2022 (5) TMI 459 - AT - Income Tax

Tribunal upholds CIT(A)'s decisions on on-money and deemed rent additions.

The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decisions on both issues. The restriction of the addition on account of on-money to ... Taxation of on-money receipts - profit element in undisclosed receipts - revenue recognition method - estimation of net profit rate on on-money - treatment of unsold property as stock-in-trade - deemed rent/annual letting value on unsold unitsTaxation of on-money receipts - revenue recognition method - Whether the on-money of Rs.6,70,51,310/- seized in search is taxable in Assessment Year 2016-17 or in earlier/subsequent years when corresponding flats were sold and income recognised. - HELD THAT: - The Tribunal accepted the finding of the CIT(A) that the on-money of Rs.6,70,51,310/- related to flats sold in other years and that income arising from those sales had been recognised and assessed in the respective years under the assessee's regular revenue recognition method. The Tribunal observed that the Assessing Officer had himself treated receipts for certain years in the assessment orders for those years, and that taxing the same receipts afresh in AY 2016-17 would be inconsistent with that accepted method. Reliance placed by the CIT(A) on earlier judicial decisions dealing with the year of taxation of on-money receipts was noted and the Tribunal found no reason to interfere with the CIT(A)'s conclusion deleting the addition insofar as it related to Rs.6,70,51,310/-. [Paras 7]Addition of Rs.6,70,51,310/- deleted for AY 2016-17; amount to be taxed in the years when corresponding flats were sold and income recognised.Profit element in undisclosed receipts - estimation of net profit rate on on-money - Whether the on-money of Rs.3,03,50,000/- received in the year under consideration is taxable as entire receipts or only to the extent of the profit embedded therein, and if so at what rate. - HELD THAT: - The Tribunal upheld the CIT(A)'s conclusion that where cash/on-money represents undisclosed sale proceeds, the entire amount is not taxable as income but only the profit element embedded therein can be brought to tax. The Tribunal accepted the judicial principle relied upon by the CIT(A) and noted that the Assessing Officer had not allowed corresponding construction cost/expenditure while treating the whole receipt as income. Having regard to the assessee's own declared profit ratios and precedents cited by the CIT(A), the Tribunal found the estimate of net profit at 20% on the on-money fair and reasonable. In view of the above, the Tribunal sustained the CIT(A)'s restriction of the Assessing Officer's addition to Rs.60,70,000/- (20% of Rs.3,03,50,000/-). [Paras 8]Addition in respect of on-money receipts of Rs.3,03,50,000/- restricted to Rs.60,70,000/- being 20% profit element; balance deleted.Treatment of unsold property as stock-in-trade - deemed rent/annual letting value on unsold units - Whether Annual Letting Value (deemed rent) can be computed and taxed on unsold flats/units held as stock-in-trade of a builder, notwithstanding that they were unsold and not actually let out. - HELD THAT: - The Tribunal agreed with the CIT(A) that unsold flats treated as stock-in-trade in the assessee's books cannot be notionally assessed as income from house property by computing annual letting value. The Tribunal relied on the principle that where property is held as stock-in-trade of a business of construction and sale, any income arising from such property partakes the character of business income and not income from house property. Judicial decisions dealing with similar facts and the treatment of unsold units as business stock were noted, and the Tribunal found no justification for the Assessing Officer's computation of deemed rent. Consequently, the addition made on account of deemed rent was deleted. [Paras 12]Addition of Rs.87,40,000/- as deemed rent deleted; unsold units held as stock-in-trade are not liable to notional ALV under income from house property.Final Conclusion: The Tribunal dismissed the Revenue's appeal: the Assessing Officer's addition of Rs.9,74,01,310/- on account of on-money was restricted to Rs.60,70,000/- (taxing only the profit element of on-money received in AY 2016-17 and directing taxation of other on-money in the years of sale), and the addition of Rs.87,40,000/- as deemed rent on unsold units held as stock-in-trade was deleted. Issues Involved:1. Restriction of addition on account of on-money received by the assessee.2. Deletion of addition on account of deemed rent for unsold units.Issue-wise Detailed Analysis:1. Restriction of Addition on Account of On-Money Received by the Assessee:The Revenue challenged the CIT(A)'s decision to restrict the addition of Rs. 9,74,01,310/- made by the Assessing Officer (AO) on account of on-money received by the assessee to Rs. 60,70,000/-. The assessee, a construction and development company, was subjected to a search under Section 132 of the Income-tax Act, 1961, which led to the discovery of documents indicating on-money received from the sale of flats in the 'Krishna Venue' project. The AO concluded that the on-money received in cash for the sale of flats in the year under consideration and in other years amounted to Rs. 9,74,01,310/-, which was treated as undisclosed income.The CIT(A) accepted the assessee's contention that the on-money of Rs. 6,70,51,310/- related to flats sold in other years should be taxed in those respective years, not in the current year. The CIT(A) directed the AO to ensure that the on-money is taxed in the relevant years when the flats were sold and income was offered to tax. This decision was supported by various judicial precedents, including the Ahmedabad ITAT's decision in Ms. D.R. Construction V/s ITO and the Pune ITAT's decision in ITO V/s Karda Construction Limited.Regarding the on-money of Rs. 3,03,50,000/- received for flats sold in the current year, the CIT(A) agreed with the assessee's argument that only the net profit embedded in the on-money should be taxed, not the entire amount. Citing several legal precedents, the CIT(A) restricted the addition to Rs. 60,70,000/-, representing 20% net profit on the on-money. The Tribunal upheld the CIT(A)'s decision, agreeing that the entire on-money cannot be treated as income and only the profit element should be taxed.2. Deletion of Addition on Account of Deemed Rent for Unsold Units:The AO added Rs. 87,40,000/- to the assessee's income as deemed rent for 133 unsold units, based on the Annual Letting Value (ALV). The AO relied on the decision of the Delhi High Court in Ansal Housing & Finance Ltd., which held that the rental income from vacant flats owned by a builder should be assessed under the head 'income from house property'.The CIT(A) deleted the addition, citing that the unsold units were treated as stock-in-trade and not as property held for earning rental income. The CIT(A) referred to several judicial pronouncements, including the Gujarat High Court's decision in Neha Builders Pvt. Ltd. and the Mumbai ITAT's decision in ITO vs. Arihant Estate Pvt Limited, which held that properties held as stock-in-trade should be assessed under 'income from business' and not 'income from house property'. The Tribunal agreed with the CIT(A), emphasizing that the deemed rent concept does not apply to properties held as stock-in-trade and upheld the deletion of the addition.Conclusion:The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decisions on both issues. The restriction of the addition on account of on-money to Rs. 60,70,000/- and the deletion of the addition on account of deemed rent were found to be justified and supported by relevant judicial precedents. The Tribunal's order was pronounced on 27th April 2022 in Ahmedabad.