Taxing Unsold Flats In Real Estate Business Applicable From AY 2018-19; ITAT Deletes Notional Rent Addition For AY 2014-15

The Mumbai Bench of Income Tax Appellate Tribunal (ITAT), while deleting the notional rent addition for AY 2014–15, held that taxing unsold flats in real estate business is applicable from AY 2018–19.

The bench of Sunil Kumar Singh (Judicial Member) and Narendra Kumar Billaiya (Accountant Member) has observed that the CIT(A) has erred in as much as it relied upon the provisions brought into statute by the Finance Act, 2017, and Section 23(5) has not been held to have a retrospective effect. Therefore, if the rental income has been taxed, then the assessee is equally eligible for the vacancy allowance as per Section 23(1)(c) for the vacant commercial units.

The appellant/assessee company has been in the business of building construction for the last several years. The total receipts credited to the profit and loss account include lease rental and sale receipts of tenancy rights. While scrutinizing the return of income, the assessing officer noticed that the assessee has shown a short-term capital loss, which is claimed to be carried forward to the subsequent assessment year. The assessee was asked to furnish copies of purchase agreements and sale agreements for office premises sold.

The assessee filed the requisite details, and on perusal of the same, the assessing officer noticed that the assessee had started construction of project "Kaledonia,” situated at Sahar Road, Andheri (East), during FY 2007–08, and it was completed during the previous year.

The assessing officer observed that instead of declaring this activity as business, the assessee has shown it under the heading "investments." From the financial statements, the assessing officer found the total cost of the commercial project Kaledonia as of March 31, 2012.

Considering the nature of the business of the assessee, the assessing officer rightly rejected the claim of investments, treated the activities of the assessee as business activity, disallowed the short-term capital loss on the sale of office premises in the project Kaledonia, and further went on to disallow the same as business loss. Since, according to the assessing officer, the assessee has not discharged its primary onus of substantiating the loss claimed with supporting evidence,.

The Assessing Officer was of the opinion that for the cost of construction of Rs. 1107,10,38,584 claimed by the assessee, no details whatsoever have been furnished by the assessee.

The assessee contended that the short-term capital loss disallowed by the assessing officer is correct inasmuch as the Kaledonia Project is the business activity of the assessee and not an investment. However, at the same time, it has been strongly claimed that once the activities of the assessee have been accepted as business activities, the income or loss should have been computed as per the relevant provisions of the Act, allowing all the expenditure incurred in furtherance of the business.

The tribunal held that the CIT(A) had erred in relying upon Section 23(5) inserted by the Finance Act, 2017 and that the same could not be applied to the impugned AY 2012–13 as Section 23(5) is not retrospective.

Counsel For Appellant: Himanshu S. Sinha

Counsel For Respondent: Sanyogita Nagpal

Case Title: Mack Star Marketing Private Limited Versus National Faceless Appeal Centre

Case No.: ITA NOs. 1709 & 1812/MUM/2023

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