KABBINALE SHRINATH HEBBAR,MANGALORE vs. ACIT, CENTRAL CIRCLE-2, MANGALORE

PER KESHAV DUBEY, JUDICIAL MEMBER:

This appeal at the instance of the assessee is directed against the order of ld. CIT(A)-2, Panaji dated 30.8.2025 vide DIN: ITBA/APL/M/250/2025-26/1080186087(1) passed u/s. 250of the Income Tax Act, 1961 (in short “theAct”) for the AY2017-18.

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“The ld. CIT(A) ought to have appreciated that unsigned approval u/s 151 of the Act in an electronic record could not be said to be valid satisfaction and thus impugned reopening notices issued by the AO would be without jurisdiction.”

4.1 Further, the Hon’ble Karnataka High Court in the case of Gundathur Thimmappa& Sons vs. CIT, Mysore, reported in (1968) 70 ITR 70 held that when the point raised by the assessee is a point which went to the root of the matter and affected not merely his liability to pay tax but also jurisdiction of the Tribunals and Authorities themselves to subject the amount concerned to tax, the Appellate Tribunal had the discretion to permit point of law to be raised for the first time in appeal because the question went to the root of the case. The Hon’ble Supreme Court in the case of

ITA No.2597/Bang/2025 KabbinaleShrinathHebbar, Mangalore Page 5 of 30 National Thermal Power Co. Ltd. Vs CIT (1998) 229 ITR 383 held that undoubtedly, the Tribunal will have the discretion to allow or not allow a new ground to be raised. But where the Tribunal is only required to consider a question of law arising from the facts which are on record in the assessment proceedings, we fail to see why such a question should not be allowed to be raised when it is necessary to consider that question in order to correctly assess the tax liability of an assessee. Accordingly, we are inclined to admit the additional legal grounds for the purpose of adjudication as there was no investigation of any fresh facts otherwise on record and these are critical for a fair adjudication of the matter.

ITA No.2597/Bang/2025 KabbinaleShrinathHebbar, Mangalore Page 6 of 30 submitted the various details as called for and accordinglythe AO concluded the assessmentproceedings by making the following additions:

i. Addition u/s 43CA to the sale consideration – Rs.3,91,441/-

The difference of Rs.3,91,441/- between the sales consideration declared as per the sale deed amounting to Rs.58,45,559/- and the stamp duty value of flat amounting to Rs.62,37,000/- sold to Mr. Manjunath Shetty.

ii. Short fall in revenue recognized - Rs.28,68,148/- During the course of assessment proceedings, the assessee had stated that the Revenue is recognized on the basis of sale deed i.e. as and when the flats are sold, the income is recognized. However, the AO found that the income earned from the flats sold to Mr. Dattatraya Bhat and M/s. Jayanthi Bhat had not been considered while arriving at the total income. The AO concluded that the assessee had followed peculiar method of revenue recognition which does not hold legal validity & therefore the AO proceeds to determine GP ratio (without Solitaire Project) @ 30% and accordingly by applying the same GP ratio of 30% determined the gross profit of Rs.29,72,540/- in solitaire project.Further, as the assessee had already recognized the profit in solitaire project amounting to Rs.1,04,392/--& therefore, the net addition was made amounting to Rs.28,64,148/-. [Rs.29,72,540 (-) 1,04,392.-]. Thus, the AO completed the assessment proceedings u/s 143(3) of the Act on 28.12.2019 on a total assessed income of Rs.12,70,67,328/-.

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6.1 Aggrieved by the assessment completed u/s 143(3) of the Act dated 28.12.2019, the assessee preferred an appeal before the ld. CIT(A)/NFAC. The ld. CIT(A)/NFAC observed that the assessee had opted to settle the dispute under the Direct Tax Vivad Se Vishwas Act,2020 and already been issued with Form No. 3 and Form No.5 as seen from ITBA Report and accordingly the appeal filed by the assessee was allowed to be withdrawn vide order dated 17/09/2022.

(i) Notional income from house property: -

During the course of search proceedings, it was observed that the assessee had constructed a number of projects and there were many unsold units in these projects. With respect to unsold units, it was enquired/verified from the assessee as to whether the assessee had computed “notional income from house property” in respect of unsold commercial & residential units? The assessee stated that the said unsold units were part of the stock in trade and meant to be sold. Hence, there was no intention of the

ITA No.2597/Bang/2025 KabbinaleShrinathHebbar, Mangalore Page 8 of 30 assessee to let out any of such properties. The assessee further stated that the question of computing the notional income on unsold units under the head “house property” does not arise in the case of the assessee. Incidentally, during the course of post-search proceedings, the assessee in his statement recorded u/s 132(4) of the Act on 19.4.2022 also admitted the fact that he had not declared any notional income on the closing stock of finished flats from inception till date. The AO after calling for the projectwise unsold commercial & residential units for the financial yar 2014-15 to 2021-22 held that as the assessee has not let out any of the premises for any financial year or part thereof at any point of time and hence, Annual Letting Value (ALV) is to be determined as per section 23(1)(a) of the Act being the sum for which the property might reasonably be expected to be let from year to year. Thereafter, the AOproceeded to compute income from house property after allowing deduction u/s 24(a) of the Act to arrive at a figure of Rs.70,35,525/- on account of notional income from house property on unsold units. The assessee during the course of assessment proceedings in response to notice u/s 142(1) of the Act also submitted that though the completion certificate of the building was received, the units were not deliverable to customers as they were not completed in all respects & they are uninhabitable. Further, the assessee also drew attention of the AO to the provisions of section 22 of the Act and submitted that if the property or its portions which are occupied by the assessee for the purpose of any business or profession carried on, the profits of which are chargeable to income tax shall be excluded from charging under the head “Income from House Property”.The assessee also submitted that the provisions of sub-section (5) to section 23 was introduced vide Finance Act, 2017 w.e.f. 1.4.2018 and accordingly applicable from AY 2018-19. The AO finally relying on the judgement of Hon’ble High Court of Delhi in the case of M/s. Ansal

ITA No.2597/Bang/2025 KabbinaleShrinathHebbar, Mangalore Page 9 of 30 Housing Construction Ltd. Vs. ACIT in ITA No.931/2017 & 934/2017 has held that the income under the head “house property” ought to have been declared by the assessee in respect of unsold units for AY 2017-18. However, as the assessee failed to declare any such income and hence an amount of Rs.70,35,525/- on account of notional income from house property on unsold units was added to the total income of the assessee for the AY 2017-18.

(ii) Maintenance charges on unsold Units:- During the course of search proceedings, it was observed that the assessee was incurring costs on maintenance charges paid to resident’sassociation in respect of unsold units held by it in respect of a particular project. Since the assessee has been provided with an adhoc deduction of 30% of the Annual Letting Value (ALV) u/s 24(a) of the Act while computing the notional income from house property and hence in the opinion of AO, the allowance of maintenance charges separately would result in double deduction of expenses. The assessee during the reassessment proceedings submitted that the flats are held by him as stock in trade and the expenditure incurred towards maintenance of these flats are incurred in connection with his business. Since the expenditure incurred is wholly & exclusively for the purpose of his business, the same is allowable as deduction u/s 37 of the Act. The AO held that the fundamental fact that expenses are being claimed under two different heads on the same assets i.e. unsold flats. This is impermissible as the same represents double deduction. In view of the same, the maintenance charges for each of the unsold units, project wise, which was debited amounting to Rs. 11,94,494/- for the AY 2017-18 was disallowed and added to the business income of the assessee and taxed as per law.

ITA No.2597/Bang/2025 KabbinaleShrinathHebbar, Mangalore Page 10 of 30 (iii) Revenue recognition:- During the course of investigation, the books of accounts of the assessee were examined and certain issues related to “Revenue recognition” were identified. The AO noticed that the assessee claimed to be following the Percentage Completion Method (POCM) but the guidelines of the ICAI, 2012 was found not to have been followed in the prescribed manner. It was seen that in certain projects, the assessee had declared revenue even though under POCM method, certain key parameters such as, 25% of the project cost has not been reached. The financials for theFY 2018-19 indicate that the assessee has computed the gross profit at 52.83% and net profit at 38.62%, whereas the corresponding figure for the FY 2019-20 is 17.78% GP and 10.69% as N.P. This in the opinion of AO indicates that the method of revenue recognition adopted by the assessee is very inconsistent and therefore, the book results are not reliable. The AO noticed that the assessee in fact was following “hybrid method of revenue recognition” instead of POCM (Percentage of completion Method). The Accounting Standard for recognition of revenue mandates that the revenue from a transaction of sale shall be recognized only when the risk and rewards associate with the property has been transferred and there is no significant uncertainty about the measurability and collectability of consideration.In order to be fair and just, the AO was of the opinion that the proper working of POCM be applied across the said projects so as to derive the actual income. During this exercise, the sales revenue declared by the assessee as per the ITR and that which ought to have been computed by applying POCM has been worked out and the difference calculated. Thereafter, the gross profit attributable to the shifting of sales revenue, which is usually pre-opening to earlier year has been worked out and same needs to be added back to the returned income. In view of the above total Rs.2,93,83,427/- was computed

ITA No.2597/Bang/2025 KabbinaleShrinathHebbar, Mangalore Page 11 of 30 as the correct Gross profit. The assessee in his statement u/s 132(4) of the Act duly admitted to such discrepancies. The AO seen from the return of income u/s 148 of the Act filed by the assessee for AY 2017-18 that Rs.3,47,70,445/- (being the sum of correct gross profit computed for 3 projects combined) has duly been declared, being the revenue recognised based on POCM instead of hybrid method. Hence, no addition has been made in this regard.

REVENUE RECOGNITION – OTHER PROJECTS (iv) It was also observed that in some cases, the sales consideration was collected in full in a particular year but revenue was not recognised, as the VAT/GST was collected in the subsequent years, wherein the sale deed also got registered. The assessee had sought to recognize the income based on the year in which the sale deeds were executed.The assessee sought to postpone the revenue recognition merely because some of the statutory dues were not collected and sale deeds have not been executed. The assessee in his sworn statement on oath u/s 132(4) of the Act dated 19.4.2022 agreed for taxation along POCM instead of hybrid methodology employed by him. The assessee reworked according to POCM based on the Income Tax Department’ direction. In view of the above, it was held that the amount of Rs.2,25,19,690/- was the correct gross profit attributable to AY 2017-18. It was also seen from return of income u/s 148 of the Act filed by the assessee for the AY 2017-18 that the income of Rs.2,25,19,690/- quantified on the basis of POCM for AY 2017-18 has duly been declared by the assessee. Hence, no addition has been made in this regard.

ITA No.2597/Bang/2025 KabbinaleShrinathHebbar, Mangalore Page 12 of 30 DISALLOWANCE OF AUDIT FEE: 7.1 During the course of search proceedings, examination of books of accounts indicated that a sum of Rs.5 lakhs was debited as Audit fees. The same was claimed as expenditure for AY 2017- 18. Further, it was seen that the assessee had not complied with provisions of section 194J of the Act in respect of professional fees paid to the CA and hence, liable for disallowance of expenses in terms of section 40(a)(ia) of the Act. The AO held thatsince TDS was not deducted on the audit fees, 30% of the audit fees of Rs.5 lakhs requires to be disallowed u/s 40(a)(ia) of the Act. However, it is seen from the return of income u/s 148 of the Act filed by the assessee for AY 2017-18 that the income of Rs.1,50,000/- (being 30% of Rs.5 lakhs) has been disallowed and added back to the total income by the assessee. Hence, no addition has been made in this regard.

7.2 Thus, the AO completed the assessment u/s 147 of the Act dated 24.7.2024 on a total assessed income of Rs.18,39,32,400/- by making total additions of Rs.6,02,83,136/- as detailed below-

• GP difference due to POCM Rs. 5,19,03,117/- • Notional Income from House Property Rs. 70,35,525/- • Maintenance Charges disallowed Rs. 11,94,494/- • Disallowance of Audit fee Rs. 1,50,000/- =============== 8. Aggrieved by the order of AO passed u/s 147 of the Act dated 24.7.2024, the assessee preferred an appeal before the ld. CIT(A)/NFAC. The ld. CIT(A)/NFAC dismissed the appeal of the assessee with the following findings: - “4.1 “This appeal by Shrinath Hebbar arises from the reassessment order passed u/s 147 of the Income-tax Act, 1961 dated 24.7.2024 by the Assistant Commissioner of Income Tax, Central Circle-2, Mangaluru, for AY 2017-18. In the said order, the Assessing

ITA No.2597/Bang/2025 KabbinaleShrinathHebbar, Mangalore Page 13 of 30 Officer assessed total income at Rs.18,39,32,400/- as against the returned income of Rs.12,38,07,740/-. The additions included (i) notional income from house property of Rs.70,35,525 on account of unsold flats (ii) disallowance of maintenance charges of Rs.11,94,494 (iii) disallowance of audit fee of Rs.1,50,000/- and (iv) adjustments to business income aggregating to Rs.5,19,03,117/- on account of recognition of revenue under Percentage of Completion Method (POCM). Aggrieved, the appellant filed the present appeal before the undersigned.

4.2 During the pendency of the appeal, the appellant opted to settle the dispute under the Direct Tax Vivad Se Vishwas Act, 2020. The designated authority, vide Certificate No.274957250260221 dated 26.2.2021 determined the amount payable at Rs.8,48,296, which was duly discharged by the appellant. Thereafter, Form-5 (Acknowledgement No.751742891281021 dated 28.10.2021) was issued, certifying that the above sum has been paid towards full and final settlement of the disputed tax arrears and granting immunity under section 6 of the Act. 4.3 In view of the above, and in terms of the provisions of the Vivad Se Vishwas Act, 2020, the present appeal is treated as withdrawn and disposed of, without adjudication on the merits of the grounds raised.

5.0 Due process of law was followed during appellate proceedings, including reasonable opportunities of being heard.

6.0 Accordingly, appeal of the appellant is dismissed.”

ITA No.2597/Bang/2025 KabbinaleShrinathHebbar, Mangalore Page 14 of 30 of account/document seized were very much available &considered by the AO during the original assessment proceedings and the entire reassessment proceedings is based on change of opinion as well as without any incriminating material found during the course of search. The assessee was consistently following the same system of accounting for the revenue recognition over past several years and during the course of original assessment proceedings, the AO had neither disputed the method of accounting followed by the assessee nor disputed the revenue recognition for preparation of financial statement except by saying that the assessee has followed a peculiar method of revenue recognition and on that count had made the Net additions of Rs.28,68,148/-. Further, the ld. A.R. of the assessee vehemently submitted that the completed assessments can be interfered by the AO only on the basis of some incriminating material unearthed during the course of search as held by the Apex Court in the case of PCIT v. Abhisar Buildwell (P.) Ltd. reported in 149 taxmann.com 399. Further, the ld. A.R. of the assessee vehemently submitted that once an assessment is completed in accordance with law, it attains finality and cannot be treated as pending or abated except as specifically provided under the Act. Further, with regard to the notional income from house property, the ld. A.R. of the assessee vehemently submitted that section 22 of the Act states that where such portions of the property consisting of building or land appurtenant thereto which is occupied by the assessee for the purpose of any business or profession carried on by him the profits of which are chargeable to Income Tax shall be excluded. Further, the provision of sub-section 5 of section 23 of the Act was introduced by Finance Act, 2017 w.e.f. 1.4.2018 and applicable from AY 2018-19. In the present case as the property was connected to the business of the assessee cannot be considered for deemed let out since charging section of house property specifically exclude such property. Lastly, with regard to

ITA No.2597/Bang/2025 KabbinaleShrinathHebbar, Mangalore Page 15 of 30 maintenance charges, the ld. A.R. of the assessee vehemently submitted that since the income is not chargeable u/s 22 of the Act, therefore, the 30% deduction towards repairs and maintenance charges is also not allowable u/s 24(a) of the Act and therefore, the assessee is fully eligible to claim deduction of maintenance charges paid on unsold stock u/s 37 of the Act while computing the income chargeable under the head business or profession and accordingly prayed to allow the appeal of the assessee.

ITA No.2597/Bang/2025 KabbinaleShrinathHebbar, Mangalore Page 16 of 30 the Act on 28.12.2019, the assessee had opted for Vivad Se Vishwas Scheme and the ld. CIT(A)/NFAC vide Order dated 17.9.2022 had already allowed the appeal of the assessee to be withdrawn. Further, on perusal of the original assessment order passed u/s 143(3) of the Act dated 28.12.2019, we also observed that the AO had made two types of additions i.e. (i) addition u/s 43CA of the Act on account of difference of Rs.3,91,441/- between the sales consideration declared as per the sale deed amounting to Rs.58,45,559/- and the stamp duty value of flat amounting to Rs.62,37,000/- sold to Mr. Manjunath Shetty. (ii) Further, the AO had observed that assessee had stated that revenue is recognised on the basis of sale deed i.e. as and when the flats are sold the income is recognized. However, the AO found that the income earned from flats sold to Mr. Dattatreya Bhat and M/s. Jayanthi Bhat has not been considered while arriving at total income and accordingly by applying the GP ratio of 30% determined without the project solitaire determined the gross profit of Rs.29,72,540/-. As the assessee had already recognized the profit in solitaire project at Rs.1,04,392/-- and therefore, the net addition was made amounting to Rs.28,64,148/-. [Rs.29,72,540 (-) 1,04,392.-].

12.1 Further, on perusal of the assessment order passed u/s 143(3) of the Act, we take note of the fact that the AO had categorically stated that the assessee had submitted the details as called for vide notice u/s 142(1) of the Act. Further, we also observed that during the course of original assessment proceedings, the assessee had stated that the revenue is recognized on the basis of sale deed, that is, as and when the flats are sold, the income is recognized. Further, the assessee had stated that as per AS-9, the revenue from sale transaction shall be recognized only when the risk and rewards associated with the property has been transferred and there is no significant uncertainty about the measurability and

ITA No.2597/Bang/2025 KabbinaleShrinathHebbar, Mangalore Page 17 of 30 collectability of consideration. The AO held that the assessee has misinterpreted the safeguards provided by the accounting standard- 9 in recognizing revenue and has followed a peculiar method of revenue recognition which does not hold legal validity & accordingly added Rs.28,68,148/-to the income of the assessee.Undisputedly, the assessment u/s 143(3) of the Act was concluded in the case of the assessee for the AY 2017-18 on 28.12.2019 i.e. way before the search action conducted on 18.2.2022. Therefore, there is no dispute that the AY under consideration is the unabated/completed assessment. On perusal of the Reassessment order dated 24/07/2024, we also observed that the AO did not even whisper about what sort of incriminating material found during the course of search except by saying books of account/documents seized were examined which in our opinion were very much available with the AO during the course of original assessment proceeding. The Apex court in the case of PCIT, Central-3 Vs. Abhisar Buildwell (P) Ltd. reported in (2023) 149 taxmann.com 399 (SC)/(2023) 454 ITR 212 has categorically held that no addition can be made in respect of unabated/completed assessment in absence of any incriminating material. Further, the Apex court has categorically stated that in case no incriminating material is unearthed during the search, the assessing officer cannot assess or reassess taking into consideration the other material in respect of completed assessments/unabated assessments. Meaning thereby, in respect of completed/unabated assessments, no addition can be made by the AO in absence of any incriminating material found during the course of search u/s 132 of the Act or requisition u/s 132A of the Act. However, the Apex Court also held that the completed/unabated assessments can be reopened by the AO in exercise of the power u/s 147/148 of the Act subject to fulfillment of the conditions as envisaged/mentioned u/s 147/148 of the Act and those powers are saved. Thus, in the instant case as the case is

ITA No.2597/Bang/2025 KabbinaleShrinathHebbar, Mangalore Page 18 of 30 reopened in exercise of the power u/s 147/148 of the Act & therefore the reasons recorded for the reopening of the assessment is very vital especially when the assessment in the case of the assessee is already concluded by the AO u/s 143(3) of the Act. We agree with the contentions of the ld. DR that this case falls under the purview of Explanation 2(i) to section 148 of the Act. Undisputedly, where a search is initiated u/s 132 of the Act, the AO shall be deemed to have information which suggests that the income chargeable to tax has escaped assessment in the case of the assessee. It is also well settled that for making additions/ disallowances in a reassessment proceedings, the conditions as envisaged/mentioned u/s 147/148 of the Act have to be fulfilled. It is settled law that the validity of a reopening must be tested solely on the basis of reasons recorded at the time of issuing the notice u/s 148 of the Act. A document not referred to in those reasons recorded u/s 148 of the Act cannot be used to justify the validity of the reopening, as the assessee must not be deprived of a fair opportunity to dispute such grounds.

12.2 On perusal of the reasons recorded by the AO for reopening the assessment (Placed at pages 72-75 of PB), it is stated that during the course of search proceedings, books of account / documents were found & seized from the premises of the assessee. The first reason was that the assessee had not voluntarily disallowed 30% of the Audit fees of Rs.5,00,000/- being Rs.1,50,000/- for not deducting the TDS as per the provisions contained u/s 40(a)(ia) of the Act for AY 2017-18. The issue was put forth to the assessee who admitted to the above disallowance. Now the second reason is that It is seen from the material evidence available on records in respect of various project developed / being developed by the assessee during various FYs that method of revenue recognition adopted by the assessee was not as per the

ITA No.2597/Bang/2025 KabbinaleShrinathHebbar, Mangalore Page 19 of 30 standards. Accordingly, the revenue recognition was recalibrated for all projects for various AYs involved. The revenues for the newer projects was calculated based on percentage completion method while for older projects, pre-ponement of revenue was done under project completion method. The AO reworked the calculation and stated that the total undisclosed income of the assessee for the AY 2017-18 is as under which in our view has absolutely nothing to do with any new tangible material: - Gross profit on Sales Turnover Sales turnover Quantified as per Quantified as S.No. Name of the AY Percentage per the Project Completion Percentage Method (in Rs.) Completion method (in Rs.) 1. Project 2017-18 5,54,22,389/- 1,66,90,622/- insignia 2. Project 2017-18 2,75,59,558/- 59,62,579/- Melody 3. Project 2017-18 2,49,89,635/- 2,25,19,690/- Sanskrith 4. Other 2017-18 12,30,13,280/- 2,25,19,690/- project Total 23,09,84,862/- 5,72,90,135/-

12.3 Thus, the AO did not even whisper about any new tangible material found during the course of search. The sole reason cited for reopening was only on the ground of method of revenue recognition adopted by the assessee not as per the standards and accordingly after careful examination, the revenue recognition was recalibrated for all the projects for various assessment years involved. In our considered opinion it is a classic case of change of opinion. On perusal of the Reassessment order, we observed that the additions on account of GP difference due to POCM amounting to Rs.5,19,03,117/- were made as in the opinion of AO the method of revenue recognition adopted by the assessee was not as per the standards. Further, on perusal of the original assessment order dated 28/12/2019, we also observed that the AO

ITA No.2597/Bang/2025 KabbinaleShrinathHebbar, Mangalore Page 20 of 30 has made an addition of Rs.28,64,148/- on the same ground that the assessee has followed peculiar method of revenue recognition which does not hold legal validity. Therefore, we have no hesitation to hold that the additions made by the AO on account of method of revenue recognition has nothing to do with any new tangible material found during the course of search and the entire action of the AO for reworking is just a review of his own order passed earlier. The AO has no authority to review his own order passed in accordance with law. We are also of the considered opinion that the entire exercise of reassessment proceedings are based on change of opinion that too without any corroborative evidence/new tangible material found during the course of search and accordingly illegal and bad in law. The AO had changed his opinion to tax the GP difference due to POCM amounting to Rs.5,19,03,117/- only on the basis of entry or entries in the books of account as mentioned in the reasons recorded for reopening which in our opinion was very much available during the course of original assessment proceedings and the AO had also considered this aspect while passing the assessment order u/s 143(3) of the Act. The revenue except by contending that during the course of search proceedings, books of accounts/documents were found and seized from the assessee inventoried as annexure A/A/2/1 to A/A/2/11 had not even taken pain to mention what sort of additional/new tangible material were found during the course of search based on which undisclosed income were detected which needs to be added to the income while passing the Reassessment Order u/s 147 of the Act. Thus, having second thoughts on the same material do not warrant the initiation of a proceeding under section 147 of the Act. We are also of the considered opinion that the assessee had consistently followed the same method of Accounting which was accepted in the past. Further, the AO had also not rejected the books of accounts of the assessee. In our opinion the method of revenue recognition is

ITA No.2597/Bang/2025 KabbinaleShrinathHebbar, Mangalore Page 21 of 30 always a Revenue neutral exercise. It is not a case that the assessee had not disclosed the profit on sale of the flats. It is only a matter of timing difference of disclosing the Revenue. The AO had already passed the detailed order u/s 143(3) of the Act by categorically observing that the assessee had misinterpreted the safeguards provided by the accounting standard-9 in recognizing revenue and has followed a peculiar method of revenue recognition. Thus, we are of the considered opinion that there was no failure on the part of the assessee to disclose fully and truly all material facts and there seems to be mere change of opinion on the part AO. [ CIT Vs Kelvinator of India Limited (2002) 256 ITR 1 (Del): 174 CTR [2002] 617 (Del)]. Further, Hon’ble supreme court in the case of CIT Vs Bhanji Lavji [1971] 79 ITR 582 (SC) held that when the primary facts necessary for the assessment are fully and truly disclosed, the AO will not be entitled on change of opinion to commence proceedings for reassessment. Similarly if he has raised a wrong legal inference from the facts disclosed, he will not, on that account, be competent to commence reassessment proceedings. In the present case the AO has no jurisdiction to review his own order passed U/s 143(3) of the Act and, accordingly we are inclined to delete the entire additions of Rs. 5,19,03,117/- as made on account of GP difference due to POCM. Accordingly, this ground of appeal of the assessee is allowed.

ITA No.2597/Bang/2025 KabbinaleShrinathHebbar, Mangalore Page 22 of 30 be brought to tax under the head “Income from House Property”. Further, the assessee submitted that these units were used to store miscellaneous materials related to other apartments, for temporary rest of labours etc. and accordingly submitted that the units are used for the purpose of assessee’s business and the same cannot be taxed under the head “income from house property”. On perusal of the reasons recorded by the AO, we observed that the AO had sought to tax the notional income from house property based on the entry or entries in the books of account. Before us, the ld. DR heavily relied upon the decision of Hon’ble Delhi High Court in the case of CIT v. Ansal Housing & Construction Ltd. [2016] 72 taxmann.com 254/ 389 ITR 373 (Delhi), as also relied by the AO in the Assessment order, wherein it was held that the ALV of unsold flats held by a construction company is taxable under section 22 of the Act. However, we are of the considered opinion that section 22 of the Act which is a charging section provides that any such property or its part, which is occupied by the assessee for the purpose of any business or profession carried on the profits of which are chargeable to income tax shall be excluded. In our considered opinion, if the property were held as stock in trade, then the said property would partake the character of stock and any income derived from the stock would be income from business and not income from house property. Further, the Finance Act, 2017inserted section 23(5) w.e.f 01/04/2018 (i.e A.Y. 2018-19). This insertion of section 23(5) by parliament clearly indicates that prior to AY 2018-19, the legislature did not treat such unsold stock in trade as taxable under the head “Income from House Property”. The provision is prospective in nature, and its very introduction indicates that no such tax charge existed in earlier years. In holding so, we heavily relied upon the order of the co-ordinate bench in the case of Chamber Construction Pvt. Ltd v. Dy. CIT, Central Circle- 3(4), Mumbai in ITA No. 4418/Mum/2017 dated 30/11/2018

ITA No.2597/Bang/2025 KabbinaleShrinathHebbar, Mangalore Page 23 of 30 in which the Tribunal after considering the decision of the Hon’ble Delhi High Court as relied upon by the AO as well as DR & also decision of Hon’ble Gujrat High Court has held as under:-

“7. We have heard the authorized representatives of both the parties, perused the orders of the lower authorities and the material available on record. We find that our indulgence has been sought by the assessee by preferring the present appeal, for adjudicating as to whether the CIT(A) is right in law and facts of the case in concluding that the deemed notional lettable value of the completed unsold flats held by the assessee company as stock-in-trade was liable to be determined and brought to tax under the head „Income from house property‟. We find from a perusal of Sec. 22 of the Act that the „annual value‟ of any property consisting of any building or land 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‟. Further, the determination of the „annual value‟ of the property is envisaged in Sec. 23 of the Act. Sec. 23(1)(a) contemplates that the sum for which the property might reasonably be expected to let from year to year is to be deemed as the „annual value‟ of the property which though might not have been let out by the assessee. 8. We have deliberated at length on the issue under consideration in the backdrop of the aforesaid statutory provisions, and are of the considered view that though the „annual value‟ of a property simpliciter owned by an assessee would be liable to be assessed under the head „Income from house property‟, however a similar treatment cannot be accorded to a property which is held by the assessee as stock-in-trade of his business. In our considered view a property which is held by an assessee as stock-in-trade of his business as that of a developer would loose its color and character as that of a property simpliciter owned by him. Our aforesaid view is fortified by the judgment of the Hon’ble High Court of Gujarat in the case of CIT Vs. Neha Builders (P) Ltd. (2008) 296 ITR 661 (Guj). The Hon’ble High Court while disposing off the appeal filed by the revenue in the case of an assessee company which was engaged in the business of construction of property, had observed that where a property is held as stock-in-trade, then the same would become or partake the character of the stock, and any income derived therefrom would be income from business and cannot be held as income from property. The Hon’ble High Court while concluding as hereinabove had observed as under: “7. 8. 9. From the order passed by the learned CIT(A), it would clearly appear that the case of the assessee

ITA No.2597/Bang/2025 KabbinaleShrinathHebbar, Mangalore Page 24 of 30 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. Development of land or property would also be one of the businesses for which the company was incorporated. 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 the said property would become or partake 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.” Admittedly, the lower authorities had relied on the judgement of the Hon’ble High Court of Delhi in the case of CIT Vs. Ansal Housing Finance & Leasing Company Ltd. (2013) 354 ITR 180 (Delhi) and had therein concluded that the notional lettable value of the unsold flats held by the assessee was liable to be determined and brought to tax under the head „Income from house property‟. We find that the issue under consideration before us i.e whether the notional lettable value of the property held by an assessee as stock-in-trade in its business as that of a developer is liable to be assessed under the head „income from house property‟, has been differently answered by the Hon’ble High Court of Gujarat in CIT Vs. Neha Builders Pvt. Ltd. (2008) 296 ITR 661 (Guj) and the Hon’ble High Court of Delhi in CIT Vs. Ansal Housing Finance and Leasing Ltd. (2013) 354 ITR 186 (Del). We are of the considered view that in the backdrop of the aforesaid conflicting views of the aforesaid non-jurisdictional High Courts, the view in favour of the assessee as had been arrived at by the Hon’ble High Court of Gujarat is to be preferred. Our aforesaid view is fortified by the judgment of the Hon’ble Supreme Court in the case of CIT Vs. Vegetable Products (1973) 88 ITR 192 (SC), wherein the Hon’ble Apex Court had observed that if two reasonable constructions of a taxing provision is possible, then that construction which favours the tax payer must be adopted. Further, we find that ITAT, Mumbai in the case of ACIT-15(2)(1) Vs. M/s Haware Construction Pvt. Ltd. [ITA no. 3321 & 3172/Mum/2016; dated 31.08.2018] had after deliberating on the aforesaid judgments of the Hon’ble High Court of Gujarat in

ITA No.2597/Bang/2025 KabbinaleShrinathHebbar, Mangalore Page 25 of 30 Neha Builders (P) Ltd.(supra) and that of the Hon’ble High Court of Delhi in Ansal Housing Finance & Leasing Company Ltd.(supra), had by taking support of the judgment of the Hon’ble Supreme Court in the case of CIT Vs. Vegetable Products Ltd. (1973) 88 ITR 192 (SC), had followed the decision of the Hon’ble High Court of Gujarat in Neha Builders (P) Ltd. (supra), and had concluded that the notional lettable value of the unsold flats held by the assessee cannot be determined and brought to tax under the head „Income from house property‟. Still further, a similar view had also been taken by the Tribunal in the case of M/s C.R Development Pvt. Ltd. Vs. JCIT-8(1)(OSD), Mumbai [ITA No. 4277/Mum/2012; dated 13.05.2015]. It was observed by the Tribunal that estimating of the rental income of the flats held by the assesses as stock-in-trade was not justified, as the said flats were neither given on rent nor the assessee had any intention to earn rent by letting out the same. We further find that another coordinate bench of the Tribunal i.e. ITAT, Mumbai Bench “G”, Mumbai in ITO-2(1)(1), Mumbai Vs. M/s Arihant Estates Pvt. Ltd. [ITA No. 6037/Mum/2016; dated 27.06.2018] had relied on an earlier view taken by the Tribunal in the case of M/s Runwal Constructions Vs. ACIT in [ITA No. 5408 & 5409/Mum/2016; dated 22.02.2018], and after deliberating on the judgment of the Hon’ble High Court of Gujarat in CIT Vs. Neha Builders Pvt. Ltd. (2008) 296 ITR 661 (Guj) and that of the Hon’ble High Court of Delhi in Ansal Housing Finance & Leasing Company Ltd. (2013) 354 ITR 186 (Del), has held that the assessing officer was not correct in bringing to tax the notional annual lettable value of the unsold flats which were held by the assessee as stock-in-trade. On a similar footing a similar view had also been taken by the ITAT, Mumbai Bench “G”, Mumbai in the case of Progressive Homes, Mumbai Vs. ACIT-Circle 4(4), Mumbai [ITA No. 5082/Mum/2016; dated 16.05.2018) and ITAT “H” Bench, Mumbai in Haware Engineers & Builders Pvt. Ltd. Vs. DCIT, Central Circle-4(2), Mumbai [ITA No. 7155/Mum/2016; dated 10.10.2018]. 10. In the backdrop of our aforesaid observations, respectfully following the judgment of the Hon’ble High Court of Gujarat in the case of CIT Vs. Neha Builders (P) Ltd. (2008) 296 ITR 661 (Guj) and the aforesaid orders of the coordinate benches of the Tribunal, we are of the considered view that the lower authorities had erred in determining the notional lettable value of the unsold flats held by the assessee company as stock-in-trade of its business of builders and property developers, and bringing the same to tax in the hands of the assessee under the head „Income from house property‟. We thus in terms of our aforesaid observations set aside the order of the CIT(A).”

13.1 Further, the Co-ordinate bench of the Tribunal in the case of Galaxy Developers v. ACIT vide order dated 26/05/2025

ITA No.2597/Bang/2025 KabbinaleShrinathHebbar, Mangalore Page 26 of 30 reported in [2025] 174 taxmann.com 1219 (Ahmedabad-Trib.) has also held as under-

“14. We have carefully considered the rival submissions, perused the assessment order, the impugned appellate order, the paper book placed on record, and the extensive judicial authorities cited on both sides. The dispute in this ground is centred around the addition of Rs.10,93,898/- made by the Assessing Officer and confirmed by the CIT(A), being deemed rental income attributed to 16 flats held by the assessee as unsold closing stock in its real estate project "Galaxy Opal." The core question that arises is whether notional income can be brought to tax under the head "Income from House Property" under section 22 of the Act in respect of flats held as stock-in-trade by a real estate developer for A.Y. 2017-18.

ITA No.2597/Bang/2025 KabbinaleShrinathHebbar, Mangalore Page 27 of 30 unsold units and taxed the resulting figure under section 22, allowing standard deduction of 30% u/s 24.

ITA No.2597/Bang/2025 KabbinaleShrinathHebbar, Mangalore Page 28 of 30 20. The Revenue has placed reliance on the decision of the Hon'ble Delhi High Court in CIT v. Ansal Housing & Construction Ltd. [2016] 72 taxmann.com 254/241 Taxman 418/389 ITR 373 (Delhi), where it was held that the ALV of unsold flats held by a construction company is taxable under section 22. However, that decision is clearly distinguishable as the facts involved treatment of unsold flats as fixed assets, not stock-in-trade and the judgment does not consider or discuss the Gujarat High Court's binding decision in Neha Builders (P.) Ltd. Subsequent legislative clarification by insertion of section 23(5) postdates that ruling and effectively limits its reach. Accordingly, the reliance on the judicial precedent in case of Ansal Housing (supra) does not override the jurisdictional binding authority of Hon'ble jurisdictional High Court in case of Neha Builders(supra), which must prevail.

13.2 Thus, respectfully following the decisions of the co- ordinate Benches of the Tribunal, we are of the considered view that the AO had erred in determining the notional lettable value of the unsold flats held by the assessee company as stock-in-trade of its business of builders and property developers, and bringing the same to tax in the hands of the assessee under the head „Income from house property‟. We thus direct the AO to delete the entire additions of Rs.70,35,525/- made towards the notional income from house property. Accordingly, this ground raised by the assessee is allowed.

ITA No.2597/Bang/2025 KabbinaleShrinathHebbar, Mangalore Page 29 of 30 income from unsold units held as stock in trade are not chargeable to income under the head “income from house property” and accordingly, the 30% of repairs and maintenance charges allowed by the AO u/s 24(a) of the Act is also disallowed. Before us, the AR of the assessee submitted that the assessee is not liable to pay the maintenance charges of common areas of the flats to the association. The flats are held by the assessee as stock in trade for the purposes of the business of the assessee and the expenditures incurred towards maintenance of these flats are therefore, incurred in connection with the business of the assessee and accordingly to be allowed as deduction u/s 37 of the Act. It is an undisputed fact that the assessee had paid maintenance charges of Rs.11,94,494/- towards unsold units of different projects. The AO disallowed the same by holding that the claims under two different heads on the same assets is impermissible. We are of the considered opinion that the assessee had rightly claimed the deduction of maintenance charges paid amounting to Rs.11,94,494/- u/s 37 of the Act while computing the income chargeable under the head ‘Profits & Gains from business or profession”. As the assessee is eligible to claim the maintenance charges paid u/s 37 of the Act & we have already disallowed the deduction u/s 24(a) of the Act as computed by the AO, we accordingly direct the AO to allow the deduction of Rs.11,94,494/- paid towards maintenance charges on unsold units as claimed by the assessee. In the result this ground raised by the assessee is allowed.

ITA No.2597/Bang/2025 KabbinaleShrinathHebbar, Mangalore Page 30 of 30

Order pronounced in the open court on 15th May, 2026

Sd/- Sd/- (Waseem Ahmed) (Keshav Dubey) Accountant Member Judicial Member

Bangalore, Dated 15th May, 2026. VG/SPS Copy to:

By order

Asst. Registrar, ITAT, Bangalore.