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Income Tax Appellate Tribunal, “C” BENCH, MUMBAI
Before: SHRI AMIT SHUKLA, JM & SHRI S RIFAUR RAHMAN, AM
IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH, MUMBAI BEFORE SHRI AMIT SHUKLA, JM & SHRI S RIFAUR RAHMAN, AM आयकरअपीलसं./ (निर्धारणवर्ा / Assessment Year: 2017-18) DCIT CENTRAL CIR-4(2) M/S. INORBIT MALLS P.LTD Room No.1918, 19th Floor, बिधम/ Plot No.C-30,BNLOCK-G, Air India Bldg, Nariman OPP SIDBI BANK, BKC, point Mumbai 400021 Vs. Bandra (East), Mumbai 400050 स्थायीलेखासं./जीआइआरसं./ PAN No. AAACK9106G (अपीलाथी/Appellant) (प्रत्यथी / Respondent) : अपीलाथीकीओरसे/ Appellant by : Mr. Madhur Agarwal, Adv. प्रत्यथीकीओरसे/Respondent by : Mr. Ganesh Bare, CIT DR सुनवाईकीतारीख/ : 14.07.2022 Date of Hearing घोषणाकीतारीख / : 11.10.2022 Date of Pronouncement आदेश / O R D E R Per Amit Shukla, Judicial Member:
The aforesaid appeal has been filed by the revenue against order dated 06.08.2021, passed by the Ld. CIT(A)-52 Mumbai for the quantum of assessment passed under section 153A r.w.s 143(3)
M/s. Inorbit Malls Pvt. Ltd. for the assessment year 2017-18. In the grounds appeal the revenue has raised following grounds: i) "Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) is justified in deleting the addition of Rs.6,66,43,442/- made by the Assessing Officer on account of notional income as income from house properties in respect of unsold units held by the assessee as its stock in trade without appreciating the decision of the Hon'ble Apex court in the case of S. G. Mercantile Corpn. (P) Ltd us C.I.T. AIR 1972 SC 732 and the decision of Hon'ble Delhi High Court in the case of CIT Vs. Ansal Housing Finance & Leasing Company Ltd. 354 ITR 180." ii) "On the facts and circumstances of the case and in law, the Ld CIT(A) has erred in restricting the disallowance u/s 14A of the IT Act to the extent of exempt income received by the assessee during the year under consideration without appreciating the Circular No. 5 of 2014 dated 11.02.2014 of CBDT." iii) On the facts and circumstances of the case and in law, the Ld. CIT (A) erred in deleting the disallowance u/s 14A of the IT Act while computing the book profits u/s 115JB of the IT Act without M/s. Inorbit Malls Pvt. Ltd. realizing the fact, that clause (f) of explanation (1) to section 115JB requires such adjustment to be made. iv) "The appellant craves to leave, to add, to amend and / or to alter any of the ground of appeal, if need be."
The facts and briefs with regard to issue raised in ground no.1 are that, Assessee is engaged in the business of Real Estate development, leasing and management of shopping malls etc. During the course of assessment proceeding the Assessing Officer has noted that the appellant has a stock of completed units totaling to Rs. 151,13,53,919/- out of which, it has received advances in respect of properties to the extent of Rs 39,12,96,068/-. The net unsold units with the assessee in closing stock was Rs 112,00,57,852/-. The Assessing Officer relying upon the Hon‟ble Delhi High Court decision in the case of Ansal Housing Finance and Leasing Company, reported in 354 ITR 180, held that the vacant units in the possession of the appellant are liable to be charged of notional rental income under the head „Income from house property‟ on the basis of their ALV. Rejecting the submissions made by the Assessee and in light of the failure of the M/s. Inorbit Malls Pvt. Ltd. assessee to provide the Annual Ratable Value (ALV) of the these shops and units, the Assessing Officer computed the ALV relying on certain ITAT decisions that, a return of 8.5% as rent on these properties is rational and acceptable. AO accordingly, proceeded to compute the income of the Assessee under „income from house property‟ by adopting 8.5% of the value of inventory, i.e., unsold stock of flats as its rental income. Thus, the income has been computed at Rs. 6,66,43,442/- under the head income from house property after allowing 30% standard deduction.
The Ld CIT(A) on the other hand referring to various decisions of ITAT Mumbai Bench including the judgment of; i) Haware Construction (P) Ltd. (2019) 101 taxmann.com 168(Mumbai-Trib); ii) M/s Runawal Constructions (AY: 2012-13); & iii) M/s C.R. Development Pvt. Ltd., 2477/Mum/2022(AY: 2009-2010), held that the Tribunal Benches have relied upon the judgment of Hon‟ble Gujarat High Court in the case of CIT Vs. Neha Builders, reported in 296 ITR 661, which has been inferred that Hon‟ble High Court has decided this issue in favour of the Assessee.
M/s. Inorbit Malls Pvt. Ltd.
Here the case of the Assessing Officer is that, since Hon‟ble Delhi High Court in the case of M/s Ansal Housing Finance and Leasing Company (Supra) has held that vacant units in the position of the appellant is liable to be charged of notional rental income on the basis of ALV and has to be assessed as income from house property. Whereas the Ld. CIT (A) had relied upon various Tribunal decisions wherein it has been inferred that Gujarat High Court Judgment in the case CIT Vs. Neha Builders Pvt. Ltd (Supra) lays down that notional rental income on unsold inventory of stock of flats/units cannot be assessed as income from house property. The Tribunal decisions relied upon by Ld. CIT (A) are as under: i) Hon‟ble Mumbai ITAT in the case of Runawal Constructions (ITA.No.5408 & 5409/Mum/2016). ii) Hon‟ble Mumbai Tribunal in case of Arihant Estates Pvt. Ltd (ITA No.6037/Mum/2016). iii) Hon‟ble Pune Tribunal in the case of M/s Kolte Patil Developers Limited V. DCIT (ITA No. 2206/PUN/2016). The Tribunal in all these decisions have followed the Gujarat High Court judgment in CIT Vs. Neha Builders Pvt. Ltd (Supra) to 6 M/s. Inorbit Malls Pvt. Ltd. decide this issue in favour of the assessee that notional rent cannot be taken as ALV for computing the income from house property on unsold inventory of flats.
Before us, the Ld. DR has referred to the decision of co- ordinate Bench decision of ITAT Mumbai in the case of Dimple Enterprises proceed DCIT, reported in 190 ITD 199, wherein the Tribunal has held that if Assessee is a builder but business of the Assessee is not letting of property, then rent from unsold stock is to be assets has income from house property, after following the decision of Hon‟ble Delhi High Court in the case of CIT vs. Ansal Housing Financial and Leasing Company Ltd (Supra). He pointed out that Tribunal has also considered the decision of Gujarat High Court in the case of CIT Vs. Neha Builders Pvt. (Supra).
On the other hand, Learned counsel for the Assessee referred to the decision of K. Raheja Corporate Services Pvt. Ltd vs. ACIT 3862&4085/Mum/2019 order dated 25.10.2021, where in the Tribunal has referred to other decisions of this Tribunal including M/s. Osho Developers Mumbai vs. ACIT, ITA No. 2372 and 1860/Mum/2019 dated 03.11.2020. M/s. Inorbit Malls Pvt. Ltd.
We have heard the rival submissions and perused the relevant finding given in the impugned orders. The main controversy as raised in ground No.1 is, whether notional income from unsold units held as stock-in-trade can be assessed under the head, “income from house property”. It has been canvassed before us that, there are divergent views on this issue, one view proposed by the judgment of Hon’ble Gujarat High Court in the case of CIT Vs. Neha Builders (Supra) which is in the favour of the Assessee, whereas the other view has been proposed in the decision of the Hon‟ble Delhi High Court in the case of the CIT Vs. Ansal Housing Financial Leasing Ltd. (Supra) which is in favor of the revenue. Therefore, judgment favorable the Assessee should be followed.
We have gone through the judgment in the case of CIT vs. Neha Builders, wherein following question of law was referred to the Hon‟ble High Court:-. “Whether, on the facts and in the circumstances of the case the rental income received from any property in the construction business can be claimed under the head of 'Income from property even though they said property was included in the closing stock M/s. Inorbit Malls Pvt. Ltd. and expenses on maintenance were debited to the profit and loss account?" The facts in that case was that the Assessee Company was engaged in the business of construction of property and one of the building property was included the closing stock in the balance sheet drawn for the business. The Assessee has filed the revised returned submitting that a part of its property was given on rent and the income derived on that basis should be computed under the head income from house property and not business income. The Hon‟ble High Court, had noted the following facts:
“Assessee Company is engaged in the business of construction of property, one of the building properties was included in the closing stock in the balance-sheet drawn for the business. The assessee filed a revised return submitting that a part of its property was given on rent and the income derived on that basis should be computed under the head "Income from house property and not as business income. The Assessing Officer, during the course of the assessment proceedings, observed that the expenses on maintenance of the property were M/s. Inorbit Malls Pvt. Ltd. debited to the profit and loss account and so also the building was shown as stock-in-trade, therefore, the prop would partake the character of the stock and any income derived from the stock cannot be taken to be income from the property. The Tribunal allowed the appeal observing inter alia, that any dividend received on the shares or any interest received from the bank would be taken to be income from other sources, therefore, any income derived under the head of "rent" would also become income from the property, it accordingly allowed the appeal and directed reconsideration of the matter.”
8.1 The Hon‟ble High Court, then observed and held as under; “9. From the order passed by the learned Commissioner of Income-tax 7 (Appeals), it would clearly appear that the case of the assessee 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. The development of land or property would also be one of the businesses for which the company was incorporated”.
M/s. Inorbit Malls Pvt. Ltd.
10. 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 they said property would become or par take 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.
M/s. Inorbit Malls Pvt. Ltd. From the statement of the assessee, it would clearly appear that it was treating the property as "stock-in-trade". Not only this, it will also be clear from the records that, except for the ground floor, which has been let out by the assessee, all other portions of the property constructed have been sold out. If that be so, the property, right from the beginning was a "stock in-trade". Agreeing with the submissions made by Mr. Naik, learned counsel for the Revenue, we hold that the Tribunal was not correct in granting the appeal of the assessee. For the reasons aforesaid, the reference deserves to be answered in favor of the Revenue. It is accordingly answered and stands disposed of No costs.”
Thus, there was no occasion by the Hon‟ble High Court to deal and decide the case were the property shown in the closing stock was not rented and income was to be computed on the basis of some notional rent. Albeit there was actual rent received from the property which was included in the closing stock and the controversy was, whether the rental income derived from letting out the flat is assessable under the head income from house property or M/s. Inorbit Malls Pvt. Ltd. business income, which Hon‟ble High Court held that it should be assessed as business income.
On the contrary, on this point, Hon‟ble Jurisdictional High Court in the case of Mangla Homes Pvt. Ltd. Vs. ITO, reported in (2010) 325 ITR 281(Bombay) wherein, the Hon‟ble Bombay High Court on the facts where the Assessee Company was incorporated with the object of dealing in properties and the main object of the company as contained in the memorandum of association was to carry on business of dealing and investment in properties, flats, warehouses, shops, commercial and residential houses. The ancillary object was to carry on business of leasing, hire purchase, renting, selling, re-selling or otherwise dispose of all forms of movable or immovable properties and assets including buildings, godowns, warehouses and real estate of any kind. The Assessee claimed by the assessee that the flat could not be sold because of recession in the market and hence it let out the flats on license basis for temporary period and earned monthly rental income as license fees. The assessee treated the said rental income as income from the business. The authorities below have concurrently found M/s. Inorbit Malls Pvt. Ltd. in favor of the revenue that the rental income cannot be treated as income from business and treated it as "income from house property" under section 22 of the Income-tax Act. The question thus raised was whether the Tribunal is right in so concluding that the rental income is an income from house property. Hon‟ble High Court after referring to various decisions of the Hon‟ble Supreme Court held that rental income owned by the Assessee was assessable as income from house property.
Then, again in the case of CIT Vs. Sane & Doshi Enterprises reported in (2015) 377 165 (Bombay), Hon‟ble High Court held that rental income received from unsold portion of the property constructed by the Assessee Real Estate Developer is assessable as income from house property. The Hon‟ble Jurisdictional High Court again after analyzing the entire jurisprudence and various judgments of Hon‟ble Supreme Court, finally held that rental income received from unsold portion of property constructed by Assessee, Real Estate Developers is assessable as income from house property and not business income. The Hon‟ble High Court had further observed that the treatment given in the books of M/s. Inorbit Malls Pvt. Ltd. account as stock-in-trade would not therefore, alter the character or nature of the income.
In another case of CIT Vs. Gundecha Builders reported in (2019) 102 taxmann.com 27 (Bombay), where the Assessee was engaged in the business of development of “Real Estate Project” rental income received from unsold portion of property constructed by it was assessable tax as income from house property.
Thus, in all these cases there was actual receipt rental income from the unsold stock of property and the controversy of whether income is to be assets under the head income from house property or business income. Hon‟ble Bombay High Court in all the aforesaid decisions has taken a contrary view to judgment of Hon‟ble Gujarat High Court in the case of Neha Builders and held that the rent received from property held as stock-in-trade and any rent received on such unsold closing stock, then income is assessable as „income from house property‟ and not as a “business income”.
The aforesaid ratio and principle, either of the Hon‟ble Gujarat High Court or the Hon‟ble Bombay High Court is not applicable on M/s. Inorbit Malls Pvt. Ltd. the facts of the present case, because, here in this case the Assessee had unsold units which were lying vacant and were in the possession of the Assessee Company. Assessing Officer held that these properties are liable to be taxed on notional rental income under the head „income from house property‟ on the basis of ALV. It is not a case that there is any actual receiving of rent as was the case before the Hon‟ble Gujarat High Court and Hon‟ble Bombay High Court. Had it been a case were Assessee have fetched rental income from the unsold stock, then following the principle laid down by the Hon‟ble Bombay High Court same would have been assessed under the head income from house property.
Now, coming to the decision of Hon‟ble Delhi High Court in the case of CIT Vs. Ansal Housing Finance & Leasing Company Ltd (Supra), one of the question of law referred before the Hon‟ble High Court was as under; “Whether the assessee was liable to pay income tax on the annual letting value of unsold flats owned by it under the head "income from house property"?
M/s. Inorbit Malls Pvt. Ltd. 15.1 There the facts relevant to the issue raised relate to the addition on account of annual letting value (ALV) of flats, added on notional basis are that the assessee-company engages itself in the business of development of mini-townships, construction of house property, commercial and shop complexes etc. In the assessment completed for the year under consideration, the AO assessed the ALV of flats which the assessee had constructed, but were lying unsold under the head "Income from house property". The assessee however, contended that the said flats were its stock-in trade and therefore the ALV of the flats could not be brought to tax under the head "Income from house property". The AO however did not accept the stand of the assessee and therefore, added the notional value of unsold flats to the total income of the assessee. On appeal by the assessee, the CIT(A) however set aside the addition made by the AO. The revenue's appeal to the Tribunal was unsuccessful.
Hon‟ble Delhi High Court after referring to various judgments of Hon‟ble Supreme Court, finally observed as held in under:
In the present case, the assessee is engaged in building activities. It argues that flats are held as part of its inventory of stock-in- M/s. Inorbit Malls Pvt. Ltd. trade, and are not let out. The further argument is that unlike in the other instances, where such builders let out flats, here there is no letting out and that deemed income which is the basis for assessment under the ALV method, should not be attributed. This Court is of the opinion that the argument, though attractive cannot be accepted. As repeatedly held, in East India, Housing & Land Development Trust's case (supra) Sultan Bros's case (supra) and Karan Pura Development Co. Ltd.'s case (supra) the levy of income tax in the case of one holding house property is premised not on whether the assessee carries on business, as landlord, but on the ownership. The incidence of charge is because of the fact of ownership. Undoubtedly, the decision in Vikram Cotton Mills Ltd. case (supra) indicates that in every case, the Court has to discern the intention of the assessee; in this case the intention of the assessee was to hold the properties till they were sold. The capacity of being an owner was not diminished one whit, because the assessee carried on business of developing, building and selling flats in housing estates. The argument that income tax is levied not on the actual receipt (which never arose in this case) but on a notional basis, i.e. ALV and that it is therefore not sanctioned M/s. Inorbit Malls Pvt. Ltd. by law, in the opinion of the Court is meritless. ALV is a method to arrive at a figure on the basis of which the impost is to be effectuated. The existence of an artificial method itself would not mean that levy is impermissible. Parliament has resorted to several other presumptive methods, for the purpose of calculation of income and collection of tax. Furthermore, application of ALV to determine the tax is regardless of whether actual income is received; it is premised on what constitutes a reasonable letting value, if the property were to be leased out in the marketplace. If the Assessee's contention were to be accepted, the levy of income tax on unoccupied houses and flats would be impermissible which clearly not the case is
Though, the judgment which has been referred by the Hon‟ble Delhi High Court in the case in “East India Housing & Land Development Trust (Supra)”, “Sultan Bros” and “Karan Pura Development Company Ltd”. (Supra) wherein, in all the cases the issue whether the rental income received from the property is to be assessed as business income or income of house property. No where, the Hon‟ble Supreme Court in any of the cases which has M/s. Inorbit Malls Pvt. Ltd. been referred by the Hon‟ble Delhi High Court dealt with issue of notional rental income when the property held as stock-in-trade or closing stock which has not been actually let out, is liable to be taxed as income from house property. However, be that as maybe, there is no contrary decision of any other High Court and therefore, this decision Hon‟ble Delhi High Court will have both binding and persuasive value. No direct contrary decision has been brought to our knowledge of any other High Court and we have already noted above that the decision of Hon‟ble Gujarat High Court in the case of Neha Builder (supra) was not on the issue on notional rent from unsold stock. Therefore, it cannot be held that on this issue the judgment of Hon‟ble Gujarat High Court is in favor of the Assessee and therefore, the judgment of Delhi High Court in the case of Ansal Housing Finance Leasing Company Ltd (Supra) should not be followed. Thus, in our opinion this Tribunal in the case of Dimple Enterprises vs. DCIT (Supra) as cited and relied upon by the Ld. DR has correctly appreciated this distinction.
One very important development took place post these judgments, that an amendment has been brought in the statute in M/s. Inorbit Malls Pvt. Ltd. section 23(5) which is applicable from AY 2018-2019 which reads as under, “Where the property consisting of any building or land appurtenant there to is held as stock-in trade and the property of 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 form the end of the financial year in which the certificate of completion of construction of the property is obtained from the competent authority, shall be taken to be nil.”
It is trite that the said amendment has to be given effect prospectively from 01.04.2018 as mentioned in the Explanatory Notes to the provisions of the Finance Act, 2017. It is a cardinal principle of the interpretation that the normal presumption which respect to an amendment is that is applicable prospectively unless and until specifically stated otherwise. The logic behind such as interpretation is that the law should govern current activities; i.e. to M/s. Inorbit Malls Pvt. Ltd. say “lex prospicit non respicit”, which means that “The Law looks forward and not backward.”
Now, that specific provision has been brought in the statute which provides that, if building or land held as stock in trade and the property has not been let out during the whole or any part of the previous year, then annual value of such property after the period of one year (which was increased 2 years), shall be computed as income from house property and up to period of one year/two years income shall be taken to be „nil‟. Thus, when specific provision has been brought with the effect from 01.04.2018 which cannot be applied retrospectively, then in our humble opinion it cannot be imputed that ALV of the flats held as stock in trade should be taxed on notional basis prior to AY 2018-19. Without any legislative intent or specific provision under the Act, such notional or deeming income should not be taxed as cardinal principle, because assessee is not aware that any hypothetical income is to be shown when he has not received any real or actual income. In our view of Hon‟ble Delhi High Court is too harsh an interpretation.
M/s. Inorbit Malls Pvt. Ltd. 20. Since, even prior to the amendment, there is one High Court judgment of Hon‟ble Delhi High Court which is directly on this issue and against the Assessee, therefore same needs to be followed. Accordingly, we hold that Assessing Officer is correct in computing ALV on notional rent on unsold stock, but with following riders and directions to the AO as discussed herein after.
Firstly, the flats or units on which assessee has received any advance in this year or in the earlier years but has not delivered or given final possession of the said flat/unit to the buyer, then no notional rent can be charged as it tantamount to sale. Secondly, if unit of flat is shown as work-in-progress in the books then also no notional rent can be computed. And Lastly, Ld. Assessing Officer is not justified in making estimate of 8.5% of investment as ALV which is unsustainable in view of the decision of Hon‟ble Bombay High Court in the case CIT Vs. Tip top Typography reported in 368 ITR 330, wherein, it has been held that rent should be computed at Municipal ratable value. We accordingly direct the AO to ascertain the Municipal ratable value for computing the notional rent. This is M/s. Inorbit Malls Pvt. Ltd. also been held by ITAT Mumbai Bench in the case of Dimple Enterprise Vs. DCIT (Supra), in the following manner:- “Now the question is of the rental value. The assessing officer has not levied the deemed rent on municipal ratable value or any nearly similar instance. The reliability of municipal ratable value has been duly upheld in several decisions. The Assessing Officer cannot make any ad hoc computation of deemed rent. Honorable Bombay High Court decision in the case of CIT vs. Tip Top Typography [2014] 48 taxmann.com 191/[2015] 228 Taxman 244 (Mag.)/[2014] 368 ITR 330 duly supports this proposition. Thus assessing officer has made an ad hoc estimate of 8.5% of investment on the plea that assessee has not been able to provide the municipal ratable value. This is not sustainable on the touchstone of Hon'ble Bombay High Court decision in the case of Tip Top Typography (supra). In our considered opinion nothing stops the assessing officer from obtaining the municipal ratable value from Departmental or government machinery. Hence we direct the assessing officer to compute the valuation of deemed rent in accordance with our observation as above and take into account the Hon'ble Jurisdictional High Court decision as above. Since we M/s. Inorbit Malls Pvt. Ltd. have decided the issue by duly taking note of Hon'ble Jurisdictional High Court decision and have also applied Hon'ble High Court decision, the reference to other decision in this case is not considered relevant to adjudication in this case.”
Thus, AO is directed to compute accordingly as per direction given above. Accordingly, ground No.1 of the revenue is partly allowed for statistical purposes.
In so far as, the disallowance u/s 14A, admittedly the Assessing Officer has made disallowance u/s 14A much beyond the exempt claimed by the Assessee. The Assessee has claimed exempt income of Rs. 2,47,373/- and has suo motto disallowed the entire exempt income of 2,47,373/-. The Assessing Officer has proceeded to make the disallowance of Rs. 42,98,652/-. The Ld.CIT (A) has restricted the disallowance to the extent of exempt of income after following the judgment of Hon’ble Bombay High Court M/s. Nirved Traders Pvt.Ltd. (ITA No. 149 of 2017) vide judgment dated 23.04.2019. Thus, Ld. CIT (A) is justified in restricting the disallowance to the extent of exempt of income. Accordingly, the M/s. Inorbit Malls Pvt. Ltd. order of the CIT (A) is confirmed and ground no.2 of the revenue is dismissed.
Similarly, disallowance u/s 14A, r.w.s 115JB is also dismissed as already we have deleted the disallowance u/s 14. 25. In the result appeal of the revenue is partly allowed for statistical purposes.