No Deemed Rent on Flats Sold by Builder declared as Stock-in-Trade: ITAT [Read Order]

The Income Tax Appellate Tribunal (ITAT), Pune Bench, has recently, in an appeal filed before it, held that there can be no deemed rent on flats sold by builder declared as stock-in-trade.

The aforesaid observation was made by the Pune ITAT, when an appeal was preferred before it by the assessee Pride and Expert Properties Private Limited, as directed against the order dated 31-10-2022 passed by the Commissioner of Income Tax (Appeals), Pune [CIT(A)], for assessment year 2017-18.

The ground raised by the assessee being questioning the action of CIT(A) in confirming the order of AO on account of deemed rent u/s. 23(4) of the Income Tax Act, the brief facts of the case pertaining to the issue where that the assessee was a company engaged in the business of property development, who during the course of assessment proceedings, was asked to explain as to why the deemed rent in respect of unsold units should not be brought to tax under the head “Income from house property”.

It was explained by the assessee that the 15 unsold flats cumulatively admeasuring 17341 sq. ft., were not sold during the year under consideration and that they were treated as closing stock. The assessee also stated that the said 15 unsold flats were not let out and therefore, no deemed rent u/s. 23(4) could be levied under the head “Income from house property”.

However, it was opined by the AO that the assessee was not in occupation of the said 15 unsold flats, and that having mere passive possession of the stock-in-trade does not qualify as own occupation for its business.

Accordingly, the AO held the deemed rent, as per the provisions u/s. 23(4) of the Income Tax Act, as chargeable on the stock-in-trade, thereby making the addition to an extent of Rs.25,20,000/- by ascertaining fair market annual letting value to the total income of the assessee.

Agitated by the same, the assessee filed an appeal before the CIT(A), who confirmed the view of AO, thus leaving the assessee aggrieved to prefer the instant appeal before the Pune ITAT.

With, Shri Suhas Bora, the AR , having placed on record decisions in favour of the assessee, along with the details of unsold flats, property tax receipts and copy of occupancy certificates, it was contended by the AR that the deemed rent u/s. 23(4) of the Income Tax Act, is not leviable .

The AR placed reliance on various the case laws as mentioned in pages 1 to 14 and 35 to 62 of the paper books, thereby vehemently arguing that the order of CIT(A) in confirming the order of AO in determining deemed rent u/s. 23(4) of the Income Tax Act under the head “Income from house property” is not maintainable, while on the other hand, the DR, Shri M.G. Jasnani, placed on record, the  decision of the Bombay High Court in the case of Gundecha Builders and the decision of ITAT, Mumbai Benches in the case of Dimple Enterprises , thus arguing that the decision of the High Court in the said cases, have held that the deemed rent from unsold flats is duly leviable u/s. 23(4) of the Income Tax Act, on account of income from house property.

Hearing the opposing contentions of either sides and thereby perusing the materials available on record, the Pune ITAT observed:

“We have heard both the parties and perused the material available on record. We note that the Hon’ble Bombay High Court in the case of Gundecha Builders, vide its order dated 31-07-2018 for A.Y. 2008- 09, has considered question of law which are reproduced in para 2 of the said decision. The relevant question of law in para 2(i) was as to “Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in treating the income received on letting out as house property income?”. On plain reading of the said question of law, we note that as to whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in treating the income received on letting out as house property.”

“Admittedly, the assessee therein is engaged in the business of developing real estate projects which is evident from para 3(a) of the said decision. Further, it is also noted from para 3(e) that letting of property is not the business of assessee therein. Further, the Hon’ble High Court of Bombay by placing reliance in the case of Sane & Doshi Enterprises reported in 377 ITR 165 (Bom.) dismissed the substantial question of law raised by the Revenue by holding that the said question does not give any rise to substantial question of law which is evident from para 3(f) of the said decision. It is pertinent to note that the facts in the case of Gundecha Builders (supra) before the Hon’ble High Court was that the assessee therein received rental income which was classified as income from house property which is evident from para 3(b) of the said order. There is no dispute with regard to this aspect from the ld. DR.”, the ITAT Bench further added.

“Coming to the present facts of the case the contention of assessee was that the said 15 unsold flats was not sold during the year under consideration and no rental income derived from the said unsold flats as they were not let out, hence, no deemed rent could be levied u/s. 23(4) of the Act. We note that the assessee treated the same as 15 unsold flats as stock-in-trade which means that the profits on its sale would be offered as business income and no rental income received by the assessee from such 15 unsold flats. Therefore, the facts in the case of Gundecha Builders, are different from the facts of the present case in hand. Thus, we reject the arguments of ld. DR of applicability of observation of Hon’ble High Court of Bombay in the case of Gundecha Builders. On similar issue and same identical facts, this Tribunal in the case of Sai Spacecon India Pvt. Ltd. in ITA No. 2824/PUN/2017, has held that no addition on account of deemed rent on unsold flats could be made in the hands of the assessee.”, the ITAT Panel consisting of Inturi Rama Rao, the Accountant Member, along with S.S. Viswanethra Ravi, the Judicial Member noted.

Thus, allowing the assessee’s appeal, the Pune ITAT held:

“In the light of the above, we hold that the order of CIT(A) is not justified in confirming the view of AO in levying deemed rent u/s. 23(4) of the Act on account of income from house property. Thus, the grounds raised by the assessee are allowed. In the result, the appeal of assessee is allowed.”

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