Unsold stock-in-trade flats and eligible housing blocks cannot be denied tax relief merely for partial project non-compliance

Prior period expenditure not claimed in profit and loss account was treated as part of project work-in-progress, so no revenue disallowance was sustained merely because the expense related to an earlier period. Unsold completed flats held as stock-in-trade were not subjected to notional annual letting value, as the property was not shown to have been let and stock-in-trade does not ordinarily yield house-property income. Payments covered by section 40(a)(ia) were not disallowed as revenue expenditure where they had been capitalised to work-in-progress, though the corresponding WIP adjustment was sustained. Deduction under section 80IB(10) could not be denied in entirety where eligible blocks or units independently satisfied the project conditions; proportionate relief remained available.

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Issues: (i) whether prior period expenses not claimed in the year could be disallowed, (ii) whether notional annual letting value could be brought to tax on unsold completed flats held as stock-in-trade, (iii) whether payments attracting section 40(a)(ia) could be disallowed in revenue account or only adjusted against work-in-progress, and (iv) whether deduction under section 80IB(10) could be denied in entirety for alleged non-fulfilment of project conditions.

Issue (i): whether prior period expenses not claimed in the year could be disallowed

Analysis: The expenses relevant to the deleted portion were not debited to the profit and loss account in the year, but were taken to the respective project work-in-progress. The disallowance sustained by the first appellate authority covered expenses that were, in substance, not claimed as a revenue deduction during the year. The settled principle applied was that prior period expenditure, when quantified and paid in the current year and otherwise allowable, cannot be disallowed merely because it relates to an earlier period.

Conclusion: The addition was deleted and the issue was decided in favour of the assessee.

Issue (ii): whether notional annual letting value could be brought to tax on unsold completed flats held as stock-in-trade

Analysis: The flats were part of the assessee's real estate stock-in-trade and were not shown to have been let out. The decision followed the jurisdictional view that where property is held as stock-in-trade and the purchaser is in substance the person enjoying the property, the flats do not yield assessable house-property income merely because sale deeds were executed later. The later statutory amendment inserting the special relief for stock-in-trade was treated as supporting the assessee's contention for the relevant year.

Conclusion: The notional ALV addition was deleted and the issue was decided in favour of the assessee.

Issue (iii): whether payments attracting section 40(a)(ia) could be disallowed in revenue account or only adjusted against work-in-progress

Analysis: A major part of the disputed payment was to a government company outside the TDS disallowance net, and the balance expenditure had been capitalised to work-in-progress rather than claimed as a revenue expense. In such a situation, the disallowance mechanism could not operate as a revenue deduction denial; at most, the corresponding work-in-progress required reduction for the TDS default component.

Conclusion: No further interference was called for with the first appellate order and the issue was decided against both sides to the extent the Tribunal upheld the existing adjustment.

Issue (iv): whether deduction under section 80IB(10) could be denied in entirety for alleged non-fulfilment of project conditions

Analysis: The projects were considered on the footing that separate blocks had separate approvals and completion permissions, and that eligible blocks or units could not be denied deduction merely because some blocks or some units allegedly breached a condition. The Tribunal applied the principle that section 80IB(10), being incentive-oriented, should not be construed so as to deny deduction for the entire project where the qualifying portion independently satisfies the statutory conditions. Commercial area and family-allotment objections were also treated as not warranting total denial where proportionate relief was otherwise justified.

Conclusion: The assessee was held entitled to deduction for the eligible part and the matter was not rejected in entirety; the issue was decided in favour of the assessee.

Final Conclusion: The cross-appeals resulted in substantial relief to the assessee on the core disputed additions, while the remaining adjustments were sustained only to the limited extent recorded in the order, leaving the overall outcome as a partial success for both sides.

Ratio Decidendi: Unsold flats held as stock-in-trade cannot be assessed to notional house-property income merely on the basis of unsold status, and a housing-project deduction under section 80IB(10) cannot be denied in entirety where identifiable eligible blocks or units independently satisfy the statutory conditions.

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