SAFAL REAL ESTATE DEVELOPERS,AHMEDABAD vs. PRINCIPAL COMMISSIONER OF INCOME TAX, AHMEDABAD-3, AHMEDABAD

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ITA 750/AHD/2024Status: DisposedITAT Chandigarh02 November 2026AY 2018-1911 pages
AI SummaryPartly Allowed

What did the Tribunal hold?

The Tribunal held that for invoking section 263, the assessment order must be erroneous and prejudicial to the revenue. The Tribunal referred to CIT Vs. Sunbeam Auto Ltd. (2011) 332 ITR 167 (Delhi) and distinguished between 'lack of inquiry' and 'inadequate inquiry'. It found that the AO had conducted a proper inquiry regarding deemed let out rent under section 23(5) and applied his mind, arriving at a plausible conclusion. The PCIT's order was based on a change of opinion, not a lack of inquiry. Therefore, the PCIT was not justified in invoking revisional jurisdiction on this issue, and the order was quashed. Regarding the valuation of closing stock, the Tribunal found that the PCIT prima facie pointed out a mistake in the valuation (assessee considered Rs. 3,321 per sq. ft. while actual cost was Rs. 3,185 per sq. ft.). The Tribunal held that the issue of closing stock valuation is distinct from the addition made under the percentage completion method. The PCIT's direction to verify the closing stock valuation was found to be correct, and the assessee's ground in this regard was dismissed. The appeal was partly allowed.

What were the facts?

The assessee, Safal Real Estate Developers, filed its return for AY 2018-19 declaring Rs. 10,91,11,920. The Assessing Officer (AO) completed the assessment under section 143(3) on 06.04.2021 at Rs. 40,54,33,090, making an addition of Rs. 29,63,21,169 on account of the percentage completion method. The Principal Commissioner of Income Tax (PCIT), Ahmedabad-3, initiated proceedings under section 263, finding the assessment order erroneous and prejudicial to the revenue. The PCIT noted that the AO failed to invoke section 23(5) regarding deemed let out rent and did not properly examine the valuation of closing stock. Consequently, the PCIT set aside the assessment order with directions to the AO to re-assess, compute addition under section 23(5), and verify closing stock valuation.

What were the issues?

1. Whether the PCIT erred in invoking section 263 of the Income Tax Act, 1961, when the AO had conducted an inquiry and passed the assessment order after considering primary details, making the order neither erroneous nor prejudicial to the revenue, and thus the assumption of power under section 263 was unjustified. 2. Whether the PCIT erred in passing the revisional order under section 263 based on surmises and conjecture that the AO had not taken cognizance of material filed during assessment proceedings. 3. Whether the PCIT erred in holding that the AO passed the assessment order without necessary inquiry and due diligence regarding deemed let out rent under section 23(5), thereby exceeding jurisdiction. 4. Whether the PCIT erred in directing the AO to pass a fresh assessment order and compute addition under section 23(5), and to verify the closing stock valuation, as these directions were erroneous and required quashing. Assessee's Contentions: The AO made proper inquiry regarding deemed let out rent and took a view, thus the PCIT's action was based on a mere change of opinion. The valuation of closing stock issue merged with the addition made under the percentage completion method, and there cannot be two different methods for revenue recognition and stock valuation. The AO had called for and examined details before passing the assessment order. Revenue's Contentions: The addition under section 23(5) was mandatorily required, and the AO's order was cryptic, showing no application of mind. The PCIT rightly exercised jurisdiction. The revenue supported the PCIT's order on the valuation of closing stock.

Which sections of the Income-tax Act were involved?

Section 263,Section 23(5),Section 143(3),Section 43CB

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, “D” BENCH, AHMEDABAD

Before: SHRI NARENDRA PRASAD SINHA & SHRI SANJAY KUMAR

For Appellant: Shri Biren Shah, AR
For Respondent: Shri R. V. Aroon Prasaad, CIT-DR
Hearing: 14.10.2026Pronounced: 02.11.2026

PER NARENDRA PRASAD SINHA, ACCOUNTANT MEMBER:

This appeal has been filed by the Assessee against the order of Principal Commissioner of Income Tax (PCIT), Ahmedabad – 3, [hereinafter referred to as “PCIT”] dated 16.03.2024 for the Assessment Year (A.Y.) 2018-19 passed in the revisional jurisdiction u/s. 263 of the Income Tax Act [hereinafter referred as “the Act”].

2.

The brief facts of the case are that the assessee had filed its return of income for A.Y. 2018-19 on 05.10.2018 declaring total income of Rs.10,91,11,920/-. The case was selected for complete scrutiny under CASS. The assessee had undertaken development of a commercial

ITA No. 750/Ahd/2024 Safal Real Estate Developers Vs PCIT, AY- 2018-19 2 scheme in the name and style “Sumel-7” and the project was substantially completed during the year. The BU permission was granted by Ahmedabad Municipal Corporation on 30.10.2015. The assessment was completed u/s 143(3) of the Act on 06.04.2021 at total income of Rs.40,54,33,090/-, wherein an addition of Rs.29,63,21,169/- was made on account of percentage completion method. Subsequently, the case record was called for and examined by the learned PCIT, who found that the AO did not invoke the provisions of section 23(5) of the Act. According to the learned PCIT, the failure of the AO to consider the provisions of section 23(5) of the Act while completing the assessment made the assessment order erroneous and prejudicial to the interest of revenue. Further, the valuation of the closing stock as done by the assessee was also not found to be in order and this aspect was not examined by the AO while completing the assessment. The Ld. PCIT, therefore, set aside the order passed u/s 143(3) of the Act dated 06.04.2021, vide the impugned order, with a direction to the AO to pass a fresh assessment order and compute the addition u/s 23(5) of the Act. Further, direction was also given to verify the working of the average cost adopted by the assessee while valuing the closing stock and make appropriate addition, if any, as per the provisions of the Act, after allowing an opportunity of being heard to the assessee.

3.

Aggrieved with the order of the Ld. PCIT, the assessee in appeal before us. The following grounds have been taken in this appeal:

1.

In law and in the facts and circumstances of the Appellant's case, the Id. PCIT grossly erred in not appreciating that in order to invoke section 263 of the Income Tax Act, 1961 (for short "the Act") two conditions must be fulfilled viz. the impugned assessment order must be erroneous and that

ITA No. 750/Ahd/2024 Safal Real Estate Developers Vs PCIT, AY- 2018-19 3

error must be prejudicial to the interest of the revenue. In the Appellant's case, ld. AO has passed the assessment order after analyzing all primary details and therefore there was no error in the impugned assessment order so as to justify action u/s 263 of the Act. In the case of Appellant, the very assumption of power u/s 263 of the Act is unjustified and bad in law and therefore, order u/s 263 of the Act deserves to be quashed. 2. In law and in the facts and circumstances of the Appellants' case, the Id. PCIT erred in passing revisional order dated 16-03-2024 under section 263 of the Act only on the surmises, conjecture and whims that ld. Assessing Officer has not take the cognizance of material filed during the course of Assessment proceeding which is bad in law. 3. In law and in the facts and circumstances of the Appellants' case, the finding of ld. PCIT that the Ld. Assessing officer has passed the order u/s 143(3) of the Act on 06-04-2021 without making necessary inquiry and without carrying out due diligence in regard to deemed let out rent u/s 23(5) of the Act during the year under consideration and Assessment Order passed for the AY 2018-19 by ld. AO dated 06-04-2021 u/s 143(3) of the Act is set aside and ld. PCIT has exceeded her jurisdiction to examine the issue. Thus, the order passed is void and bad in law. 4. In law and in facts and circumstances of the Appellant case, the Id. PCIT has failed to appreciate that the Id. AO during the course of Assessment proceeding has called for several details and after looking into the same has passed the Assessment Order dated 06-04-2021 u/s 143(3) of the Act. Thus, mere change of opinion of the Id. PCIT on the same set of facts won't make Assessment order erroneous and prejudicial to the interest of revenue. Hence, the order passed under section 263 dated 16-03-2024 is without jurisdiction, bad-in-law and void-ab-initio. 5. In law and in the facts and circumstances of the Appellants' case, the Ld. PCIT failed to appreciate that during the course of assessment, the Appellant had furnished detailed explanation with respect to the revenue recognition policy adopted for project Sumel 7. After considering the same, the Ld. A.O. passed the assessment order dated 06-04-2021. Thus, the assessment order dated 06-04-2021 is neither erroneous nor prejudicial to the interests of the revenue and therefore the impugned order has been passed merely on the basis of change of opinion. Hence, the order dated 16-03-2024 passed under section 263 of the Act is bad- in-law and the same be quashed. 6. In law and in the facts and circumstances of Appellant's case, the Id. PCIT erred in specific directing Assessing Officer to pass fresh Assessment Order and compute addition u/s 23(5) of the Act is erroneous and require to be quashed.

ITA No. 750/Ahd/2024 Safal Real Estate Developers Vs PCIT, AY- 2018-19 4 7. In law and in the facts and circumstances of the Appellant's case, the Id. PCIT erred in directing Assessing Officer for making fresh Assessment Order and verify the working adopted by Appellant while valuation of closing stock and make appropriate addition when the said method was already disturbed by erstwhile ld. AO and now accepted by ld. PCIT. There can not be two different method to recognize revenue and stock for one scheme from department. Thus, such specific direction of Id. PCIT require to be quashed. 8. The appellant craves leave to add, amend, alter or delete any of the above grounds of appeal.

4.

Shri Biren Shah, the learned AR of the assessee, submitted that the issue of deemed let out rent u/s 23(5) of the Act, was duly examined by the AO during the course of assessment proceeding. He drew our attention to the notice issued by the AO in this regard as well as the reply submitted by the assessee before the AO. The learned AR submitted that the AO, after considering the reply of the assessee, did not consider it necessary to make any addition u/s 23(5) of the Act on account of deemed let out rent. He submitted that since the AO had made proper inquiry on this issue and taken a view, the assessment order could not be held to be erroneous and prejudicial to the interests of the revenue. The Ld. Counsel contended that when the matter was examined in-depth by the AO, the Ld. PCIT was not correct in initiating proceedings under Section 263 of the Act on the ground that the matter was not examined by the AO. He further contended that the order of the learned PCIT was based on a mere change of opinion. On the issue of valuation of closing stock, the learned AR submitted that the valuation of the assessee was already disturbed by the AO while making the addition on the basis of percentage completion method and there cannot be two different methods to recognize the revenue and the closing stock.

ITA No. 750/Ahd/2024 Safal Real Estate Developers Vs PCIT, AY- 2018-19 5 5. Per contra, Shri R. V. Aroon Prasaad, the Ld. CIT-DR, supported the order of the Ld. PCIT. He submitted that the addition u/s 23(5) of the Act was mandatorily required to be made and the learned PCIT had rightly exercised his jurisdiction as the AO did not make any such addition. He further submitted that the order of the AO was cryptic, only accepting the submission of the assessee, and there was no evidence of application of mind by the AO on the issues. On the issue of valuation of closing stock, the Ld. CIT-DR supported the order of the Ld. PCIT.

6.

We have considered the rival submissions. There is no dispute to the fact that the Ld. PCIT had inherent power to review the order of the AO, if the order of the AO is found to be erroneous and prejudicial to the interest of the revenue. We have to, therefore, examine whether the basic condition that the order of the AO was erroneous and prejudicial to the interest of the revenue was satisfied in this case and if so, how this fact was brought out in the order under Section 263 of the Act passed by the Ld. PCIT. In the present case, the learned PCIT held the assessment order to be erroneous and prejudicial to the interests of the revenue on the issue of non-application of the provisions of section 23(5) of the Act. From the copy of the notice issued u/s 142(1) dated 25.11.2020, brought on record in the paper book, it is found that the AO had examined the rent received/receivable by the assessee during the year. The relevant query of the AO in this respect is reproduced below:

“6. Please provide project wise details (Completed & Under constructed) of the properties (along with its description) held by you during the year. Please also mention if it is sold (Booked) or unsold, unit wise.

ITA No. 750/Ahd/2024 Safal Real Estate Developers Vs PCIT, AY- 2018-19 6

a) Description of the property [Full Details of flats / duplex /villas sold (party wise), consideration/ Advances received (if any), area (in sft), along with copy of sale deeds], if any. b) Status of the property Complete/ incomplete c) Monthly rent and total rent received/receivable (actual let out or the letable value) during the year d) Provide computation of annual letable value of each property along with supporting documents, if applicable. e) The date of Building Use (BU) Permission received in respect of unsold units. f) The value of closing stock/ work in progress in respect of unsold unit for which BU Permission have been received. g) The value of closing stock / work in progress in respect of unsold unit for which BU Permission has not been received. h) Computation of House property income claimed at Rs 10,71,46,126/- with reference to the property details provided as above.

7.

The assessee vide letter dated 10.12.2020 filed before the AO, had made the following submissions in this regard:

“6. For the point 6(c) and 6(d) and 6(h), the Assessee Firm submits that the units that are ready for sale and not been booked / advance received for the same. Out of which the Assessee Firm has rented out certain units and from which it has earned rent income of Rs. 28,66,703/- during the year under consideration. For the ready reference the Assessee submits chart of units that has been rented out till it is booked and advance is received along with ledger copy of account vide Annexure - G

(i) Further, it is submitted that Assessee Firm had made all efforts and has been offering discounted price for its units still there is no demand for its scheme. The Assessee Firm had also tried to, provide scheme that by making installment basis they, may own, the entire unit. This scheme was circulated in the channel broker and other mediators so they would help us sale the unsold stock lying with us. The copy of such.scheme is enclosed herewith vide Annexure - H. Every Year the Assessee Firm has been increasing and incurring cost on sales promotion and marketing to attract and invite customer.

ITA No. 750/Ahd/2024 Safal Real Estate Developers Vs PCIT, AY- 2018-19 7 But it is sadden fact that over all real estate market has been facing sluggish and stagnant scenario and more particularly before incepting scheme there was likely of development of particular area and for which, heavy investment was made by us. But with the passage of time there has been negative response from the market however all best possible efforts are being made to sell the units of stock. Also the, Assessee Firm has made all efforts for renting the unsold stock at reduce rate, even in the same there is adverse response from the market. The units that are ready for sale and could not be rented out details are submitted vide Annexure -1

(ii) In view of the above, the Assessee Firm submits that considering the above facts and circumstances no deemed let out for the unsold stock be made in the instant case.

(iii) In addition to the same, the Assessee Firm submits that units that are booked and the advance has been received and subsequently conveyance deed has been executed then no deem let out of rent can be computed for the same for the fact that said units are already in constrictive possession and that without approval said units cannot be rented out or else it would violation of the contract and unlawful activity on the part of the Assessee Firm. However, if your good, self, wishes to take any adverse view then kindly provide us the specific notice along with your reasoning for the same and provide us opportunity to put forth our contention in detailed against the same”.

8.

It was thus explained that the assessee had rented out certain unsold units and had earned rental income of Rs. 28,66,703/-, which was duly offered to tax. It was further explained that the assessee-firm had made all efforts to rent out the unsold stock, but all the units could not be rented out and details of the units not rented out were also provided. It was further explained that some of the units were booked and advance was received, and such units could not have been rented out without the approval of the prospective buyers. The AO, after considering the explanation of the assessee, did not make any addition u/s 23(5) of the Act in respect of the unsold units which were not rented out during the year. From the materials as brought on record, it is evident that the AO had examined the issue of applicability of section 23(5) of the Act and after

ITA No. 750/Ahd/2024 Safal Real Estate Developers Vs PCIT, AY- 2018-19 8 considering the facts and the explanation of the assessee, no addition u/s 23(5) of the Act was made.

9.

Thus, it is apparent from the above facts that the details of deemed rental of unsold flats was called for and examined in detail by the AO in the course of assessment proceeding. After examining the details as brought on record by the assessee, the AO had taken a considered decision that no addition u/s 23(5) of the Act in respect of the unsold units which were not rented out during the year, was called for. It has been held by the Hon’ble Jurisdictional High Court in the case of CIT vs. Kamal Galani [2018] 95 taxmann.com 261 (Gujarat) that once the Assessing Officer carried out detailed inquiries, it was not open for the Commissioner to reopen the issue on mere apprehension and surmises. The Explanation-2 to Section 263 of the Act stipulates that the order of the AO will be deemed to be erroneous and prejudicial to the interest of the revenue, if such order is passed without making enquiries for verifications which should have been made or if the order is passed allowing any relief without enquiring into the claim. This condition is not found fulfilled in this case as the AO had made detailed inquiries on the issue of addition u/s 23(5) of the Act in the course of assessment proceedings. It was held by the Hon’ble Delhi High Court in the case of CIT Vs. Sunbeam Auto Ltd. - (2011) 332 ITR 167 (Delhi) that one has to see from the records as to whether there was application of mind before allowing the expenditure and one has to keep in mind the distinction between ‘lack of inquiry’ and ‘inadequate inquiry’. If there was any enquiry, even inadequate,

ITA No. 750/Ahd/2024 Safal Real Estate Developers Vs PCIT, AY- 2018-19 9 that would not by itself give occasion to the Commissioner to pass order under Section 263 of the Act merely because he has a different opinion in the matter. It is only in cases of ‘lack of inquiry’ that such a course of action would be open. The present case cannot be treated as a case of ‘lack of inquiry’ as the AO had deeply examined the issue in the course of assessment proceeding. Even if the inquiry was not adequate in the opinion of the Ld. PCIT, this doesn’t give him jurisdictional power to review the order of the AO. The scope of Commissioner’s power under Section 263 of the Act would be available when the AO conducts no enquiry or no proper enquiry or doesn’t apply his mind to the legal issues arising out of the material on record; only then the revisional power is available. In the present case, the AO did conduct proper inquiries based on which he came to a legal conclusion, which was plausible and, therefore, the Ld. PCIT was not justified in invoking the revisional jurisdiction u/s 263 of the Act directing further inquiries or taking different view in the matter on the issue of addition u/s 23(5) of the Act.

10.

In the present case, the AO had made the enquiry, applied his mind and came to the conclusion that no addition u/s 23(5) of the Act was called for. The Ld. PCIT has not brought out any inadequacy in the enquiry as conducted by the AO in the course of assessment proceeding, rather the entire foundation of the order u/s 263 of the Act is found to be based on change of opinion. As per the provision of Section 263 of the Act, the Ld. PCIT is empowered to conduct further enquiry as deemed necessary, but no such enquiry was conducted to prove that the

ITA No. 750/Ahd/2024 Safal Real Estate Developers Vs PCIT, AY- 2018-19 10 contention of the assessee as made before the AO, was not correct. The Ld. PCIT has only examined the details and evidences filed before the AO in the course of assessment and on that basis she had a different opinion about the issue decided by the AO. The powers under Section 263 of the Act cannot be exercised only on the basis of change of opinion. It had to be first established that order was erroneous and prejudicial to the interest of the revenue and, this condition is not found fulfilled in this case.

11.

In view of the above facts, we are of the considered opinion that the present order of the Ld. PCIT is not tenable in law on the issue of addition u/s 23(5) of the Act, as the foundation to exercise the revisional jurisdiction u/s 263 of the Act is missing in the present case. Therefore, the order of the PCIT passed u/s 263 of the Act on this issue is quashed and set aside. Accordingly, the grounds raised by the assessee in this regard are allowed.

12.

As regards undervaluation of stock, the learned PCIT found that the assessee had considered the cost to be charged to the Profit and Loss Account at Rs. 3,321 per sq. ft., whereas the actual cost worked out to Rs.3,185 per sq. ft. only. The assessee having adopted a higher rate for valuation of closing stock, which was not examined by the AO; this certainly resulted in the assessment order being erroneous and prejudicial to the interest of revenue. The assessee had explained that since the AO had already made addition u/s. 43CB of the Act, by applying the percentage completion method, the issue of valuation of cost had merged with the addition made by the AO, which was pending before the learned

ITA No. 750/Ahd/2024 Safal Real Estate Developers Vs PCIT, AY- 2018-19 11

CIT(A). The learned AR has reiterated the same arguments before us. The issue of valuation of closing stock and the addition on the basis of percentage completion method are altogether two different issues. Merely because the AO had made an addition by adopting the percentage completion method, he was not precluded from examining the valuation of the closing stock. Whether a separate addition in respect of valuation of closing stock was required to be made or not, is an altogether different issue. The learned PCIT has prima facie pointed out that there was a mistake in the valuation of closing stock and has, therefore, set aside the assessment order with a direction to verify the working of the average cost adopted by the assessee while valuing the closing stock, after allowing an opportunity of being heard to the assessee. We do not find anything wrong with the direction of the learned PCIT on this issue. Accordingly, the ground taken by the assessee in this regard is dismissed.

13.

In the result, the appeal of the assessee is partly allowed.

Order pronounced in the Court on 02/11/2026 at Ahmedabad.

Sd/- Sd/- (SANJAY KUMAR) (NARENDRA PRASAD SINHA) Judicial Member Accountant Member Dated – 02nd November, 2026 (True Copy) Neelesh, Sr. PS Digitally signed by JEETENDRA DEVENDRABHAI UPADHYAY आदेश क� आदेश क� �ितिलिप �ितिलिप अ�ेिषत अ�ेिषत/Copy of the Order forwarded to : आदेश आदेश क� क� �ितिलिप �ितिलिप अ�ेिषत अ�ेिषत DN: c=IN, o=PERSONAL, JEETENDRA title=6087, 2.5.4.20=7e5568a89b633f174b2 1. अपीलाथ� / The Appellant 8a80f5e63c638da40b7313fb47 DEVENDRA ebaefda841cf59d1703, 2. ��यथ� / The Respondent. postalCode=380059, BHAI st=Gujarat, 3. संबंिधत आयकर आयु� / Concerned CIT serialNumber=816dc56e896211 a1a21ccc4abc94ddc94458f4a1b 4. आयकर आयु�(अपील) / The CIT(A) UPADHYAY 37be8e1854e9399295106d4, cn=JEETENDRA DEVENDRABHAI 5. िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण / DR, ITAT, UPADHYAY Date: 2026.11.05 10:55:16 6. गाड� फाईल /Guard file. +05'30' आदेशानुसार/BY ORDER, आदेशानुसार आदेशानुसार आदेशानुसार पंजीकार (Dy./Asstt.Registrar) उप/सहायक उप सहायक पंजीकार उप उप सहायक सहायक पंजीकार पंजीकार

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