KANAKIA SPACES PRIVATE LIMITED,MUMBAI vs. ASSISTANT COMMISSIONER OF INCOME TAX-CENTRAL CIRCLE 4(1), MUMBAI

PER PAWAN SINGH, JUDICIAL MEMBER; , 7289 Mum 17 & 209 and 210 Mum 18-M/s Kanakia Spaces Pvt. Ltd.

Year 2013-14 and similarly two cross appeal for Assessment Year 2014-

15 are directed against the separate orders dated 04.10.2017 passed by ld. Commissioner of Income-tax (Appeals)-52, hereinafter referred as ld

CIT (A), Mumbai. The assessee in appeal for both the years has raised the identical grounds of appeal for adding the Annual Letting Value

(ALV) of unsold unit under the head Income from House Property.

Similarly, the revenue has raised identical ground of appeal for both the years in deleting the interest expenditure under section 36(i)(iii). As assessee as well as revenue has raised identical grounds of appeal in their respective appeals, therefore, all the appeals were clubbed heard and are decided by common order for the sake of convenience. For appreciation of facts, the appeals for Assessment Year 2013-14 are treated as lead case. The assessee has raised the following grounds of appeal.

1. The learned Commissioner of Income Tax Appeal-52, erred in law & on facts in confirming order of the assessing Officer in adding the ALV of the unsold units which constitutes stock in trade of the appellant as “Income from house Property” u/s 22 of the Income Tax Act, 1961.

2. The appellant prays that the order passed u/s. 143(3) adding sum of Rs. 1,10,11,692/- as ALV of the unsold units under the head “Income from house property” is bad in law & should be quashed.

“Whether on the facts and in the circumstances of the case and in law, Ld. CIT(A) erred in deleting the disallowance of interest expenditure of Rs. 2 , 7289 Mum 17 & 209 and 210 Mum 18-M/s Kanakia Spaces Pvt. Ltd.

2,23,67,733/- u/s 36(1)(iii) of the Act, when the assessee failed to prove that the interest paid has been utilized wholly and exclusively for the business purpose.” 3. Brief facts of the case are that the assessee-company is engaged in the business of construction, builder and developer of projects. The assessee filed its return of income for Assessment Year 2013-14 on 28.09.2013 declaring income of Rs. 15 Crore (approx). The return of income was selected for scrutiny and the assessment was completed under section 143(3) on 31.03.2016. The assessee in the return of income has offered income earned on sale of flats/ units in different projects. The unsold flats/units in various projects were shown as stock-in-trade. The Assessing Officer prepaid the summary of unsold unit in different project in the following manner:

S.No. NAME OF THE LOCALITY NO OF AREA IN PROJECTS UNITS SQ FEET 1 WESTERN EDGE I BORIVALI EAST 1 8227 2 WESTERN EDGE II BORIVALI EAST 16 22800 3 351 ICON ANDHERI EAST 8 10449 4 CHALLENGER THAKUR 4 3950 VILLAGE, ANDHERI- DAHISAR 5 EDEN ROSE MIRA ROAD 8 3600 MIRA ROAD 6 PERIWINKLE 3 800 MIRA ROAD 7 MARY GOLD 7 5600 MIRA ROAD 8 PORWAL TOWER 6 3450 MIRA ROAD 9 SANSKRUTI SHOP 2 530 MIRA ROAD 10 ANANTA 2 986 11 COUNTRY PARK III BORIVALI 1 1152 12 CINE WONDER THANE 1 190 13 NIHARIKA THANE 3 3090 4. The assessing officer issued show-cause notice to the assessee as to why the ALV of such units/flats be not treated as “Income from House , 7289 Mum 17 & 209 and 210 Mum 18-M/s Kanakia Spaces Pvt. Ltd.

Property”. The assessee filed its reply dated 19.01.2015. In the reply, the assessee stated that they are in the business of real estate development, during the course of business they constructed / developed a number projects. The different units are sold during the construction or after completion of project and the income from those units are offered for tax.

The unit lying unsold and vacant is treated as closing stock as shown in the trade of assessee. The income of sale of unsold unit is also shown under the head “Business Income”. The stock-in-trade constitutes the business asset of the assessee and no notional ALV can be assessed under the head “Income from House Property” in respect of such unsold unit.

The assessee again filed its reply dated 19.01.2016 and stated that income in respect of sale of unit is offered under the head “Income from Business and Profession”. They never have intention to hold the premises as investment and to earn rental income. When there was intention to earn rental income from the premises constructed, the assessee-company has already transferred the premises on lease to investment account at cost.

The income tax is leviable on the income earned or received and not on any notional calculations. The assessee-company holding the units/premises as stock-in-trade to earn business income. There is no intention on the part of assessee-company to earn rental income of those unsold units. Thus, the same cannot be taxed on the basis of notional ALV because the assessee-company is in occupation in the course of their 4 , 7289 Mum 17 & 209 and 210 Mum 18-M/s Kanakia Spaces Pvt. Ltd. business. The contention of assessee was not accepted by Assessing

Officer. The Assessing Officer by relying on the decision of Hon’ble

Delhi High Court in Ansal Housing Finance and Leasing Company Ltd.

(344 ITR 180 (Del) concluded that ALV of finished goods/units held by assessee at closing stock has to be treated as “Income from House

Property”. The Assessing Officer worked out the ALV of unsold units at Rs. 1,57,30,988/- and after granting 30% deduction of Rs. 47,19,296/- treated the remaining of Rs. 1,10,11,692/- as “Income from House

Property”. 5. The Assessing Officer also noted that the assessee has taken huge unsecured loan and also given loan and advances. The assessee also claimed interest expenditure of Rs. 85.69 Crore on unsecured loan against the interest income of Rs. 68.58 Crore on loan and advances. The Assessing Officer asked the assessee to furnish the business purpose of various loans and advances and issued show-cause notice as to why the interest expenditure proportionate to the interest free loan be disallowed.

The assessee filed its reply dated 19.01.2016. In the reply, the assessee enclosed chart showing detailed of non-interest bearing loan and own funds available and non-interest bearing loan given to various parties. On the basis of the details it was further stated that that assessee’s own funds and non-interest bearing loans are Rs. 245.42 Crore against which non-interest bearing loan/advances of Rs. 151.6 Crore. The assessee further contended 5 7289 Mum 17 & 209 and 210 Mum 18-M/s Kanakia Spaces Pvt. Ltd. that out of Rs. 151.6 Crore, the assessee has made advances of Rs. 50.74 Crore is towards the loan/advances to creditors. The assessee is in the business of real estate development, loan being stock-in-trade for the assessee; the said advances are in the nature of trade advances and for the purpose of business. Thus, the interest on such advances being in the nature of business, advances cannot be disallowed on notional basis. For further interest free loan of Rs. 100.32 Crore, the assessee furnished detailed of non-interest bearing loans. The assessee has given interest free loan of Rs. 80.78 Crore to wholly owned subsidiary and Rs. 6.37 Crore to its associate concern and balance of Rs. 13.17 Crore is given as interest free friendly loan. The main object of subsidiary companies and associate concern is also of real estate development. Thus, on account of business expediency, interest cannot be disallowed on notional basis on which interest free loan given. The submission of assessee was not accepted by Assessing Officer by taking view that assessee has given several interest free loans and advances, all loans and advances are forwarded from earlier years and they have been no transfer of payments during the year and have been carried forward for next years. The Assessing Officer recorded such friendly loans in para-4.5 of his order. The Assessing Officer was of the view that assessee has given interest free loans and advances, the outstanding of which at the end of year was Rs. 13.77 Crore. The assessee have borrowed the fund from various sources and claimed expenditure of Rs. 86.69 Crore 6 ITA No. 7288, 7289 Mum 17 & 209 and 210 Mum 18-M/s Kanakia Spaces Pvt. Ltd. after considering the interest received during the year, the net outgo on interest is Rs. 17.11 Crore. The assessing officer further took his view that the assessee has not brought on record any commercial expediency for advancing interest free friendly loan. The assessee has paid interest ranging from 9% to 21%. The Assessing Officer worked out 17% interest on friendly loan and thereby disallowed Rs. 2.35 Crore under section 326(1)(iii).

6. On appeal before the ld. CIT(A), the addition on account of ALV of unsold unit was upheld. However, the addition on account of disallowance under section 36(1)(iii) was deleted. Thus, aggrieved by the order of ld. CIT(A), both the parties have filed their respective cross appeals by raising the grounds of appeal which we have referred above. 7. We have heard the submissions of the ld. Authorized Representative (AR)

of the assessee and ld. Departmental Representative (DR) for the revenue and have gone through the orders of authorities below. In support of ground of appeal, the ld. AR of the assessee submits that the assessee is a builder and developer, the assessee has shown the unsold unit as stock-in- trade and the income derived from such stock-in-trade cannot be termed as ‘ Income from House Property’. The ld. AR of the assessee further submits that the assessing officer relied on the decision of Delhi High

Court in Ansal Housing Finance and Leasing Ltd (supra) and there is contrary decision of Hon’ble Gujarat High Court in case of Neha Builders 7 , 7289 Mum 17 & 209 and 210 Mum 18-M/s Kanakia Spaces Pvt. Ltd.

Pvt. Ltd. (296 ITR 661) wherein it was held that the unsold unit cannot be taxed on the basis of notional ALV. It was argued by ld ld AR for the assessee that there is no decision of Jurisdictional High Court, therefore, the assessee is entitled for the benefit of the decision favorable to the assessee. The ld. AR of the assessee further submits that in assessee’s group case in Sarang Property Developers Pvt. Ltd. in ITA No.

5620/Mum/2016) and in assessee’s own case for Assessment Year 2012-

13 in dated 31.10.2018 similar addition/disallowance was deleted. The ld. AR of the assessee further relied upon the other decision of Tribunal in ACIT Vs. Haware

Construction (P.) Ltd. [2019] 101 taxmann.com 168, Cosmospolis Construction vs. ITO in & 231/PUN/2018 dated 12.09.2018, C.R.Developments P. Ltd. vs. JCIT in dated 13.05.2015, Runwal Constructions Vs. ACIT and vice versa in ITA Nos. 5408/Mum/2016 and 5409/Mum/2016 dated 22.02.2018, ITO Vs. Arihant

Estates Pvt. Ltd. in dated 27.06.2018. 8. On the other hand the ld. DR for the revenue supported the order of the lower authorities. The ld. DR for the revenue also relied on the decision of Delhi High Court in Ansal Housing Finance and Leasing Ltd (supra). 9. We have considered the submission of parties and gone through the orders of authorities below. During the assessment the assessing officer added

Rs. 1.57 Crore under the head ‘ income from house property’ by 8 , 7289 Mum 17 & 209 and 210 Mum 18-M/s Kanakia Spaces Pvt. Ltd. estimating the deemed rental income of the assessee in respect of unsold units and after grating statutory deduction of 30% treated the remaining as ‘ income of house property’. The ld CIT(A) confirmed the action of assessing officer by relying on the decision of Delhi High Court in Ansal

Hosing Finance and Leasing Ltd (supra). We are conscious of the facts that that the legislature has inserted sub-section (5) in section 23 of the Act by Finance Act, 2017, with effect from 01.04.2018, which is not applicable for the years under consideration.

10. We have noted that in assessee’s own case for AY 2012-13, similar

addition was made by assessing officer was upheld by ld CIT(A), however on appeal before Tribunal the same was deleted in ITA No.

6686/Mum/2016 vide order dated 31.10.2018. The relevant part of the decision is extracted below:

“7. We have heard the rival submissions and perused the relevant materials on record. The reasons for our decision are given below.

On the above issue, we come across one decision for the assessee and another decision for the revenue. The decision in Neha Builders Pvt.Ltd.(supra) is for the assessee, whereas the decision in Ansal Hsg. Finance & Leasing Co. Ltd.,(supra) is for the Revenue. The Hon’ble Supreme Court in the case of CIT v. Vegetable Products 88 ITR 192 (SC) has held that “if two reasonable constructions of a taxing provisions are possible, that construction which favours the tax payer must be adopted.” Thereby, we will follow the decision in Neha Builders Pvt.Ltd. (supra).

7.1 The following sub-section (5) has been inserted after sub-section (4) of section 23 by the Finance Act, 2017, w.e.f. 01.04.2018: 9 , 7289 Mum 17 & 209 and 210 Mum 18-M/s Kanakia Spaces Pvt. Ltd.

“(5) Where the property consisting 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 nil.”

Thus, in order to give relief to Real Estate Developers, section 23 has been amended w.e.f. AY 2018-19 (FY 2017-18). By this amendment, it is provided that if the assessee is holding any house property as his stock-in- trade which is not let out for the whole or part of the year, the annual value of such property will be considered as Nil for a period up to one year from the end of the financial year in which a completion certificate is obtained from the competent authority.

In view of the above amendment to section 23, we are not adverting to the case laws relied on by the Ld. counsel and Ld. DR.

In the instant case, the assessee is in the business of real estate development. The issue of taxability is with regard to unsold flats/units of Rs.1,85,95,17,274/- held by the appellant under the head ‘Closing Inventories’. The AY is 2012-13. In view of the insertion of sub-section (5) in section 23 by the Finance Act, 2017, w.e.f. 01.04.2018 narrated hereinbefore, we set aside the order of the Ld. CIT(A) and allow the 1st & 2nd grounds of appeal.”

11. Further, in assessee’s group case the coordinate bench of Mumbai

Tribunal in Sarang Property Developers Pvt Ltd in ITA No.

5620/Mum/2016 passed the following order;

i.e. in Ansal Housing Financing & Leasing Co. Ltd. (supra) wherein it was held that assessee is liable to be taxed on notional ALV of unsold units under the head “Income from House Property”. The ld. AR of the assessee is relying upon the decision of Hon’ble Gujarat High Court in CIT vs. Neha Builders P. Ltd. (supra) wherein it was held that when the assessee-company engaged in the business of construction of property and one of the building/property was included in the closing stock in the balance-sheet drawn by assessee, the property would partake the character of “stock” and any income derived from stock would not be taken to be Income from House Property. The Hon’ble High Court further held that business of the assessee is to construct the property and sale it, then that would be the business and business stock, would be taken as “stock-in-trade” and any income derived from such stock cannot be termed as ‘Income from House Property’.

5. In the case in hand, there is no dispute that assessee treated the unsold unit is treated as ‘stock-in-trade’ in its books of account. Further, the unit sold by the assessee has been offered under the head “Income from Business”. Thus, the unsold flat which are stock-in-trade, when are sold, they are assessable under the head “Income from Business” and therefore, the Assessing Officer is not correct in bringing those units to tax on the basis of notional ALV under the head “Income from House Property”.

the income derived by assessee would be “Income from Business”. On the same analogy in the case in hand, the assessee is engaged in the business of construction and development, which is the main business of the assessee, the units which could not be sold at the end of the year and were shown as ‘stock-in-trade’, estimating rental income on notional ALV was not justified. Particularly when, there is no evidence on record that these units were either given on rent or that the assessee has intention to let out those units. The Units which are not sold are stock-in-trade and the income arising of its sale is liable to be taxed as Business Income, therefore, we do not find any justification in calculating notional ALV of the vacant units. Therefore, we direct the Assessing Officer to delete the addition made on estimate basis. In the result, Ground of appeal raised by assessee is allowed”

8. In Runawal Constructions & Runawal Builders Pvt Ltd (supra), the following order was passed;

“7. We have heard the rival submissions and perused the orders of the authorities below and the decisions relied upon. It is an undisputed fact that the assessee’s are in the business of builders, developers and construction. Both the assessee’s have constructed various projects and the projects were treated as stock in trade in the books of account. Flats sold by the assessee’s were assessed under the head 'income from business'. There were certain unsold flats in stock in trade which the AO treated as property assessable under the head 'income from house property' and computed notional annual letting value on such unsold flats placing reliance on the decision in the case of Ansal Housing Finance & Leasing Co. Ltd. (supra). The action of the AO was upheld by the learned CIT(A).

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 house property. While holding so the Hon'ble High Court observed 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.

9. 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'."

"3. The ld. AR placed the order of Bombay Tribunal in the case of M/s Perfect Scale Company Pvt. Ltd., to 3234/Mum/2013, order dated 6-9-2013, wherein it was held that in respect of assets Runwal Constructions & Runwal Builders held as business, income from the same is not assessable u/s.23(1) of the IT Act. 13 , 7289 Mum 17 & 209 and 210 Mum 18-M/s Kanakia Spaces Pvt. Ltd.

4. On the other hand, ld. DR relied on the order of Hon'ble Delhi High Court in the case of Ansal Housing Finance & Leasing Co. Ltd., 354 ITR 180 (Delhi) in support of the proposition that even in respect of unsold flats by the developer is liable to be taxed as income from house property.

10. In the case on hand before us it is an undisputed fact that both assessee’s have treated the unsold flats as stock in trade in the books of account and the flats sold by them were assessed under the head 'income from business'. Thus, respectfully following the above said decisions we hold that the unsold flats which are stock in trade when they were sold they are assessable under the head 'income from business' when they are sold and therefore the AO is not correct in bringing to tax notional annual 14 , 7289 Mum 17 & 209 and 210 Mum 18-M/s Kanakia Spaces Pvt. Ltd.

letting value in respect of those unsold flats under the head 'income from Runwal Constructions & Runwal Builders house property'. Thus, we direct the AO to delete the addition made under Section 23of the Act as income from house property.

9. Further, by following the decision of Runawal Constructions & Runawal

Builders (supra), identical relief was granted in Arihant Estate Pvt Ltd

(supra). In ACIT Vs Haware Constructions (P) Ltd (supra) the coordinate bench of Mumbai Tribunal also took the view that if a real estate developer holds any house property as his stock-in-trade which is not let out for whole or part of year, annual value of such property will be considered as Nil for a period up to one year from end of financial year in which a completion certificate is obtained.

01.04.2018; therefore, the same is not applicable for the assessment year under consideration.

raised by the assessee are allowed.

12. In the result the appeal of the assessee is allowed. by Revenue for AY 2013-14

13. The revenue has raised grounds of appeal against the deleting the interest disallowances. The ld. DR for the revenue supported the order of assessing officer. The ld. DR further submits that on similar issues the appeal for AY 2012-13 was restored by the Tribunal to the file of assessing officer. , 7289 Mum 17 & 209 and 210 Mum 18-M/s Kanakia Spaces Pvt. Ltd. Therefore, the issue raised by the revenue be also restored to the file of assessing officer.

14. On the other hand the ld AR for the assessee supported the order of the ld CIT(A). The ld. AR for the assessee submits that the assessee has sufficient interest free funds available with them, therefore, the presumption would arise that the investments were made by the assessee from interest free funds. The ld. AR submits that the assessee has interest free funds of Rs.245.42 Crore. The assessee has Share capitals of Rs.12.59 Crore, Reserve & Surplus of Rs. 145.88 Crore and interest free loans of Rs. 86.95 Crore, thus the assessee owned total interest free funds of Rs. 245.95 Crore.

The assessee advanced interest free advance and loan Rs.151.06 Crore only. Out of Rs.151.06 Crore a sum of Rs. 50.74 Crore was business advances, Rs 80.78 Crore was advanced to subsidiary and Rs. 6.37 to associate concerns. Thus, the advances given to subsidiary and associate concerns cannot be considered for disallowances in view of the decision of Supreme Court in S.A Builder (158 Taxman 74 SC). In alternative submissions that the assessee has sufficient interest free funds the ld AR for the assessee relied on the decision of Hon’ble Bombay High Court in CIT Vs Reliance Utilities & Power ltd (313 ITR 340 Bom).

“12.We have heard the rival submissions and perused the relevant materials on record. The reasons for our decision are given below.

In the case of Reliance Utilities & Power Ltd. (supra), the assessee claimed deduction of interest on borrowed capital. The AO recorded a finding that the sum of Rs.213 crores was invested out of its own funds and Rs.147 crores was invested out of borrowed funds. Accordingly, he disallowed interest amounting to Rs.4.40 crores calculated at 12% per annum for three months from January 2000 to March 2000. The Commissioner (Appeals) found that the assessee had enough interest free funds at its disposal for investment and accordingly deleted the addition of Rs.4.40 crores made by the AO and directed him to allow the deduction u/s 36(1)(iii). The order of the Commissioner (Appeals) was upheld by the Tribunal. On further appeal, the Hon’ble Bombay High Court held that if there were funds available both interest-free and overdraft and/or loans taken, then a presumption would arise that investments would be out of the interest-free funds generated or available with the company, if the interest-free funds were sufficient to meet the investments. In this case, , 7289 Mum 17 & 209 and 210 Mum 18-M/s Kanakia Spaces Pvt. Ltd. this presumption was established considering the finding of fact both by the CIT(A) and the Tribunal. Therefore, interest was deductible.

In the case of Madhav Prasad Jatia v. CIT (1979) 118 ITR 200 (SC), it has been held by the Hon’ble Supreme Court that for claiming deductions u/s 36(1)(iii), the basic requirements are:

(a) the money i.e. (capital) must have been borrowed by the assessee; (b) it must have been borrowed by the assessee for his business, profession or vocation; and (c) the assessee must have paid interest on the amount and claimed it as an allowance. We have admitted the additional evidence filed by the assessee. But we keep in mind that where an additional evidence has been allowed to be adduced, the interests of justice demand that the other side must be given an opportunity to explain or rebut such additional evidence as clarified in the decision in Smt. Urmila Ratilal v. CIT (1982) 136 ITR 797, 799 (Guj); Hiralal Devdutt Jagadhri v. Addl. CIT (1980) 18 CTR (Punj) 96, 98.

In view of the above facts and position of law, we set aside the order of the Ld. CIT(A) and remit the matter relating to the 3rd and 4th ground of appeal to the file of the AO to make a de novo order as per the ratio laid down in Madhav Prasad Jatia (supra) and Reliance Utilities & Power Ltd. (supra), after giving reasonable opportunity of being heard to the assessee. We direct the assessee to file the relevant documents/evidence before the AO.

Thus the 3rd and 4th grounds of appeal are allowed for statistical purposes.”

raised by the revenue are also restored back to the file of assessing officer to verify the facts and pass the order in accordance with law and as per the directions of the order dated 31.10.2018 in ITA No. 6686/Mum/2016. In the result the grounds of appeal raised by the revenue are allowed for statistical purpose.

17. In the result, appeal of revenue is allowed for statistical purpose.

ITA 7289/Mum/2018 for AY 2014-15 by assessee. 18. The assessee has raised identical grounds of appeal s as raised in appeal for AY 2013-14, which we have already noted that the facts for the year under consideration is also identical except variation of figure of additions, which we have allowed, therefore, following the principal of consistency the appeal for the year under consideration is also allowed with similar directions.

19. In the result the appeal of the assessee is allowed.

ITA No.210/Mum/2018 for AY 2014-15 by Revenue. 20. The revenue has raised identical grounds of appeals as raised in appeal for AY 2013-14, except variation of disallowance under section 36(1)(iii), which we have already restored to the file of assessing officer, therefore, 7289 Mum 17 & 209 and 210 Mum 18-M/s Kanakia Spaces Pvt. Ltd. following the principal of consistency the appeal for the year under consideration is also allowed with similar directions.

Order pronounced in the open court on 23/04/2019.