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Tax Publishers Tata Housing Development Co. Ltd. v. PCIT [ITA Nos. 3492 & 3493/Mum/2019, dt. 28-9-2020] : 2020 TaxPub(DT) 3875 (Mum.-Trib.) Additions for annual value for vacant flats held as stock-in-trade -- Per section 23(5) introduction years *Facts:* Assessee in the real estate business had unsold vacant flats as inventory. The PCIT invoked powers under section 263 and made additions to annual value on such unsold flats in the hands of the assessee. On appeal the assessee contended that the case could not have been reopened under section 263 as the fact of the assessee being in the real estate business and in possession of vacant flats were all known information and thus the order of the ITO was not erroneous or prejudicial to the interests of the revenue besides there being divergent views on the topic. Held in favour of the assessee that the additions made by the PCIT for the notional annual value on the unsold flats cannot be sustained. The invocation of section 263 was bad in law. Cases where the unsold inventory annual value cannot be assessed as house property -- (1) C.R. Development (P) Ltd. v. JCIT (ITA No. 4277/M/2012 (Mum-ITAT)) (2) Runwal Constructions v. ACIT 52 CCH 569 (Mum-ITAT) (3) ACIT v. Haware Constructions Pvt. Ltd., (ITA No. 3321/Mum/2016) (4) ITO v. Arihant Estates Pvt. Ltd. 53 CCH 321 (Mum-ITAT) (5) Mahanagar Constructions v. ITO (ITA No. 623/Pun/2018) (Pune-ITAT) (6) CIT v. Neha Builders Pvt. Ltd., (2008) 296 ITR 661 (Guj-HC) : 2008 TaxPub(DT) 0294 (Guj-HC) Cases where it has been held against the assessee. CIT v. Ansal Housing Finance & Leasing Co. Ltd., (2013) 354 ITR 0180 (Del-HC) : 2013 TaxPub(DT) 0681 (Del-HC) Applied: S.D. Corporation (P) Ltd. v. Pr. CIT, 102 taxmann.com 226 (Mum) : 2019 TaxPub(DT) 2185 (Mum-Trib) and Archie Creation v. Pr. CIT, ITA No. 4449/M/2019, assessment year 2014-15 decided on 13-7-2020 : 2020 TaxPub(DT) 3646 (Mum-Trib). "13. We have noted that during the assessment, the assessee vide its reply/Letter, dated 24-11-2015 furnished the detail of opening and closing stock consisting of flat readily available for sale in respect of Imperil project. In the details of inventory, the assessee clearly bring on record that at the time of opening of written down value of 21 flat, consisting of area of 80000 (may be sq.ft.) total value of Rs. 170,41,088,56 out of which the assessee has sold 14 flats of total area 48830 (may be sq.ft.) of value of Rs. 104,01,45,443. Thereby the assessee remained in possession of total 7 unsold flats consisting area of 31170 (may be sq.ft.) value of which was shown at Rs. 66,39,63,413. The assessee has also furnished the complete details of name of parties, flat number and details of the cost of flats sold during the year. Moreover, the learned Commissioner (Appeals) in the notice under section 263 has referred that on verification, certain discrepancies were found in the assessment order. The learned Commissioner (Appeals) has also referred that the assessee has shown unsold flat valuing of Rs. 66,39,63,413 in closing stock. Thereby, all the information/details were gathered by the learned PCIT from the assessment record. We have further noted that in the notice, the learned Commissioner (Appeals) has referred the decision of Hon'ble Delhi High Court in Ansal Housing Finance & Leasing Co. Ltd.'s case (supra). The learned AR of the assessee while making submission has vehemently submitted that issue is debatable and there is contrary decision of Hon'ble Gujarat High Court in Neha Builders (P.) Ltd.'s case (supra) wherein the Hon'ble Court has taken a view that, if property is used as a stock-in-trade, then said property would become or partake character of stock and any income derived from such stock would be "Income from Business" and not "Income from House Property". Therefore, keeping in view the contrary decision of non-jurisdictional High Court, we are of the view that issue is debatable and two views are possible. The Hon'ble Supreme Court in Max India Ltd.'s case (supra) held that when two views are inherently possible, the provision of section 263 would not attract. We may refer here that the unsold flat was treated by assessee as stock-in-trade in its books of account. The flats sold by the assessee were assessed under the head "Income from Business". Therefore, in our considered view that the order for not bringing the unsold flats to tax at notional letting value under the head "Income from Other Sources" is not erroneous. The assessing officer has taken one of the possible views. Even otherwise, sub-section (5) in section 23 was inserted by Finance Act, 2017 and is applicable only from 1-4-2018 and not for the assessment year under consideration. Therefore, the twin condition as prescribed under section 263 are not fulfilled in respect of first issue, i.e., taxability of unsold flats under the head "Income from House Property"." *Editorial Note:* The decision would be a good respite to cases prior to introduction of section 23(5). Section 23(5) is inserted to give teeth to the deeming annual value provision which otherwise would have not been possible due to below counters as well -- 1. Stock in trade vacant flats cannot be deemed for annual value in house property. 2. Non-existence of section 23(5) would imply that legislature did not contemplate taxing it in the first place in the years prior to 1-4-2018 3. Assessee can have two portfolios one a trading and another an investing portfolio -- taxation follows the mode of holding in each portfolio.

Tax Publishers

Tata Housing Development Co. Ltd. v. PCIT [ITA Nos. 3492 & 3493/Mum/2019, dt. 28-9-2020] : 2020 TaxPub(DT) 3875 (Mum.-Trib.)

Additions for annual value for vacant flats held as stock-in-trade -- Per section 23(5) introduction years

Facts:

Assessee in the real estate business had unsold vacant flats as inventory. The PCIT invoked powers under section 263 and made additions to annual value on such unsold flats in the hands of the assessee. On appeal the assessee contended that the case could not have been reopened under section 263 as the fact of the assessee being in the real estate business and in possession of vacant flats were all known information and thus the order of the ITO was not erroneous or prejudicial to the interests of the revenue besides there being divergent views on the topic.

Held in favour of the assessee that the additions made by the PCIT for the notional annual value on the unsold flats cannot be sustained. The invocation of section 263 was bad in law.

Cases where the unsold inventory annual value cannot be assessed as house property --

(1) C.R. Development (P) Ltd. v. JCIT (ITA No. 4277/M/2012 (Mum-ITAT))

(2) Runwal Constructions v. ACIT 52 CCH 569 (Mum-ITAT)

(3) ACIT v. Haware Constructions Pvt. Ltd., (ITA No. 3321/Mum/2016)

(4) ITO v. Arihant Estates Pvt. Ltd. 53 CCH 321 (Mum-ITAT)

(5) Mahanagar Constructions v. ITO (ITA No. 623/Pun/2018) (Pune-ITAT)

(6) CIT v. Neha Builders Pvt. Ltd., (2008) 296 ITR 661 (Guj-HC) : 2008 TaxPub(DT) 0294 (Guj-HC)

Cases where it has been held against the assessee.

CIT v. Ansal Housing Finance & Leasing Co. Ltd., (2013) 354 ITR 0180 (Del-HC) : 2013 TaxPub(DT) 0681 (Del-HC)

Applied: S.D. Corporation (P) Ltd. v. Pr. CIT, 102 taxmann.com 226 (Mum) : 2019 TaxPub(DT) 2185 (Mum-Trib) and Archie Creation v. Pr. CIT, ITA No. 4449/M/2019, assessment year 2014-15 decided on 13-7-2020 : 2020 TaxPub(DT) 3646 (Mum-Trib).

"13. We have noted that during the assessment, the assessee vide its reply/Letter, dated 24-11-2015 furnished the detail of opening and closing stock consisting of flat readily available for sale in respect of Imperil project. In the details of inventory, the assessee clearly bring on record that at the time of opening of written down value of 21 flat, consisting of area of 80000 (may be sq.ft.) total value of Rs. 170,41,088,56 out of which the assessee has sold 14 flats of total area 48830 (may be sq.ft.) of value of Rs. 104,01,45,443. Thereby the assessee remained in possession of total 7 unsold flats consisting area of 31170 (may be sq.ft.) value of which was shown at Rs. 66,39,63,413. The assessee has also furnished the complete details of name of parties, flat number and details of the cost of flats sold during the year. Moreover, the learned Commissioner (Appeals) in the notice under section 263 has referred that on verification, certain discrepancies were found in the assessment order. The learned Commissioner (Appeals) has also referred that the assessee has shown unsold flat valuing of Rs. 66,39,63,413 in closing stock. Thereby, all the information/details were gathered by the learned PCIT from the assessment record. We have further noted that in the notice, the learned Commissioner (Appeals) has referred the decision of Hon'ble Delhi High Court in Ansal Housing Finance & Leasing Co. Ltd.'s case (supra). The learned AR of the assessee while making submission has vehemently submitted that issue is debatable and there is contrary decision of Hon'ble Gujarat High Court in Neha Builders (P.) Ltd.'s case (supra) wherein the Hon'ble Court has taken a view that, if property is used as a stock-in-trade, then said property would become or partake character of stock and any income derived from such stock would be "Income from Business" and not "Income from House Property". Therefore, keeping in view the contrary decision of non-jurisdictional High Court, we are of the view that issue is debatable and two views are possible. The Hon'ble Supreme Court in Max India Ltd.'s case (supra) held that when two views are inherently possible, the provision of section 263 would not attract. We may refer here that the unsold flat was treated by assessee as stock-in-trade in its books of account. The flats sold by the assessee were assessed under the head "Income from Business". Therefore, in our considered view that the order for not bringing the unsold flats to tax at notional letting value under the head "Income from Other Sources" is not erroneous. The assessing officer has taken one of the possible views. Even otherwise, sub-section (5) in section 23 was inserted by Finance Act, 2017 and is applicable only from 1-4-2018 and not for the assessment year under consideration. Therefore, the twin condition as prescribed under section 263 are not fulfilled in respect of first issue, i.e., taxability of unsold flats under the head "Income from House Property"."

Editorial Note: The decision would be a good respite to cases prior to introduction of section 23(5). Section 23(5) is inserted to give teeth to the deeming annual value provision which otherwise would have not been possible due to below counters as well --

1. Stock in trade vacant flats cannot be deemed for annual value in house property.

2. Non-existence of section 23(5) would imply that legislature did not contemplate taxing it in the first place in the years prior to 1-4-2018

3. Assessee can have two portfolios one a trading and another an investing portfolio -- taxation follows the mode of holding in each portfolio.