Tribunal overturns tax authority's decision on Annual Letting Value for unsold flats

The Tribunal quashed the Principal Commissioner of Income Tax's order, finding that the Assessing Officer had made a proper decision in line with the law and CBDT Circular regarding the Annual Letting Value of unsold flats held as stock-in-trade. The invocation of revisional jurisdiction under Section 263 by the PCIT was considered unjustified. The appeal of the assessee was allowed, and the order was pronounced on 03/02/2023.

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Issues Involved:
1. Invocation of revisional jurisdiction under Section 263 of the Income Tax Act by the Principal Commissioner of Income Tax (PCIT).
2. Determination of Annual Letting Value (ALV) of unsold flats held as stock-in-trade.

Detailed Analysis:

1. Invocation of Revisional Jurisdiction under Section 263 of the Income Tax Act:

The primary issue revolves around the invocation of revisional jurisdiction by the PCIT under Section 263 of the Income Tax Act. The assessee contested that the PCIT did not satisfy the conditions precedent as stipulated under Section 263. According to the judicial precedent set by the Hon'ble Supreme Court in Malabar Industries Ltd. vs. CIT, the twin conditions that must be satisfied for invoking Section 263 are: (i) the order of the Assessing Officer (AO) must be erroneous, and (ii) as a consequence of the erroneous order, prejudice must be caused to the interest of the Revenue.

The Tribunal examined whether the PCIT could successfully invoke revisional jurisdiction. The PCIT pointed out that the AO's order did not tax the ALV of unsold flats held as stock-in-trade, which he deemed erroneous and prejudicial to the Revenue. However, the Tribunal noted that the AO had conducted a proper inquiry into the closing stock of unsold flats during the assessment proceedings. The AO had taken a conscious and plausible view not to levy notional rent on these unsold flats, considering the insertion of sub-section (5) in Section 23 of the Act, which applies from AY 2018-19.

The Tribunal emphasized that the AO's decision was in line with the CBDT Circular No. 02/2018, which clarified that the annual value of house property held as stock-in-trade shall be taken as nil for one year from the end of the financial year in which the certificate of completion is obtained. Therefore, the AO's order was neither erroneous nor prejudicial to the Revenue, and the PCIT's invocation of Section 263 was unjustified.

2. Determination of Annual Letting Value (ALV) of Unsold Flats Held as Stock-in-Trade:

The PCIT argued that the ALV of the unsold flats should have been brought to tax as deemed rent under Section 23(1)(a) of the Act. He calculated the deemed rent as 8% of the value of unsold flats, amounting to Rs. 96,14,895/-, and directed the AO to tax this under the head "Income from House Property."

The Tribunal noted that the AO had already considered the issue of unsold flats during the assessment proceedings and had decided not to levy notional rent, as the relevant provision (sub-section (5) of Section 23) was applicable only from AY 2018-19. The Tribunal referred to the CBDT Circular and the Co-ordinate Bench's decision in the case of M/s. Tata Housing Development, which held that the amendment is prospective and applicable from AY 2018-19.

The Tribunal concluded that the AO's decision was in consonance with the law and the CBDT Circular, and hence, it could not be termed as erroneous or prejudicial to the Revenue. The PCIT's direction to tax the deemed rent was therefore unwarranted.

Conclusion:

The Tribunal quashed the impugned order of the PCIT, holding that the AO had conducted a proper inquiry and taken a plausible view in line with the CBDT Circular. The invocation of revisional jurisdiction under Section 263 by the PCIT was deemed unjustified, and the appeal of the assessee was allowed. The order was pronounced in the open court on 03/02/2023.

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