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Income Tax Appellate Tribunal, “D” Bench, Mumbai
THE INCOME TAX APPELLATE TRIBUNAL “D” Bench, Mumbai Shri Shamim Yahya (AM) & Shri Pavankumar Gadale (JM)
I.T.A. No. 5269/Mum/2019 (Assessment Year 2015-16)
Vs. DCIT,CC-4(2) Dimple Enterprises 1st Floor, Plot No.25 Room No.1918, Air India Girnara, “B” Wing, Building, Nariman Point Palimala Road, Mumbai-400 021 Pali Hill, Bandra(W), Mumbai-400 050 PAN : AAAFD1153H (Appellant) (Respondent)
Assessee by Shri Gautam Thackre Department by Shri R.Mishra Date of Hearing 30.03.2021 Date of Pronouncement 21.05.2021
O R D E R Per Shamim Yahya (AM) :- This appeal by the Assessee is directed against the order of learned CIT(A) dated 06.06.2019 and pertains to Assessment Year 2015-16.
The grounds of appeal read as under :
“1. The order passed by the Learned Commissioner of Income Tax(A) 52 is bad in law. 2. The Learned Commissioner of Income Tax(A) 52 has erred in dismissing the appeal and confirming the addition of Rs. 22,25,565/=(net) as notional deemed income from house property in respect of unsold units lying vacant, held as stock-in-trade(Inventory). 3. The Learned Commissioner of Income Tax(A) 52 has erred in confirming the addition, following the ratio of Ho'ble Delhi High Court in the case of Ansal Housing Finance and Leasing Company Ltd. without appreciating the fact that SLP has been granted by the Ho’ble Supreme Court against the decision. 4. The Learned Commissioner of Income Tax(A) 52 has failed to appreciate that amendment to Income Tax Act to Section 23(5) to tax Notional Deemed House Property Income on unsold units held as Inventory is prospective and therefore conversely there are no provisions to tax the same in AY 2015-16.
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The Learned Commissioner of Income Tax(A) 52 has erred in not considering various case laws cited by the appellant. 6. The Learned Commissioner of Income Tax(A) 52 has erred in not considering that no income under the head House Property is to be computed taking the ALV at 8.5% of the cost ignoring the various case laws holding the municipal ratable value be taken as ALV. 7. The appellant prays that the addition of Rs. 22,25,565/- be deleted.” 3. Brief facts of the case are that the assessee is engaged in the business of builders/construction and Real Estate Development. It filed its original return of income n 29.09.2015 declaring a total income of Rs.35,12,040/-. Consequently, notices u/s. 143(2) and 142(1) were duly issued and served on the assessee. During the course of assessment proceedings, on examining he balance sheet of the assessee, the AO ob served that unsold finished stock of units has been shown to be of Rs. 14,96,17,771/-
Upon assessing officer’s enquiry as to why the deemed rent on finished premises should not be added, the assessee explained the facts as under:-
“The assessee firm engaged in the business of construction, development, builder and dealing in real estate. In pursuance of this activity the assesee has carried out construction activity of commercial building namely ‘K’ Raheja Prime’ bearing CTS No.754 at Marol Andheri East. The said commercial project consists of nine units. Out of nine units, two units have been sold during the previous year and remaining seven units are shown as stock in trade (inventory). The unsold stock is shown as stock in trade of our business. The occupation certificate in respect of said project ‘K’ Raheja Prime’ was obtained on 24th September, 2014, subject to the certificate u/s 270-A of MMC Act shall be obtained from H.E within 3 months. The certificate u/s 270A of MMC Act has been obtained on 30/12/2014. The unsold flat, were not intended of being letout during the previous year.”
Assessee further referred to certain case law from ITAT. The assessee further submitted that the Delhi High Court decision in Ansal Housing Finance and Leasing Company Ltd (supra) is pending with Hon’ble Supreme Court. It was further submitted that amendment to section 23(5) is prospective.
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However, the assessing officer was not convinced. Referring to the Delhi High Court decision in the case of Ansal Housing Finance and Leasing Company Ltd (supra), the assessing officer concluded as under:
“4.2 As mentioned above, for arriving at the annual value of these properties the assessee was asked to provide the Annual Ratable Value of such units. However, the assessee failed to provide the same. In absence of the ALV, the annual value is arrived at by estimating the same @8.5% of the cost of construction of the property. This position has also been upheld by the Mumbai Tribunal in the following cases: a) M/s. Om Prakash & Co. (87 TTJ 183 Mum) and b) M/s. ChemMech(P) Ltd. (83 ITD 427 Mum)
Upon assessee’s appeal Ld.CIT (A) referred to Delhi High Court decision in the case of Ansal Housing Finance and Leasing Company Ltd (supra) and found the same to be applicable on the facts of the case. He further noted that as submitted assessee itself section 23(5) amendment is prospective. Learned CIT(A) further observed as under :-
5.4. It is important to note here that while deciding the issue raised in the case of Chennai Properties & Investments Ltd., the Hon'ble Supreme Court has also discussed about the judgment of the same Court in the case of East India Housing and Land Development Trust Ltd., as under :- "With this background, we first refer to the judgment of this Court in East India Housing & Land Development Trust Ltd- 's case (supra) which has been relied upon by the High Court. That was a case where the company was incorporated with the object of buying and developing landed properties and promoting and developing markets. Thus, the main objective of the company was to develop the landed properties into markets. It so happened that some shops and stalls, which were developed by it, had been rented out and income was derived from the renting of the said shops and stalls. In those facts, the question arose for consideration was whether the rental income that is received was to be treated as income from the house property or the income from the business. This court while holding that the income shall be treated as income from the house property, rested its decision in the context of the main objective of the company and took note of the fact that letting out of the property was not the object of the company at all. The court was therefore, of the opinion that the character of that income which was from the house property had not altered because it was received by the company formed with the object of developing and setting up properties.
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5.5. In the judgment in the case of Chennai Properties & Investments Ltd., the Hon'ble Supreme Court has also discussed the law laid down by it in the case of Karanpura Development Co. Ltd. vs. CIT, West Bengal. The relevant portion of the judgment is reproduced as under :-
"Before we refer to the Constitution Bench judgment in the case of Sultan Brothers (P.) Ltd. (supra), we would be well advised to discuss the law laid down authoritatively and succinctly by this Court in 'Karanpura Development Co. Ltd. v. CIT[1962] 44 ITR 362 (SC). That was also a case where the company, which was the assessee, was formed with the object, inter alia, of acquiring and disposing of the underground coal mining rights in certain coal fields and it had restricted its activities to acquiring coal mining teases over large areas, developing them as coal fields and then sub-leasing them to collieries and other companies. Thus, in the said case, the leasing out of the coal fields to the collieries and other companies was the business of the assessee. The income which was received from letting out of those mining leases was shown as business income. Department took the position that it is to be treated as income from the house property. It would be thus, clear that in similar circumstances, identical issue arose before the Court. This Court first discussed the scheme of the income Tax Act and particularly six heads under which income can be categorized/classified. It was pointed out that before income, profits or gains can be brought to computation, they have to be assigned to one or the other head. These heads are in a sense exclusive of one another and income which falls within one head cannot be assigned to. or taxed under, another head. Thereafter, the Court pointed out that the deciding factor is not the ownership of land or leases but the nature of the activity of the assessee and the nature of the operations in relation to them- It was highlighted and stressed that the objects of the company must also be kept in view to interpret the activities. In support of the aforesaid proposition, number of judgments of other jurisdictions, i.e. Privy Counsel, House of Lords in England and US Courts were taken note of The position in law, ultimately, is summed up in the following words: — "As has been already pointed out in connection with the other two cases where there is a letting out of premises and collection of rents the assessment on property basis may be correct but not so, where the letting or sub-letting is part of a trading operation. The diving line is difficult to find; but in the case of a company with its professed objects and the manner of its activities and the nature of its dealings with its property, it is possible to say on which side the operations fall and to what head the income is to be assigned."
5.6 After applying the aforesaid principle to the facts, which were there before the Court, it came to the conclusion that income had to be treated as income from business and not as income from house property. We are of the opinion that the aforesaid judgment in Karanpura Development Co. Ltd.'s case (supra) squarely applies to the facts of the present case."
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5.7. It is also relevant to refer to the concluding part of the judgement of the Hon'ble Supreme Court in the case of Chennai Properties & Investments Ltd. the relevant portion of the judgement is reproduced as under :-
"No doubt in Sultan Brothers (P.) Ltd. 's case (supra), Constitution Bench judgment of this Court has clarified that merely an entry in the object clause showing a particular object would not be the determinative factor to arrive at an conclusion whether the income is to be treated as income from business and such a question would depend upon the circumstances of each case, viz., whether a particular business is letting or not. This is so stated in the following words:— "We think each case has to be looked at from a businessman's point of view to find out whether the letting was the doing of a business or the exploitation of his property by an owner. We do not further think that a thing can by its very nature be a commercial asset. A commercial asset is only an asset used in a business and nothing else, and business may be carried on with practically all things. Therefore, it is not possible to say that a particular activity is business because it is concerned with an asset with which trade is commonly carried on. We find nothing in the cases referred, to support the proposition that certain assets are commercial assets in their very nature."
5.8. It would be seen from the above that the Hon'ble Supreme Court has held that for deciding the issue whether income from a property is to be assessed as business income or income from house property, the deciding factor is the nature of the activity of the assessee and the nature of the operations in relation to the property. In the case of East India Housing and Land Development Trust Ltd , the assessee-company was incorporated with the object of buying and developing landed properties and promoting and developing markets. Accordingly, the rental income from some shops and stalls developed and rented out by the assessee was held to be assessable as income from house property. While holding so, the Hon'ble Court took note of the fact that letting out of the property was not the object of the assessee. Similarly in the case of Karanpura Development Co. Ltd. v. CIT, the assessee was engaged in the activity of acquiring coal mining leases over large areas, developing them as coal fields and then sub-leasing them to collieries and other companies. Therefore, the Hon'ble Court held that the income received from letting out of mining leases should be treated as income from business. Further, in the case of Chennai Properties & Investments Ltd. also, it was held that rental income received from letting out of properties should be treated as business income, observing that letting out of the properties was the business of the assessee. Thus, it is clear from the judgements of the Hon'ble Supreme Court discussed above that income earned from letting out of property will be assessed as income from business, only if the assessee is engaged in the business of letting out of properties. In the present case, the appellant has never taken a stand that it is engaged in the business of letting out of properties. A stated above, it is clear from the statement of facts filed along with Form no.35 and written submissions filed by the appellant during assessment proceedings and appellate proceedings that it is engaged in the business of construction of properties and sale thereof. In fact, in the
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submissions, the appellant has also admitted that it was never its intention to earn income by letting out the premises Therefore, the ratio of the decision of Hon'ble Supreme Court in the case of East India Housing and Land Development Trust ltd. is squarely applicable to the facts of the present case. Further, the facts in the present case are identical to the facts in the case of Ansal Housing Finance & "Leasing Co. Ltd. decided by the Hon'ble Delhi High Court, and therefore, the said decision is also squarely applicable to the present case. 5.9 In view of the discussion in the foregoing paragraphs. 1 hold that the AO has rightly assessed deemed income from the unsold units in the hands of the appellant as per the provisions of Sec.22 and 23 of the Act. The AO has also rightly computed the ALV @ 8.5% of the investment which is as per the ratio of the decision in the cases of M/s. Om Prakash & Co. (87 TTJ 183) (ITAT, Mumbai) and M/s. Chem Mech P. Ltd. (83 ITD 427)(ITAT, Mumbai). Accordingly, the addition of Rs. 22,25,565/- made by the AO after adopting the deemed rental income to be of Rs 31,79,378/- is upheld and the ground taken by the appellant are rejected. Accordingly, the only ground of appeal in the present case is dismissed.”
Against the above order, assessee is in appeal before us.
We have heard both the parties and perused the records. We have carefully considered the submissions and perused the records. The only issue for our consideration is the levy of deemed rent on the unsold real estate property of the assessee who is a real estate developer. It is not the case of the assessee that its object include letting out of the property. In fact before the assessing officer it was submitted that assessee has never contemplated leasing or renting the property.
On this issue of deemed rent on unsold stock of real estate the only High Court order available is that of the honourable Delhi High Court in the case of Ansal Properties (Supra). It has been mistakenly referred that honourable Gujarat High Court decision in the case of CIT versus Neha builders (266 ITR 661) is in favour of the assessee. The question decided by honourable Gujarat High Court in the above said case was as under :-
“Whether on the facts and in the circumstances of the case, the rental income from any property in the construction business can be claimed under the head of “Income from Property’ even though the said property was included in the closing stock and expenses on maintenance were debited to the P&L a/c?”
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The honourable High Court had adjudicated the issue as under :-
“8. 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.
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'.”
Thus honourable High Court had never expounded on the issue before us nor it was seized with the issue of deemed rent on unsold stock of flats. Moreover we also note that honourable jurisdictional High Court in the case of CIT versus Gundecha builders by the order dated 31 July 2018 has held that if the assessee is a builder but is not engaged in the business of letting of property, the lease rent from unsold flats is assessable to tax under the head income from house property.
Thus on the touchstone of above said jurisdictional High Court decision which is binding upon us the exposition that emanates is that if the business of the assessee is not letting of the property, then the rent from the unsold stock is to be assessed as income from house property. This is another reason why no help is drawn to be assessee by referring the decision of Neha Builders (supra).
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We note that honourable Delhi High Court in the case of Ansal Housing Finance & Leasing Co. Ltd. (supra) had expounded as under :- “13. 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 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, Sultan, and Karanpura, 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 indicates that in every case, the Court has to discern the intention of the assessee; in this case the intention of the assesse 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 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 is clearly not the case.
As far as the alternative argument that the assessee itself is occupier, because it holds the property till it is sold, is concerned, the Court does not find any merit in this submission. While there can be no quarrel with the proposition that "occupation" can be synonymous with physical possession, in law, when Parliament intended a property occupied by one who is carrying on business, to be exempted from the levy of income tax was that such property should be used for the purpose of business. The intention of the lawmakers, in other words, was that occupation of one's own property, in the course of business, and for the purpose of business, i.e. an active use of the property, (instead of mere passive possession) qualifies as "own" occupation for business purpose. This contention is, therefore rejected. Thus, this question is answered in favour of the revenue, and against the assessee.”
From the above it is amply clear that deemed rent on the unsold stock is exigible to tax under the head income from house property. The assessee has contended that the provisions of section 23(5) are prospective and hence not
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applicable in the present assessment year. We may gainfully referred to the provision of section 23(5) :-
“23(5) Where the property consisting of any building or land appurtenant thereto is held as stock-in-trade and the property or any part of the property is not let during the whole or any part of the previous year, the annual value of such property or part of the property, for the period up to [one year] from the end of the financial year in which the certificate of completion of construction of the property is obtained from the competent authority, shall be taken to be nil.”
The finance bill included the following explanatory note in this regard :- “No notional income for house property held as stock-in-trade Section 23 of the Act provides for the manner of determination of annual value of house property. Considering the business exigencies in case of real estate developers, it is proposed to amend the said section so as to provide that where the house property consisting of any building and land appurtenant thereto is held as stock-in-trade and the property or any part of the property is not let during the whole or any part of the previous year, the annual value of such property or part of the property, for the period upto one year from 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 This amendment will take effect from 1st April, 2018 and will, accordingly apply in relation to assessment year 2018-19 and subsequent years.”
From the above it is amply clear that the said section was inserted to provide relief to the builders and developers from the ambit of deemed rent on unsold stock already present in the sanguine provisions of section 23, for a period of one year with effect from 1.4.2018. Hence the assessee is mistaken in its plea that deemed rent has been levied under the provisions of section 23(5) which as per the claim of the assessee is prospective. As we have noted that it is nobody's case that deemed rent is to be levied under the provisions of section 23(5). Hence this plea of the assessee that deemed rent was not leviable as section 23(5) was not in existence in the statute books for the impugned assessment year is totally unsustainable
Thus from the decision and precedence from Hon'ble Delhi High Court in the case of Ansal Housing Finance & Leasing Co. Ltd.(supra) read alongwith
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Hon'ble Jurisdictional High Court decision in CIT Vs. Gundecha Builders (supra), it is amply clear that deemed rent from the unsold stock is duly leviable on the assessee on the facts of present case. Hence principally we do not find any infirmity in the proposition that deemed rent is leviable upon the assessee.
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 adhoc computation of deemed rent. Hounourable Bombay High Court decision in the case of CIT Vs. Tip Top Typography (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 have decided the issue by duly taking note of Hon'ble Jurisdictional High Court decision and have also applied Hon'ble Delhi High Court decision, the reference to other decision in this case is not considered relevant to adjudication in this case.
In the result this appeal by the assessee stands partly allowed for statistical purposes. Pronounced in the open court on 21.5.2021.
Sd/- Sd/- (PAVANKUMAR GADALE) (SHAMIM YAHYA) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai; Dated : 21/05/2021
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Copy of the Order forwarded to : 1. The Appellant 2. The Respondent 3. The CIT(A) 4. CIT 5. DR, ITAT, Mumbai 6. Guard File. BY ORDER, //True Copy// (Assistant Registrar) PS ITAT, Mumbai