2021 (4) TMI 1163 - AT - Income Tax

Tribunal Partially Allows Appeal, Remands Section 41(1) Addition for Fresh Consideration

Kumar Properties and Real Estate Private Limited Versus DCIT, Circle-14, Pune

The Tribunal partly allowed the appeal, deleting the addition towards deemed rental income and the disallowance under section 14A. The matter of the ... Addition towards deemed rental income on stock-in-trade of unsold flats/bungalows - AO opined that the assessee ought to have offered deemed notional rental income on such vacant flats/bungalows - assessee submitted that the flats/bungalows were its stock-in-trade, from which no income could be taxed under the head ‘Income from house property’ - HELD THAT:- As flats/bungalows are occupied by the assessee owner; business of property development is carried on by the assessee; the occupation of the flats etc. is for the purpose of business; and profits of such business are chargeable to income-tax. Ergo, all the four conditions for exclusion from section 22 of the Act are cumulatively satisfied in the present case. A close scrutiny of the provision inducted by the Finance Act, 2017, transpires that where a property is held as stock-in-trade which is not let out during the year, its annual value for a period of one year, which was later enhanced by the Finance Act, 2019 to two years, from the end of the financial year in which the completion certificate is received, shall be taken as Nil. The amendment has been carried out w.e.f. 1.4.2018 and the Memorandum explaining the provisions of the Finance Bill also clearly provides that this amendment will take effect from 01.04.2018 and will, accordingly apply in relation to the assessment year 2018-19 and subsequent years.stantly, we are concerned with the assessment year 2013-14. As such, the amendment cannot apply to the year under consideration. In the absence of the applicability of such an amendment, no income can be said to have accrued to the assessee from unsold flats available as stock-in-trade. We, therefore, overturn the impugned order on this score and delete the addition of ₹ 1.47 crore sustained in the first appeal. Addition u/s.41(1) - a company, namely, M/s. JVS Komatsco Industries Pvt. Ltd. (JVSK) had to receive a sum from the assessee and the said amount was written off by the company as bad debt in its accounts for the year under consideration - HELD THAT:- The controversy has arisen out of certain purchase transactions of the assessee from JVSK during the course of its business. JVSK wrote off the sum in question its books of account, but the assessee chose not to show the corresponding income. The ld. AR submitted that the amount of ₹ 77,021/- represents the amount which was deducted by it from the invoices raised by JVSK and only the net amount was debited in its accounts. AR prayed for giving one opportunity to the assessee to place the necessary details on record to prove its case. In the given facts and circumstances, we are of the considered view that it would be in the interest of justice if the impugned order on this score is set aside and the matter is restored to the file of the AO for deciding this issue afresh after allowing hearing to the assessee. In case the assessee succeeds in proving that it recorded only the net value (after deduction) at the time of incurring expenses but JVSK recorded its gross invoice value only and the sum of ₹ 77,021/- is equivalent of the differential amount of Rs.i, then no addition would be called for u/s 41(1) of the Act. In the otherwise scenario, the AO will deal with the issue as per law. Disallowance u/s.14A - HELD THAT:- As found as an admitted position that the assessee, in fact, did not earn any exempt income from the investment made in Marigold Properties during the year under consideration. The Hon'ble Delhi High Court in Cheminvest Ltd. [2015 (9) TMI 238 - DELHI HIGH COURT] has held that if there is no exempt income, there can be no question of making any disallowance u/s 14A of the Act. Similar view has been taken by the Hon'ble Delhi High Court in CIT vs. Holcim India P. Ltd. [2014 (9) TMI 434 - DELHI HIGH COURT] More recently the Hon’ble jurisdictional High Court in Pr. CIT VS. Kohinoor Projects Pvt. Ltd. [2020 (1) TMI 1161 - BOMBAY HIGH COURT]has held that in the absence of any exempt income, there cannot be any disallowance of expenses u/s 14A. As the assessee in the instant case admittedly did not earn any exempt income during the year, respectfully following the ratio of the above decisions, we hold that no disallowance was called for. The impugned order is overturned on this score and the sustenance of the disallowance is deleted. Issues Involved:1. Addition towards deemed rental income on stock-in-trade of unsold flats/bungalows.2. Addition u/s.41(1) of the Act for a written-off liability.3. Disallowance u/s.14A for expenses related to exempt income.Issue-wise Detailed Analysis:1. Addition towards deemed rental income on stock-in-trade of unsold flats/bungalows:The primary issue concerns the addition of Rs. 1,47,65,688/- towards deemed rental income on unsold flats/bungalows held as stock-in-trade by the assessee. The Assessing Officer (AO) opined that the assessee should have offered deemed notional rental income on these vacant properties, relying on the judgment in CIT Vs. Ansal Housing Finance and Leasing Company Ltd. The AO computed the annual letting value under section 23 of the Income-tax Act, 1961, and made the addition, which was upheld by the CIT(A).The Tribunal examined whether the unsold flats/bungalows, held as stock-in-trade, could be charged under 'Income from house property'. Section 22 of the Act was scrutinized, which charges the annual value of property held by the assessee as an owner, except when occupied for business purposes. The Tribunal noted that the assessee fulfilled all the conditions for exclusion from section 22, as the properties were occupied by the assessee-owner for business purposes, and the profits from such business were chargeable to income-tax.The Tribunal also considered conflicting judgments from the Hon’ble Delhi High Court and the Hon’ble Gujarat High Court, ultimately favoring the view that income from properties held as stock-in-trade should be treated as 'Income from business'. Additionally, the Tribunal noted the amendment by the Finance Act, 2017, which prospectively provided that the annual value of stock-in-trade properties not let out would be nil for a specified period. As this amendment was not applicable to the assessment year 2013-14, the Tribunal concluded that no income accrued from the unsold flats, thus overturning the addition.2. Addition u/s.41(1) of the Act for a written-off liability:The second issue involved the addition of Rs. 77,021/- under section 41(1) of the Act. The AO observed that a company, JVSK, had written off this amount as bad debt, leading to the conclusion that the liability ceased to exist. The assessee did not object before the AO but challenged the addition before the CIT(A), who upheld it.The Tribunal reviewed the submissions and found that the controversy arose from purchase transactions where the assessee deducted certain amounts from JVSK's invoices. The AR claimed that only the net amount was recorded in the assessee's books, and the written-off amount represented this deduction. The Tribunal noted the lack of evidence to support this claim and remanded the matter to the AO for fresh consideration, directing the assessee to provide necessary details to prove its case.3. Disallowance u/s.14A for expenses related to exempt income:The third issue concerned the disallowance of Rs. 15,21,690/- under section 14A. The AO noted that the assessee had invested in a partnership firm, Marigold Properties, which returned a loss, and made a disallowance based on the average value of investment. The CIT(A) upheld the disallowance, reasoning that the loss was a negative income, not nil income.The Tribunal found that the assessee did not earn any exempt income during the year. Citing judgments from the Hon’ble Delhi High Court and the Hon’ble jurisdictional High Court, the Tribunal held that no disallowance under section 14A is warranted in the absence of exempt income. The Tribunal overturned the disallowance, noting that disallowance cannot exceed the exempt income earned during the year.Conclusion:The appeal was partly allowed. The Tribunal deleted the addition towards deemed rental income and the disallowance under section 14A, while remanding the matter of the addition under section 41(1) for fresh consideration by the AO. The order was pronounced in the Open Court on 28th April, 2021.