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

The Tribunal partly allowed the appeal, deleting the addition towards deemed rental income and the disallowance under section 14A. The matter of the addition under section 41(1) for a written-off liability was remanded for fresh consideration by the AO.

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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.

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