TNCP LLP.,COIMBATORE vs. ITO, NCW-1(1), COIMBATORE

The assessee had responded to the said notice by placing on record the details of cost of unsold units as on 31.03.2018, Year on year direct cost incurred & 2603/Chny/2025 to build 984 units as per Garden City profit and Loss account, Total Direct cost incurred on the project as a whole, Proportionate Direct Cost of 57 Units unsold but completed as well as the details of re-computed annual lettable value. Thereafter, the AO had issued the Show Cause Notice dated 27.04.2021 in proposing to make an addition of Rs.38,27,834/- as deemed income from house property, which sum was arrived by computing the ALV at 8% of the total proportionate cost of 74 units (Rs.6,83,54,183/-), which were considered as unsold and finished qualifying as house property attracting the provisions of section 23(1) of the Act, after providing standard deduction at 30%. Furthermore, the AO proposed to disallow the certain payments / contributions of Provident Fund/ESI received from employee which were deposited by the assessee beyond the due date of making payment to such relevant funds within the meaning of section 36(1)(va) r.w.s 2(24)(x) of the Act as mentioned in point No.20(b) of Tax Audit Report.

The assessee responded to the said Show Cause Notice vide reply dated 03.05.2021 and the same is reproduced herein below:

The AO after considering the reply of the assessee furnished to the Show Cause Notice had issued another notice u/s.142(1) of the Act in calling for further details on 24.08.2021 and the assessee responded to the same on 14.09.2021.

The AO after considering the said reply had proceeded to pass the scrutiny assessment order dated 20.09.2021 in making an addition of Rs.29,48,467/- as income of the assessee in terms of Section 23(1) r.w.s 23(5) of the Act after computing the estimated cost for unsold units of 57 as on 31st March 2018 (Estimated based on booking during 2017-18) at Rs.5,26,51,195/-, notional ALV at 8% on such estimated cost being Rs.42,12,096/-, providing a standard deduction at 30% in arriving at the deemed income from house property at Rs.29,48,467/-.

However, the AO had not disallowed the claim of payment of Rs.41,876/- made on account of belated remittances of the employees’ contribution to PF & ESI as mentioned in Row No.20b of the tax audit report in view of the same being disallowed by the CPC, Bengaluru while processing the return of income filed for the assessment year under consideration in the intimation order passed in terms of Section 143(1) of the Act dated 01.10.2019. & 2603/Chny/2025

The said scrutiny assessment order was passed in determining the taxable total income at Rs.2,08,18,207/-.

Thereafter, the AO had issued the Show Cause Notice u/s.274 r.w.s 270A of the Act in proposing to levy penalty u/s.270A of the Act vide Show Cause Notice dated 20.09.2021 by observing as follows:

Thereafter, the penalty order was passed u/s.270A of the Act vide order dated 15.01.2022 by holding that the addition made under the head “Income from House Property to the extent of Rs.29,48,467/- is attracted the penal rigors of ‘‘misrepresentation or suppression of facts” as prescribed u/s.270A(9)(a) r.w.s 270A(8) of the Act by imposing a penalty of Rs.20,40,808/-.

The assessee being aggrieved by both the scrutiny assessment order as well as the penalty order passed u/s.270A of the Act, had challenged the said by filing appeal before the Ld.CIT (Appeals) / NFAC, Delhi.

The assessee had contended before the Ld.CIT(Appeals) that the addition made under the head “Income from House Property” on the facts of the present case was unwarranted in view of the fact that at ‘Garden City Project’ under concern was a Joint venture project, where the land owner is a different tax payer. The assessee had adopted AS 7 to recognize its income and the balance kept under as working in progress/stock in trade and the unsold units would become the character of the stock, and any income derived from the stock, would be income from the business, no income from such unfinished stock in trade can earn /accrue to earn income as stipulated u/s.23(5) of the Act. & 2603/Chny/2025

Furthermore, the assessee submitted that the deeming provision imputed by the AO in holding that the each unsold units should have been completed and ready to use was against the facts and circumstances of the case especially in view of the fact the assessee had furnished explanation along with evidences in support of the stand that the said units could not have been be given on rent since major work like fixing of front doors, fixing of sanitary fittings and painting were to be done only once the booking is done for the customer based on their requirements.

The assessee contended that it had recognised the unsold flats as work in progress in the books of account and the flats sold by them were assessed under the head income from business and not under income from house property.

However, the said submission of the assessee came to be rejected by the Ld.CIT(Appeals) who had held as follows:

The Ld.CIT(A) vide appellate order dated 09/07/2025 had confirmed the addition made in terms of Section 23(1) r.w.s 23(5) of the Act forming part of the scrutiny assessment order dated 20.09.2021.

Similarly in the appeal arising from the penalty order dated 15.01.2022, the Ld.CIT(A) vide appellate order also dated 09.07.2025 had confirmed the levy of penalty u/s.270A of the Act by following as follows:

The assessee aggrieved by aforesaid order of the Ld.CIT(A), had filed the present appeals before us.

Before us, the Ld.AR for the assessee argued that the invocation of the deeming provisions in terms of Section 23(1) r.w.s 23(5) of the Act on the facts of the present case was unwarranted and he brought to our notice that the said deeming provision was introduced with effect from the Assessment Year under consideration and he further pointed out that the said provision also granted one year exemption period from the date of completion of the subject asset. The Ld.AR contended that the assessee had followed project completion method and the disputed asset is in the nature of work in progress (yet to be completed), thereby not attracting the provisions of Section 23(5) of the Act. Alternatively, & 2603/Chny/2025 the Ld.AR submitted that the quantification of the ALV by estimating 8% on the WIP was arbitrary and without any basis, calling for interference.

With regard to the levy of penalty u/s.270A of the Act, the Ld.AR argued that said penalty was levied in consequent to making a deeming addition for the assessment year under consideration by estimating the ALV and as such the levy of penalty in such circumstances would not fall within the provisions of “mis- reporting of income within the ambit of Section 270(9) of the Act.

Per contra, the Ld.DR for the Revenue contended that the Assessee has not demonstrated that the subject asset are work in progress before the AO and pleaded for confirming the assessment order as well as the penalty order passed in terms of Section 270A of the Act.

We have heard both the parties, pursued the material available on record and gone through the orders of the authorities along with the paperbook filed before us. The sole issue for our consideration is whether the AO was correct at making the addition of deemed house property income invoking the provisions in Section 23(5) of the Act for the Assessment Year under consideration. It is seen from the records that the assessee had followed AS 7 for reporting its income from the project under consideration, adopting Project completion method.

Even though we find force in the argument of the Ld.AR, on the non – applicability of the provisions in Section 23(5) of the Act, the stage of completion has to be examined factually for determining the year of applicability of the said provisions.

However, to serve the interest of both the sides and considering the facts of the present case, we deem it fit to estimate the ALV for the purpose of quantification of income in terms of Section 23(5) of the Act by computing the :-9-:

Accordingly, the grounds of appeal raised by the assessee in is partly allowed.

Moreover, with respect to under-reporting u/s.270A(3) of the Act, we find that AO had estimated the income without rejecting / questioning the completeness of the books and therefore, we are of the view that the facts of the present case would fall within the exceptions carved out in Section 270A(6)(b) of the Act, which provision reads as follows: