Appeal partially allowed: Expenses reduced, notional income deleted. Unauthorized construction & rent issues irrelevant.

The Tribunal partially allowed the appeal by reducing the disallowance of expenses to 10% and deleting the addition of notional income from unsold stock held as stock-in-trade. The issues related to unauthorized construction and determination of average monthly rent became irrelevant as a result of the Tribunal's decision. The order was issued on 27/04/2018.

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Issues Involved:
1. Disallowance of expenses.
2. Notional income from unsold stock of the commercial complex assessed under 'Income from House Property'.
3. Unauthorized constructed area and its impact on rental income assessment.
4. Determination of Average Monthly Rent for unsold area.

Detailed Analysis:

1. Disallowance of Expenses:
The assessee, engaged in real estate development, faced a disallowance of Rs. 2,40,804/- by the AO out of total expenses of Rs. 12,04,021/- due to unverifiability. The AO requested the assessee to produce books of account and vouchers, which were not provided. The CIT(A) upheld this disallowance. The assessee argued that the expenses were fully verifiable and incurred for business purposes, citing various judicial precedents to support their claim. The Tribunal noted that while the expenses were not found excessive, the lack of supporting vouchers justified a partial disallowance. Therefore, the Tribunal directed the AO to restrict the disallowance to 10% instead of 20%.

2. Notional Income from Unsold Stock:
The AO assessed the notional annual letting value (ALV) of the unsold space in the commercial complex 'Silver Square' under sections 22 and 23 of the IT Act, based on rent from a portion let out to M/s. Domino's Pizza. This resulted in an addition of Rs. 1,04,60,370/- after deductions. The assessee contended that the unsold stock, held as stock-in-trade, should be assessed under 'Income from Business' rather than 'Income from House Property', citing judgments from the Gujarat High Court and the Supreme Court. The Tribunal acknowledged divergent views on this issue but leaned towards the assessee's stance, noting that the property held as stock-in-trade should not be subjected to notional rental income under 'Income from House Property'.

3. Unauthorized Constructed Area:
The assessee argued that the 4th floor, measuring 2355.50 sq. ft., was unauthorized and could not be let out, thus should not be considered for ALV determination. The Tribunal found that the 4th floor was indeed unauthorized and subject to demolition by municipal authorities, making it ineligible for standard rent determination. Consequently, the ALV of such property was deemed to be nil.

4. Determination of Average Monthly Rent:
The AO determined the ALV based on the rent of Rs. 77.22 per sq. ft. for the unsold area, which was contested by the assessee. The Tribunal concluded that since the unauthorized construction could not be let out and was facing demolition, the ALV for this area should be nil. Additionally, the Tribunal noted that the property was vacant not due to the assessee's intent but due to circumstances beyond their control, thus allowing the benefit of vacancy under section 23(1)(c).

Conclusion:
The Tribunal partly allowed the appeal, reducing the disallowance of expenses to 10% and deleting the addition of notional income from the unsold stock held as stock-in-trade. Consequently, grounds regarding unauthorized construction and average monthly rent became infructuous. The order was pronounced on 27/04/2018.

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