Notional rent cannot be assessed on unsold flats held as stock-in-trade for A.Y. 2012-13 under section 23(5)

ITAT Mumbai held that notional rent/ALV cannot be assessed on unsold flats held as stock-in-trade for A.Y. 2012-13. The tribunal ruled that Finance Act 2017 amendment under section 23(5) applying to unsold inventory flats is effective from A.Y. 2018-19 onwards, not retrospectively. Following judicial precedent from NMS Enterprises case, ITAT set aside CIT(A)'s order and directed AO to delete the ALV addition for unsold flats, allowing the appeal in favor of the assessee.

---

---

Issues Involved:

1. Confirmation of addition under "Income from Property."
2. Addition of notional income for unsold flats.
3. Application of Delhi High Court decision in a different context.
4. Estimation of Annual Letting Value (ALV) without show cause notice.
5. Basis of ALV estimation for multiple flats.
6. Adoption of Municipal rateable value for notional income.
7. Denial of vacancy allowance for vacant flats.

Summary:

Issue 1: Confirmation of Addition under "Income from Property"
The Commissioner of Income-tax (Appeals) confirmed the addition of Rs. 32,92,135/- (rectified to Rs. 16,67,015/- u/s 154 of the IT Act) made by the Assessing Officer under the head "Income from Property" for the assessment year under appeal.

Issue 2: Addition of Notional Income for Unsold Flats
The Commissioner of Income-tax (Appeals) confirmed the addition of notional income for 13 flats held partly as stock in trade and partly as fixed assets, holding the appellant liable to notional income under S. 22 of the Income-tax Act 1961.

Issue 3: Application of Delhi High Court Decision
The Commissioner of Income-tax (Appeals) applied the decision of the Delhi High Court in the case of Ansal Housing Finance Leasing Co. Ltd. to the appellant's case.

Issue 4: Estimation of ALV without Show Cause Notice
The Commissioner of Income-tax (Appeals) confirmed the estimation of the ALV of the flats on the basis of the proportionate rent received for flat no. 20, made by the Assessing Officer without issuing any show cause notice.

Issue 5: Basis of ALV Estimation for Multiple Flats
The Commissioner of Income-tax (Appeals) confirmed the addition based on the rent received for flat no. 20 without appreciating that it could not form the basis of the ALV for all other flats in the building.

Issue 6: Adoption of Municipal Rateable Value
The Commissioner of Income-tax (Appeals) erred in not adopting the Municipal rateable value as the basis of estimating notional income for the 13 flats and confirmed the addition based on the rent received for flat no. 20.

Issue 7: Denial of Vacancy Allowance
The Commissioner of Income-tax (Appeals) erred in not granting vacancy allowance for the period during which the 13 flats were vacant in the financial year.

Tribunal's Decision:
The Tribunal found that the CIT(A) erred in confirming the action of the Assessing Officer in computing the ALV of the flats disclosed under stock in trade. The Tribunal referred to the decision in Unique Estates Development Co Ltd vs DCIT, which held that the ALV of unsold flats disclosed under stock in trade is not sustainable. The Tribunal also noted that the amendment in Finance Act 2017, regarding provisions U/sec 23(5) of the Act, is applicable from A.Y. 2018-19 and not to the present A.Y. 2012-13. Therefore, there was no provision to assess notional rent/ALV of unsold flats U/sec 22 of the Income Tax Act for the year under consideration. The Tribunal set aside the order of the CIT(A) and directed the Assessing Officer to delete the addition of ALV of the unsold flats. Both appeals filed by the assessee were allowed.

Conclusion:
The appeals were allowed, and the additions made by the Assessing Officer were deleted based on the Tribunal's finding that the provisions for notional rent/ALV of unsold flats were not applicable for the assessment year in question.

---