The officer has added notional annual letting value on my builder-client's unsold flats for AY 2012-13. Section 23(5) did not exist then. Can he do that?
No, on the Mumbai Tribunal's view. Section 23(5) was inserted by the Finance Act 2017 with effect from AY 2018-19; for earlier years there was no provision bringing the notional annual value of unsold flats held as stock-in-trade to tax under section 22, and flats carried as stock generate business income when they are sold, not house property income while they lie unsold.
Decided by the ITAT (Shri Prashant Maharishi, Accountant Member and Shri Pavan Kumar Gadale, Judicial Member) on 2024-01-22, reported as ITA No. 2779/Mum/2023 (AY 2012-13) and ITA No. 2777/Mum/2023 (AY 2014-15); ITAT Mumbai 'G' Bench. It bears on section 22, section 23, section 23(5), section 24(a), section 143(3) of the Income Tax Act 1961, in House Property and Assessment & Scrutiny matters.
This is the whole of the pre-AY 2018-19 defence for a builder, and it is worth real money because officers reopen and revise old years on exactly this point. But the reader must know that it is not a settled national position: the Gujarat High Court in Neha Builders supports it and the Delhi High Court in Ansal Housing Finance & Leasing (354 ITR 180) is squarely the other way, and it was Ansal Housing that both the Assessing Officer and the Commissioner (Appeals) relied on here. The Tribunal preferred the Gujarat line. The argument is also self-limiting: from AY 2018-19 section 23(5) itself deems the annual value to be nil only for one year (two years from AY 2020-21) from the end of the financial year of the completion certificate, so for current years the taxpayer's case has to be built inside section 23(5), not outside it. Note too how the Tribunal disposed of Gundecha Builders — it distinguished it because there the unsold portion had actually been let, which is a warning that the defence weakens the moment any of the unsold stock is put on rent.
Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere.
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The assessee company carried on the business of construction. It built 20 flats in a building known as 'Sham Sharan' at TPS Sangamwadi, Pune. Six flats were transferred to fixed assets and let, and the rent from those was offered under income from house property after a vacancy claim; the remaining flats were carried in the balance sheet under inventories as stock-in-trade at cost. For AY 2012-13 the return declared a loss of Rs 6,24,226 and was picked up for scrutiny under CASS. By letter dated 16 January 2015 the Assessing Officer asked the assessee to explain why the flats should not be treated as deemed to be let and notional rent taxed under the head income from house property. The assessee replied on 29 March 2015 relying on the vacancy provision and on the flats being stock. The Assessing Officer was not satisfied, computed the annual let out value of the flats disclosed under stock-in-trade at Rs 47,78,400, allowed the 30 per cent deduction under section 24(a) and brought Rs 32,92,135 to tax under income from house property, assessing total income at Rs 26,67,910 by an order under section 143(3) dated 31 March 2015; the addition was later rectified under section 154 to Rs 16,67,015. The Commissioner (Appeals), National Faceless Appeal Centre, confirmed the addition, applying the Delhi High Court decision in Ansal Housing Finance & Leasing Co. Ltd. AY 2014-15 was identical except in figures.
Both appeals were allowed and the Assessing Officer was directed to delete the addition of annual let out value on the unsold flats. The annual value of unsold flats held as stock-in-trade falls to be considered under section 23(5) as inserted by the Finance Act 2017, which operates from AY 2018-19; for AY 2012-13 and AY 2014-15 there was accordingly no basis for assessing a notional annual letting value under section 22 (paragraphs 8, 9 and 11).
The Tribunal took the audited accounts as the starting point: the flats stood under inventories in the balance sheet, the rent from the six flats held as fixed assets had been separated out of business income and offered under house property, and the assessee's accounting policy had been followed consistently (paragraph 7). It then adopted in full the coordinate bench decision in Unique Estates Development Co Ltd v. DCIT (ITA No. 4598/M/2019, AY 2016-17, order dated 22 March 2021), which itself carried forward Ferani Hotels Ltd., Runwal Constructions v. ACIT (ITA Nos. 5408 and 5409/M/2016, order dated 22 February 2018), C.R. Developments P. Ltd. v. JCIT (ITA No. 4277/M/2012, order dated 13 May 2015), Makewaves Sea Resort Pvt Ltd and Perfect Scale Company Pvt Ltd. The core of that line, quoted in the order, is the Gujarat High Court in Neha Builders Pvt Ltd: if the business of the assessee is to construct the property and sell it or to construct and let it out, the business stocks, movable and immovable, are stock-in-trade and any income derived from such stocks cannot be termed income from property. Chennai Properties & Investments Ltd. v. CIT (373 ITR 673) was applied by analogy — the main object of the company being construction and development, unsold flats which were neither let nor intended to be let could not be made to yield an estimated rent under section 23. Ansal Housing Finance & Leasing Co. Ltd. (354 ITR 180 (Delhi)), on which the Revenue relied, was not followed, and CIT v. Gundecha Builders was distinguished on the ground that there the unsold portion had actually been given on rent and the rental income treated as business income, whereas here nothing had been let. On the amendment point the Tribunal set out NMS Enterprises v. Pr. CIT (ITA No. 1103/M/2022, AY 2017-18, order dated 25 January 2023), where a revision under section 263 was quashed because the charge under the deeming provision applies only from AY 2018-19 and the matter was in any event debatable.
We considering the facts, circumstances and the amendment, the annual value of unsold flats held as stock in trade has to considered as per the amendment in the finance Act 2017 under section 23(5) of the Act is applicable from A.Y 2018-19 and the present case is A.Y.2012-13.
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Handle my notice → Ask a CA on WhatsAppNo, on the Mumbai Tribunal's view. Section 23(5) was inserted by the Finance Act 2017 with effect from AY 2018-19; for earlier years there was no provision bringing the notional annual value of unsold flats held as stock-in-trade to tax under section 22, and flats carried as stock generate business income when they are sold, not house property income while they lie unsold. This was decided by the ITAT (Shri Prashant Maharishi, Accountant Member and Shri Pavan Kumar Gadale, Judicial Member) and bears on section 22, section 23, section 23(5), section 24(a), section 143(3) of the Income Tax Act 1961. It is reported as ITA No. 2779/Mum/2023 (AY 2012-13) and ITA No. 2777/Mum/2023 (AY 2014-15); ITAT Mumbai 'G' Bench. This is the whole of the pre-AY 2018-19 defence for a builder, and it is worth real money because officers reopen and revise old years on exactly this point. But the reader must know that it is not a settled national position: the Gujarat High Court in Neha Builders supports it and the Delhi High Court in Ansal Housing Finance & Leasing (354 ITR 180) is squarely the other way, and it was Ansal Housing that both the Assessing Officer and the Commissioner (Appeals) relied on here. The Tribunal preferred the Gujarat line. The argument is also self-limiting: from AY 2018-19 section 23(5) itself deems the annual value to be nil only for one year (two years from AY 2020-21) from the end of the financial year of the completion certificate, so for current years the taxpayer's case has to be built inside section 23(5), not outside it. Note too how the Tribunal disposed of Gundecha Builders — it distinguished it because there the unsold portion had actually been let, which is a warning that the defence weakens the moment any of the unsold stock is put on rent. If it applies to you, the first step is this: Establish the stock-in-trade character on the record first: produce the audited balance sheet showing the flats under inventories at cost, the accounting policy, and the fact that flats sold in earlier years were assessed as business income.
The assessee company carried on the business of construction. It built 20 flats in a building known as 'Sham Sharan' at TPS Sangamwadi, Pune. Six flats were transferred to fixed assets and let, and the rent from those was offered under income from house property after a vacancy claim; the remaining flats were carried in the balance sheet under inventories as stock-in-trade at cost. For AY 2012-13 the return declared a loss of Rs 6,24,226 and was picked up for scrutiny under CASS. By letter dated 16 January 2015 the Assessing Officer asked the assessee to explain why the flats should not be treated as deemed to be let and notional rent taxed under the head income from house property. The assessee replied on 29 March 2015 relying on the vacancy provision and on the flats being stock. The Assessing Officer was not satisfied, computed the annual let out value of the flats disclosed under stock-in-trade at Rs 47,78,400, allowed the 30 per cent deduction under section 24(a) and brought Rs 32,92,135 to tax under income from house property, assessing total income at Rs 26,67,910 by an order under section 143(3) dated 31 March 2015; the addition was later rectified under section 154 to Rs 16,67,015. The Commissioner (Appeals), National Faceless Appeal Centre, confirmed the addition, applying the Delhi High Court decision in Ansal Housing Finance & Leasing Co. Ltd. AY 2014-15 was identical except in figures. The matter was decided on 2024-01-22 by the ITAT (Shri Prashant Maharishi, Accountant Member and Shri Pavan Kumar Gadale, Judicial Member). On those facts the ITAT held as follows. Both appeals were allowed and the Assessing Officer was directed to delete the addition of annual let out value on the unsold flats. The annual value of unsold flats held as stock-in-trade falls to be considered under section 23(5) as inserted by the Finance Act 2017, which operates from AY 2018-19; for AY 2012-13 and AY 2014-15 there was accordingly no basis for assessing a notional annual letting value under section 22 (paragraphs 8, 9 and 11).
The Tribunal took the audited accounts as the starting point: the flats stood under inventories in the balance sheet, the rent from the six flats held as fixed assets had been separated out of business income and offered under house property, and the assessee's accounting policy had been followed consistently (paragraph 7). It then adopted in full the coordinate bench decision in Unique Estates Development Co Ltd v. DCIT (ITA No. 4598/M/2019, AY 2016-17, order dated 22 March 2021), which itself carried forward Ferani Hotels Ltd., Runwal Constructions v. ACIT (ITA Nos. 5408 and 5409/M/2016, order dated 22 February 2018), C.R. Developments P. Ltd. v. JCIT (ITA No. 4277/M/2012, order dated 13 May 2015), Makewaves Sea Resort Pvt Ltd and Perfect Scale Company Pvt Ltd. The core of that line, quoted in the order, is the Gujarat High Court in Neha Builders Pvt Ltd: if the business of the assessee is to construct the property and sell it or to construct and let it out, the business stocks, movable and immovable, are stock-in-trade and any income derived from such stocks cannot be termed income from property. Chennai Properties & Investments Ltd. v. CIT (373 ITR 673) was applied by analogy — the main object of the company being construction and development, unsold flats which were neither let nor intended to be let could not be made to yield an estimated rent under section 23. Ansal Housing Finance & Leasing Co. Ltd. (354 ITR 180 (Delhi)), on which the Revenue relied, was not followed, and CIT v. Gundecha Builders was distinguished on the ground that there the unsold portion had actually been given on rent and the rental income treated as business income, whereas here nothing had been let. On the amendment point the Tribunal set out NMS Enterprises v. Pr. CIT (ITA No. 1103/M/2022, AY 2017-18, order dated 25 January 2023), where a revision under section 263 was quashed because the charge under the deeming provision applies only from AY 2018-19 and the matter was in any event debatable. In the words reproduced by the source cited on this page: "We considering the facts, circumstances and the amendment, the annual value of unsold flats held as stock in trade has to considered as per the amendment in the finance Act 2017 under section 23(5) of the Act is applicable from A.Y 2018-19 and the present case is A.Y.2012-13." The decision followed or applied Unique Estates Development Co Ltd v. DCIT, ITA No. 4598/M/2019 (ITAT Mumbai) — followed and reproduced in full; CIT v. Neha Builders Pvt Ltd (Gujarat High Court) — relied on through the quoted coordinate bench orders; M/s Runwal Constructions v. ACIT, ITA Nos. 5408 and 5409/M/2016 (ITAT Mumbai) — followed; M/s C.R. Developments P. Ltd. v. JCIT, ITA No. 4277/M/2012 (ITAT Mumbai) — followed; Chennai Properties & Investments Ltd. v. CIT [2015] 373 ITR 673 (SC) — applied by analogy; NMS Enterprises v. Pr. CIT, ITA No. 1103/M/2022 (ITAT Mumbai) — followed on prospective operation of section 23(5); CIT v. Gundecha Builders — distinguished; Ansal Housing Finance & Leasing Co. Ltd. [354 ITR 180] (Delhi High Court) — relied on by the Revenue, not followed.
It was decided by the ITAT on 2024-01-22 and is reported as ITA No. 2779/Mum/2023 (AY 2012-13) and ITA No. 2777/Mum/2023 (AY 2014-15); ITAT Mumbai 'G' Bench. Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere. A Tribunal decision binds the assessing officer and the Commissioner (Appeals) within that Tribunal's jurisdiction, and is persuasive before other benches. It is not binding on a High Court, and a contrary co-ordinate bench decision will be argued against you, so check whether the point has been taken the other way before you build a reply around it. On section 22, section 23, section 23(5), section 24(a), section 143(3), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. Both appeals were allowed and the Assessing Officer was directed to delete the addition of annual let out value on the unsold flats. The annual value of unsold flats held as stock-in-trade falls to be considered under section 23(5) as inserted by the Finance Act 2017, which operates from AY 2018-19; for AY 2012-13 and AY 2014-15 there was accordingly no basis for assessing a notional annual letting value under section 22 (paragraphs 8, 9 and 11). It arises in House Property and Assessment & Scrutiny matters, on section 22, section 23, section 23(5), section 24(a), section 143(3) of the Income Tax Act 1961, and was decided by Shri Prashant Maharishi, Accountant Member and Shri Pavan Kumar Gadale, Judicial Member. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Check the assessment year before anything else. If it is AY 2018-19 or later, this line is unavailable and the argument must be run inside section 23(5) — date of the completion certificate, and one year or two years depending on whether the year falls before or after AY 2020-21. Meet Ansal Housing head-on rather than ignoring it; cite Neha Builders (Gujarat) and the coordinate-bench line (Runwal Constructions, C.R. Developments, Ferani Hotels, Unique Estates) that the Mumbai benches have consistently followed. If any part of the unsold stock was actually let during the year, segregate it — Gundecha Builders was distinguished on precisely that footing. Take an alternative ground on quantum in any event: that the annual value cannot be estimated from the rent of one let flat and must at highest rest on the municipal rateable value. Those grounds were raised here without prejudice and are worth preserving for a higher forum. If the Revenue relies on the 2017 amendment as showing that the pre-amendment position was taxable, answer it with NMS Enterprises (ITA 1103/M/2022), where the same argument was rejected in a section 263 setting.
High Courts differ on this point. The proposition this order rests on is contested at High Court level: the Gujarat High Court in CIT v. Neha Builders Pvt Ltd holds that income from property held as stock-in-trade is business income and not property income, while the Delhi High Court in Ansal Housing Finance & Leasing Co. Ltd. (354 ITR 180) holds that notional annual letting value on a builder's unsold flats is assessable under house property. The Mumbai benches have consistently followed the Gujarat line and did so here. Separately, the position for AY 2018-19 onwards is governed by section 23(5) as inserted by the Finance Act 2017 (nil annual value for one year from the end of the financial year of the completion certificate) and as extended to two years by the Finance Act 2019 from AY 2020-21, so the reasoning here speaks only to earlier years. I did not check whether the Revenue appealed this particular order to the Bombay High Court, and no later decision citing it was searched for. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Three things in the report do not sit neatly. First, the cause title of the order names the respondent as 'DCIT Circle 3(3)(1), Aayakar Bhavan, M.K. Road, Mumbai', while indiankanoon indexes the case as 'Shamdarshan Properties Private ... vs ITO Ward 3(3)(2), Mumbai'. Second, the balance sheet figures in paragraph 3 speak of 14 flats held as stock (cost Rs 45,91,986, later written Rs 45,91,896 in paragraph 7) while ground 2 speaks of 13 flats held partly as stock and partly as fixed assets. Third, the long extract set out in paragraph 7 is a quotation from Unique Estates Development Co Ltd and ends with a direction relating to 'A.Y. 2013-14'; that year belongs to the quoted order, not to this case. A livelaw report of this decision gives the date of order as 7 February 2024; the order as retrieved is pronounced on 22 January 2024, and the retrieved text is preferred. The order spells 'follow' as 'fallow' in paragraphs 8 and 9; quotations here reproduce the text exactly as printed. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
Both appeals were allowed and the Assessing Officer was directed to delete the addition of annual let out value on the unsold flats. The annual value of unsold flats held as stock-in-trade falls to be considered under section 23(5) as inserted by the Finance Act 2017, which operates from AY 2018-19; for AY 2012-13 and AY 2014-15 there was accordingly no basis for assessing a notional annual letting value under section 22 (paragraphs 8, 9 and 11).
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