Unsold flats held as stock-in-trade cannot be taxed as deemed rent under section 23(1)(a), must be assessed as business income

ITAT Mumbai set aside PCIT's revision order under section 263 regarding deemed rent on unsold flats held as stock-in-trade. PCIT contended that annual letting value of unsold inventory should be taxed as deemed rent under section 23(1)(a). However, ITAT held that AO properly investigated the matter following CBDT circular guidelines. Relying on SC precedent in Chennai Properties Investments Ltd. vs CIT, tribunal ruled that unsold flats held as stock-in-trade should be assessed under business income head, not as deemed rent under property income. PCIT's jurisdiction under section 263 was deemed unsustainable. Assessee's appeal was allowed.

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Issues Involved:
1. Jurisdiction under Section 263 of the Income Tax Act, 1961.
2. Principles of natural justice.
3. Taxation of the annual value of property forming part of closing stock under "Income from House Property".

Summary:

Jurisdiction under Section 263 of the Income Tax Act, 1961:
The appellant, M/s. Coronate Constructions, challenged the order passed by the Principal Commissioner of Income Tax (PCIT) under Section 263 of the Income Tax Act, 1961, which set aside the assessment order dated 22/12/2019. The PCIT invoked revisionary jurisdiction, finding the assessment order erroneous and prejudicial to the interest of the revenue. The Tribunal examined whether the Assessing Officer (AO) had failed to tax the annual value of the property forming part of the closing stock under "Income from House Property". The AO had accepted the self-assessed income of the assessee after examining the submissions and details provided.

Principles of Natural Justice:
The assessee argued that the PCIT violated the principles of natural justice by not considering the submissions filed by the assessee while passing the order under Section 263. The Tribunal noted that the AO had conducted a thorough investigation, calling for detailed submissions and explanations from the assessee, which were duly provided and considered.

Taxation of Annual Value of Property Forming Part of Closing Stock:
The PCIT held that the annual value of the property forming part of the closing stock should be taxed under "Income from House Property". However, the Tribunal found that the AO had followed the CBDT Circular No.02/2018, which provided that the annual value of property held as stock-in-trade shall be taken as nil for one year from the end of the financial year in which the completion certificate was obtained. The Tribunal also referenced the Supreme Court's decision in Chennai Properties & Investments Ltd. vs CIT, which held that unsold flats in stock-in-trade should be assessed under "business income" and not under "Income from House Property".

Conclusion:
The Tribunal concluded that the AO had examined all relevant details and followed the applicable legal guidelines. The order passed by the AO was neither erroneous nor prejudicial to the interest of the revenue. Therefore, the invocation of jurisdiction under Section 263 by the PCIT was not sustainable. The appeal filed by the assessee was allowed, and the impugned order under Section 263 was set aside.

Order Pronounced:
The appeal filed by the assessee was allowed, and the order was pronounced in the open court on 09.11.2023.

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