Income Tax Tribunal Rejects PCIT's Section 263 Invocation for Notional Rental Income

The Tribunal held that the Principal Commissioner of Income Tax erred in invoking Section 263 of the Income Tax Act for the Assessment Years 2014-15 and 2015-16. It was determined that the Assessing Officer had considered the issue of notional rental income on vacant flats held as stock-in-trade and had taken a possible view, not making the assessment orders erroneous. The Tribunal emphasized that the amendments introduced by the Finance Act, 2017, regarding taxing notional annual value of property held as stock-in-trade were prospective and not applicable to the assessment years in question. Consequently, the PCIT's orders were quashed, and the appeals by the assessee were allowed.

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Issues Involved:
1. Invocation of revisional jurisdiction under Section 263 of the Income Tax Act, 1961.
2. Taxability of notional rental income on vacant flats held as stock-in-trade.
3. Applicability of divergent High Court decisions on the issue.
4. Conditions for invoking Section 263 of the Act.
5. Applicability of amendments introduced by Finance Act, 2017.

Issue-wise Detailed Analysis:

1. Invocation of Revisional Jurisdiction under Section 263:
The Principal Commissioner of Income Tax (PCIT) invoked revisional jurisdiction under Section 263 of the Income Tax Act, 1961, for the Assessment Years 2014-15 and 2015-16. The PCIT issued a show cause notice on 15/03/2019, stating that the Assessing Officer (AO) failed to consider the addition of notional rental income on vacant flats, making the assessment order erroneous and prejudicial to the interest of revenue. The assessee contended that the AO had applied his mind during the assessment proceedings and made no addition regarding notional annual letting value on unsold flats held as stock-in-trade.

2. Taxability of Notional Rental Income on Vacant Flats Held as Stock-in-Trade:
The PCIT relied on the decision of the Hon’ble Delhi High Court in CIT vs. Ansal Housing Finance & Leasing Co. Ltd., which held that notional rental income on vacant flats should be added to the total income. However, the assessee argued that the AO was aware of the nature of the business and the closing inventory of flats, and after applying his mind, made no addition for notional rental value. The assessee cited the Hon’ble Gujarat High Court's decision in CIT vs. Neha Builders Pvt. Ltd., which held that income derived from property held as stock should be treated as business income, not income from house property.

3. Applicability of Divergent High Court Decisions:
The assessee pointed out that there were divergent views from non-jurisdictional High Courts on the issue. The Delhi High Court in Ansal Housing Finance & Leasing Co. Ltd. held that notional annual lettable value of unsold flats should be assessed as 'Income from House Property,' while the Gujarat High Court in Neha Builders Pvt. Ltd. held that such income should be treated as 'Business Income.' The Tribunal noted that the AO had taken one of the possible views, and the assessment order would not become erroneous just because the PCIT preferred a different view.

4. Conditions for Invoking Section 263 of the Act:
The Tribunal emphasized that for invoking Section 263, the twin conditions must be satisfied: (i) the order of the AO is erroneous, and (ii) it is prejudicial to the interests of the revenue. The Tribunal found that the AO had considered the issue during the assessment proceedings and had taken a possible view. The Hon’ble Supreme Court in Malabar Industrial Co. Ltd. v. Commissioner of Income-tax and Commissioner of Income-tax (Central) v. Max India Ltd. held that when two views are possible, the order of the AO cannot be considered erroneous.

5. Applicability of Amendments Introduced by Finance Act, 2017:
The Tribunal noted that sub-section (5) to Section 23, which taxes the notional annual value of property held as stock-in-trade, was inserted by the Finance Act, 2017, effective from 01-04-2018. This amendment is substantive and applies prospectively, not to the assessment years under consideration. Therefore, the AO could not have made any addition on account of notional rental value of flats held as stock-in-trade for the impugned assessment years.

Conclusion:
The Tribunal concluded that the PCIT erred in invoking the provisions of Section 263 of the Act. The assessment orders for both assessment years were not erroneous, and the PCIT's orders were quashed. The appeals by the assessee were allowed, and the Tribunal reiterated that the AO's view was one of the possible views and not erroneous in law.

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