as to why the deemed rental income on unsold inventory flats should not be added. It was submitted by the assessee that its housing project Aranesywhar Park, Phase-II has been completed and there were 52 units of stock in trade. In absence of any satisfactory explanation given by the assessee, the Assessing Officer estimated the deemed rent of the properties at 3% of Rs.15,49,59,096/- i.e. the work in progress of Aranesywhar Park, Phase-II and determined the notional rent at Rs.46,48,772/-. The Assessing Officer similarly noted that an amount of Rs.7,33,762/- received by the assessee towards interest on fixed deposit has not been offered to tax. On being questioned by the Assessing Officer it was stated by the assessee that this interest is earned out of one time maintenance charges received from the flat holders and has an overriding title on account of expenses. However, the Assessing Officer was not satisfied with the explanation given by the assessee. According to him, interest on fixed deposits is taxable and is not expressly exempt. According to him even if there is an overriding title of the expenses to meet these expenses the maintenance charges collected is not taxable. He, therefore, made addition of Rs.7,33,762/- being interest on fixed deposits received during the year. Thus, he determined total income of the assessee at Rs.2,31,77,120/- as against the returned income of Rs.1,77,94,590/-.
In appeal the Ld. CIT(A) / NFAC upheld the action of the Assessing Officer.
5. Aggrieved with such order of the Ld. CIT(A) / NFAC the assessee is in appeal before the Tribunal by raising the following grounds:
The Learned Commissioner of Income Tax (Appeals), NFAC, has erred, both on facts and in law in confirming the addition of Rs.46,48,772/- made by the Assessing Officer towards notional rent for the property held as stock in trade. Appellant prays for the cancellation of addition.
2. The Learned Commissioner of Income Tax (Appeals), NFAC has erred in confirming the addition of Rs.7,33,762/- on account of interest on fixed deposits, without appreciating that the said interest income did not accrue to the appellant, being covered by an overriding title in favour of flat purchasers' maintenance fund. Appellant prays for the cancellation of addition.
3. Without prejudice to Ground 2 above, the learned Commissioner of Income Tax (Appeals), NFAC failed to direct allowance maintenance of corresponding expenditure while treating the said interest as income. Appellant prays for the cancellation of addition.
4. Appellant is aggrieved on interest u/s 234, 234B. Appellant prays to delete the same.
Appellant prays for just and Equitable relief.
6. Appellant prays to add, alter, amend, take additional ground and/ or withdraw the Ground/s and submit additional evidences as the occasion may demand during appellate proceedings.
We have heard the rival arguments made by both the sides, perused the orders of the Assessing Officer and the Ld. CIT(A) / NFAC and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. So far as the first issue is concerned i.e. deemed income from the house property on account of unsold flats, we find the issue stands decided in favour of the assessee by a number of decisions. We find the Co-ordinate Bench of the Tribunal in the case of Pride and Expert Properties Private Limited vs. ACIT vide order dated 14.02.2023 for assessment year 2017-18 has decided the issue in favour of the assessee by observing as under: “6. We have heard both the parties and perused the material available on record. We note that the Hon’ble Bombay High Court in the case of Gundecha Builders (supra) vide its order dated 31-07-2018 for A.Y. 200809 considered question of law which are reproduced in para 2 of the said decision. The relevant question of law in para 2(i) is reproduced here-in below for ready reference : “(i) 7. Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in treating the income received on letting out as house property income?”
7. Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in treating the income received on letting out as house property income?” On plain reading of the said question of law, we note that whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in treating the income received on letting out as house property. Admittedly, the assessee therein is engaged in the business of developing real estate projects which is evident from para 3(a) of the said decision. Further, it is also noted from para 3(e) that letting of property is not the business of assessee therein. Further, the Hon’ble High Court of Bombay by placing reliance in the case of Sane & Doshi Enterprises reported in 377 ITR 165 (Bom.) dismissed the substantial question of law raised by the Revenue by holding that the said question does not give any rise to substantial question of law which is evident from para 3(f) of the said decision. It is pertinent to note that the facts in the case of Gundecha Builders (supra) before the Hon’ble High Court was that the assessee therein received rental income which was classified as income from house property which is evident from para 3(b) of the said order. There is no dispute with regard to this aspect from the ld. DR.
8. Coming to the present facts of the case the contention of assessee was that the said 15 unsold flats was not sold during the year under consideration and no rental income derived from the said unsold flats as they were not let out, hence, no deemed rent could be levied u/s. 23(4) of the Act. We note that the assessee treated the same as 15 unsold flats as stock-in-trade which means that the profits on its sale would be offered as business income and no rental income received by the assessee from such 15 unsold flats. Therefore, facts in the case of Gundecha Builders (supra) are different from the facts of the present case in hand. Thus, we reject the arguments of ld. DR of applicability of observation of Hon’ble High Court of Bombay in the case of Gundecha Builders (supra). On similar issue and same identical facts, this Tribunal in the case of Sai Spacecon India Pvt. Ltd. in held no addition on account of deemed rent on unsold flats could be made in the hands of the assessee. The relevant portion of the same are as under for ready reference : “3. Heard both the parties and perused the material available on record. We note that the assessee is a Private Limited Company engaged in the business of Promoter, Developer, Builder and Power Generation. The AO found 37 unsold flats ready for possession and completion certificate in respect of said flats were also issued. He observed the assessee has not offered any rent income on these 37 unsold flats. The assessee claimed that the flats are stock-in-trade and the income from it is income from Business and Profession and not from House Property. The AO did not accept the submissions of the assessee and proceeded to calculate deemed rent vide its Para No. 5.4 to an extent of Rs.27,97,200/-. The CIT(A) confirmed the same. According to ld. AR that the issue is covered in favour of the assessee and the addition made by the AO as confirmed by the CIT(A) is not maintainable and the assessee recognized unsold flats as stock-in-trade. The ld. AR placed on record of order of this Tribunal in the case of Kumar Properties and Real Estate Private Limited in for A.Y. 2013-14. The Co-ordinate Bench of Tribunal vide order dated 28-04- 2021 discussed the issue in detail from Para Nos. 3 to 13 of the said order and held that an exception has been carved out in section 22 of the Act that any such property or its part, which is occupied by the assessee for the purposes of any business or profession carried, the profits of which are chargeable to incometax, shall be excluded on satisfying the conditions therein. The Co-ordinate Bench, further discussed the four conditions in Para Nos. 6, 7, 8 and 9. The first condition being that the property or its part should be occupied by the assessee as an owner. There is no material evidence to show before us that the assessee is not occupied the said unsold 37 flats. The second condition is that any business or profession should be carried on by the assessee. We note that the assessee filed return showing income from such business and also engaged in the business of property development. The third condition is that the occupation of the property should be for the purpose of business or profession wherein the assessee before us shown the said 37 unsold flats as stock in trade. The last condition is that profits of such business or profession should be chargeable to income-tax. In the present case that there is no dispute that the profits of the business of construction by the assessee are chargeable to income-tax. Therefore, in our view that the unsold 37 flats are occupied by the assessee are as owner; business of construction is carried on by the assessee; the occupation of the flats is for the purpose of business; and profits of such business are chargeable to Income-tax. Thus, in our opinion, all the four conditions provided in exclusion clause in section 22 of the Act are to be excluded, therefore, we hold that no addition on account of deemed rent on unsold 37 flats can be made in the hands of the assessee. The ld. DR did not dispute that the assessee recognized the unsold flats as stock-in-trade but however relied on the order of CIT(A). Thus, the order of CIT(A) is not justified and it is set aside. Thus, the grounds raised by the assessee are allowed.”
9. In the light of the above, we hold that the order of CIT(A) is not justified in confirming the view of AO in levying deemed rent u/s. 23(4) of the Act on account of income from house property. Thus, the grounds Nos. 1 to 3 raised by the assessee are allowed.”
Similar view has been taken by the Co-ordinate Bench of the Tribunal in the case of Cosmopolis Construction vs. ITO vide & 231/PUN/2018 order dated 12.09.2018 order dated 12.09.2018 and in the case of Jayant Avinash Dave vs. DCIT vide order dated 18.05.2023. Further, the Hon’ble Gujarat High Court in the case of CIT vs. Neha Builders (P.) Ltd. reported in 164 Taxman 342 (Guj) has held that 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 business' and not 'income from property’.
Respectfully following the decisions of the Co-ordinate Bench of the Tribunal cited (supra), we set aside the order of the Ld. CIT(A) / NFAC and direct the Assessing Officer to delete the addition made by him on account of notional income from the house property. The first issue raised by the assessee is accordingly allowed.
So far as the second issue i.e. addition made on account of interest on fixed deposits is concerned, we find the Ld. CIT(A) / NFAC while dismissing the grounds raised by the assessee has observed as under:
It is the submission of the Ld. Counsel for the assessee that given an opportunity the assessee is in a position to substantiate his case by filing the requisite details before the Ld. CIT(A) / NFAC to his satisfaction. Considering the totality of the facts of the case and in the interest of justice, we deem it proper to restore the issue to the file of the Ld. CIT(A) / NFAC with a direction to grant one opportunity to the assessee to substantiate his case by filing the requisite details and decide the issue as per fact and law. The assessee is also hereby directed to submit the requisite details before the Ld. CIT(A) / NFAC on the appointed date without seeking any adjournment under any pretext, failing which the Ld. CIT(A) / NFAC is at liberty to pass appropriate order as per law. We hold and direct accordingly. The second issue raised by the assessee is accordingly allowed for statistical purposes.
In the result, the appeal filed by the assessee is allowed for statistical purposes.
Order pronounced in the open Court on 30th March, 2026.