Developer's unsold flats held as stock-in-trade exempt from deemed rental income taxation under section 43CA

ITAT Mumbai held that deemed rental income from unsold flats held as stock-in-trade cannot be taxed for assessment years up to 2017-18, following coordinate bench precedents. The CIT(A) correctly deleted the AO's addition of estimated annual letting value at 8.5%. However, regarding section 43CA addition for difference between sale consideration and stamp duty valuation, the tribunal allowed assessee's cross-objection, deleting the addition as the 1.67% difference fell within the 10% threshold limit under retrospectively applicable provisions inserted by Finance Act 2020.

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Issues Involved:
1. Deletion of addition made on account of deemed income from house property.
2. Confirmation of addition under Section 43CA of the Income Tax Act, 1961.

Summary:

Issue 1: Deletion of Addition on Account of Deemed Income from House Property
The Revenue challenged the deletion of an addition of Rs. 4,24,78,935/- made by the AO, which was based on the estimated Annual Letting Value (ALV) of unsold stock of flats. The AO relied on the Delhi High Court's judgment in CIT vs. Ansal Housing Finance & Leasing Co. Pvt. Ltd. The CIT(A) deleted the addition, stating that Section 23(5) of the Income Tax Act, which provides for computing the annual value of property held as stock-in-trade, is applicable only from AY 2018-19. The Tribunal upheld the CIT(A)'s decision, citing precedents from co-ordinate Benches of the Tribunal and the Gujarat High Court's ruling in CIT vs. Neha Builders (P) Ltd., which held that deemed notional rental income on unsold stock cannot be taxed up to AY 2017-18.

Issue 2: Confirmation of Addition under Section 43CA
The assessee contested the addition of Rs. 2,29,500/- under Section 43CA, arguing that the difference between the sale value and the stamp duty valuation was only 1.67%, within the tolerance limit. The CIT(A) confirmed the addition, interpreting the provisions as prospective from AY 2019-20. However, the Tribunal, following co-ordinate Bench decisions, held that the first proviso to Section 43CA, which allows a tolerance limit of up to 10%, is applicable retrospectively. Consequently, the Tribunal deleted the addition, as the difference was within the 10% margin.

Conclusion:
The Tribunal dismissed the Revenue's appeal and allowed the assessee's cross objections, confirming that no deemed rental income on unsold stock could be taxed up to AY 2017-18 and deleting the addition under Section 43CA due to the retrospective application of the 10% tolerance limit.

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