FERANI HOTELS PVT LTD,MUMBAI vs. THE DEPUTY COMMISSIONER OF INCOME TAX CIRCLE -4(2)(1), MUMBAI

/Mum/2024 Ferani Hotels Pvt Ltd “1. "Whether on the facts and circumstances of the case and in law, the CIMAL is right on restricting the addition of annual letting value to 2.5% instead of @7% made by AO?” 2. "Whether on the facts and circumstances of the case and in late, the CIT(A) is right in directing the AO to compute the annual letting value at 2.5 and provide deduction u/s 24(a) thereon?" 3. The appellant craves leave to add, amend, alter and/or vary any of the grounds of appeal before or at the time of hearing."

3. Brief facts of the case are that the assessee is a hotelier, promoter and builder and pay brokerage to M/s K Raheja Realty Pvt Ltd (in short, ‘KRRPL’). The assessee is also doing business as hotelier in Tamil Nadu. During the impugned assessment year, the assessee paid the brokerage @3% to KRRPL for selling of immovable properties. The assessee continued its deal more than 10 years with the said party. On going through the Balance Sheet of the assessee, the ld. AO noticed that inventories amount to Rs. 536,43,44,222/- which consists of finished goods amount to Rs. 307,73,03,792/-and after deducting the parking amount to Rs. 5,41,214/- the balance works out to Rs. 307,67,62,578/- which is treated as stock of the unsold and unoccupied property. During the assessment proceedings, the Ld.AO has restricted the brokerage payment to KRRPL from 3% to 2%. The determination of percentage of commission was fully relied on the his last order for A.Y. 2015-16 where he relied on the order of the TPO who has made adjustment to the brokerage amount toRs.87,35,269 being excess of brokerage paid @0.87% and restricted to @2% of the expenditure incurred towards brokerage. During the impugned assessment year, the Ld.AO followed the same directions of last assessment year and restricted expenses of brokerage @2%. The Ld. AR informed the bench that the appeal for A.Y. 2015-16 filed before the /Mum/2024 Ferani Hotels Pvt Ltd Ld.CIT(A) which is still pending. But, for impugned assessment year, the appeal was filed before the Ld. CIT(A) and Ld.CIT(A) upheld the view of the Ld.AO. Related to calculation of Annual Letting Value (ALV) on unsold stock of immovable propertiesby invoking section 23(5) of the Act, the Ld.AO has determined @7% ALP on unsold and unoccupied property amount to Rs. 307,67,62,578/- which works out to Rs.21,53,73,381/-. The Ld. AO allowed deduction @30% of the ALV and the balance amount of Rs.15,07,61,366/- was treated as net ALV which was added back with the total income of the assessee. The issue was agitated before the Ld.CIT(A). The Ld.CIT(A) determinedrate of ALV@2.5% instead of @7%and after allowing deduction, the net addition works out to Rs. 5,38,43,345/- and restricted accordingly. Finally, the appeal was partly allowed. Being aggrieved on the impugned appeal order, both the assessee and the revenue filed appeal before us.

“(iv) The sister concern of the assessee M/s. Middle East International is also assessed to tax and income assessed for the assessment year 1991-92 is Rs. 9,38,510 and for the assessment year 1992-93 is Rs. 14,65,880 and the said assessment orders have been placed on record.

(v) Under the Central Board of Direct Taxes Circular No. 6-P, dated July 6, 1968, it is stated that no disallowance is to be made under section 40A(2) in respect of the payments made to the relatives and sister concerns where there is no attempt to evade tax.

In view of the aforesaid admitted facts we are of the view that the Tribunal was correct in coming to the conclusion that the Commissioner of Income-tax (Appeals) was wrong in disallowing half per cent. commission paid to the sister concern of the assessee during the assessment years 1991-92 and 1992-93. The learned advocate appearing for the appellant was also not in a position to point out how the assessee evaded payment of tax by the alleged payment of higher commission to its sister concern since the sister concern was also paying tax at higher rate and copies of the assessment orders of the sister concern were taken on record by the Tribunal.

We, therefore, answer the above question of law raised in these appeals 6 in the affirmative and dismiss the above appeals filed by the appellant. There will, however, be no order as to costs.”

He further relied on the co-ordinate bench of ITAT, Delhi Bench “E” in the case of M/s Trinity Global Enterprises Ltd vs ITO, date of pronouncement 12/01/2024 where the co-ordinate bench upheld a similar view

“18. The assessee furnished all relevant details to A.O./CIT(A) to justify the incurrence of such expenses in the paper book from 202 to 249. The assessee submitted the Details of steps involved in insurance brokering business, party wise details of Risk Management & Supervision charges expenses, ledger A/c of Risk Mgmt Supervision Charges, ledger of M. M. Carpets, supervisory Reports of Work done by M. M. Carpets, invoices issued by M. M. Carpets, ITR Ack. of M. M. Carpets for A.Y 2011-12 and audited Balance Sheet of M. M. Carpets ending as on 31 .03.11. The assessee also replied all the queries of the Revenue wherein no discrepancy has been noticed. The similar expenses have been disallowed by the AO in A.Y. 2012-13 which has been allowed by the ld. CIT(A). Hence, the issue rest there. Further, we find that the Assessing Officer or the ld. CIT(A) have not brought any comparable cases to prove that the payments made to M.M. Carpets are more than the market averages. Thus, we find that the expenses have been indeed payable and paid, no comparable cases have been brought on record, the M. M. carpets recipient company is also a tax paying company in the highest bracket, hence the revenue’s allegation that this is ploy for tax avoidance holds no good.”

Further reliance was placed in the order of co-ordinate bench of ITAT, Chennai Bench “A” in the case of Egberts India Pvt Ltd date of pronouncement 10/06/2024. The coordinate bench has adopted a similar view regarding the restrictions on brokerage and has decided the appeal in favor of the assessee.

/Mum/2024 Ferani Hotels Pvt Ltd 5. The Ld. DR fully relied on the orders of the revenue authorities but was unable to present any contrary judgment to refute the submissions made by the Ld. AR.

/Mum/2024 Ferani Hotels Pvt Ltd In our considered view, the reduction of brokerage to 1% is unjustified and lacks any substantial basis. Accordingly, the impugned appellate order is set aside on this issue, and the addition of Rs.1,12,02,841/- made by the Ld. AO is deleted. Accordingly, ground No.1 of the assessee is allowed.

He further relied on decision of the Hon'ble High Court of Gujarat in the case of CIT Vs. NehaBuilders (P) Ltd. (2008) 296 ITR 661 (Guj), wherein it wasobserved that if the business of the assessee is to constructproperty and sell it or to construct and let out the same, thenany income derived from the immovable properties held by it asits stock-in-trade cannot be assessed under the head "Incomefrom house property". The Hon'ble High Court while concludingas herein above, had 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 'businesses 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 /Mum/2024 Ferani Hotels Pvt Ltd 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."

/Mum/2024 Ferani Hotels Pvt Ltd 10. We have considered the submissions of both parties and perused the documents available on record. During the assessment proceedings, the Ld. AOcomputed the ALV @7% on the unsold stock-in-trade of the flats. On appeal, the Ld. CIT(A)reduced the percentage of ALV to @2.5%, thereby partly allowing the appeal.

We note that Section 23 of the Act is a deeming provision applicable solely to income classified under the head “Income from House Property.” The core issue to be addressed is whether the income in question falls within the purview of Section 22 read with Section 23, i.e., “Income from House Property,” or whether it should be considered under Section 28 as “Income from Business.” In this regard, we respectfully observe that the Hon’ble Supreme Court in the case of Chennai Properties & Investments Ltd.(supra) has emphasized that the tax treatment of rental income hinges upon the business objectives and activities of the taxpayer. The Hon’ble Apex Court held that if the primary purpose of a business is letting out properties, the rental income arising therefrom must be categorized as “Income from Business,” diverging from the general presumption of taxing such income under “Income from House Property.” The nature and intent of the activities must therefore be evaluated in determining the appropriate classification. This position has also been upheld by the Hon’ble Gujarat High Court in Neha Builders (P) Ltd.(supra), where it was held that in cases where an assessee is engaged in the business of constructing and selling properties, and the unsold properties are included as closing stock in the balance sheet, such properties partake the character of stock-in-trade. Consequently, any income derived from /Mum/2024 Ferani Hotels Pvt Ltd such stock-in-trade cannot be classified as “Income from House Property.” The Hon’ble High Court further clarified that where the business of the assessee is to construct and sell properties, the properties held as stock-in-trade are to be treated as business assets, and any income derived therefrom must be considered as “Income from Business.”

This view has been reaffirmed by the coordinate bench of the ITAT, Mumbai, in the assessee’s own case, (supra). Accordingly, income generated from unsold stock-in-trade must be assessed under the head “Income from Business and Profession” and not under “Income from House Property.” Furthermore, Section 23 of the Act is a deeming provision, operating in conjunction with Section 22. However, in the present case, the application of Section 22 is inapplicable, and consequently, the determination of ALV is unwarranted. Considering the above, the addition upheld by the Ld. CIT(A) is hereby deleted. Accordingly, Ground 2(a) of the assessee’s appeal is allowed, and the revenue’s appeal is dismissed. Grounds 2(b) & 2(c) remain only for academic purposes.

ITA No.3860/Mum/2024 (Assessee’s Appeal) & (Revenue’s Appeal)for AY 2017-18