AO must examine deemed rental value of unsold flats under section 23(5) after CIT revision order upheld

ITAT Mumbai upheld CIT's revision order under section 263 directing AO to examine deemed rental value of unsold flats under section 23(5) provisions, finding AO failed to make specific enquiries despite calling for information. However, ITAT set aside CIT's direction regarding method of accounting for revenue recognition, ruling that AO had applied mind and accepted assessee's consistent project completion method which was previously accepted by revenue authorities. The assessee's appeal was partly allowed.

---

---

Issues Involved:
1. Jurisdiction under section 263 of the Income Tax Act, 1961.
2. Revenue recognition method for the project.
3. Deemed rental income on unsold flats under section 23(5) of the Act.

Summary of Judgment:

Issue 1: Jurisdiction under section 263
The assessee argued that the Principal Commissioner of Income Tax (Pr.CIT) erred in assuming jurisdiction u/s 263 without satisfying the condition precedents, making the order dated 29.03.2023 without jurisdiction and bad-in-law. The Pr.CIT found the assessment order dated 04.02.2021 erroneous and prejudicial to the interest of the revenue, thus justifying the issuance of a revision notice u/s 263.

Issue 2: Revenue recognition method for the project
The Pr.CIT contended that the assessee's method of recognizing revenue for the "Yashaskaram Project" was not in accordance with the percentage completion method or project completion method, but rather an estimated basis, which was not acceptable. The assessee argued that it followed the project completion method consistently and offered the income in A.Y. 2019-20. The tribunal found that the assessee had been consistent in its method of accounting, which was accepted by revenue authorities in earlier years. Therefore, the tribunal set aside the Pr.CIT's direction concerning the method of accounting for revenue recognition.

Issue 3: Deemed rental income on unsold flats under section 23(5)
The Pr.CIT argued that the assessee failed to recognize deemed rental income on unsold flats held as stock-in-trade, which should be taxed under "Income from House Property" as per section 23(5). The tribunal noted that the AO did not make specific inquiries regarding the applicability of section 23(5) during the assessment proceedings. Since the AO failed to examine and verify these facts, the tribunal upheld the Pr.CIT's direction to the AO to make a fresh assessment considering the deemed rental value u/s 23(5).

Conclusion:
The appeal was partly allowed. The tribunal upheld the Pr.CIT's direction on the determination of deemed rental value but set aside the direction concerning the method of accounting for revenue recognition.

---