The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has clarified that the notional rent has to be determined on vacant unsold flats/shops held as stock-in-trade by the taxpayer under the head “income from house property”. The computation of such notional rent cannot be made on an ad hoc estimate of a percentage of the investment; instead, the Annual Letting Value must be determined in accordance with the Municipal Rateable Value.
Further, the ITAT explained that the ad hoc disallowance of business promotion expenses is justified when the taxpayer fails to substantiate the expenditure with documentary evidence in the form of bills and vouchers.
The proviso to sub-section (1) of section 43CA of the Income Tax Act, which provides a tolerance band for variations between the stated sale consideration and the stamp duty valuation, is curative in nature and has retrospective application. Consequently, if the difference between the sale consideration and the stamp duty value falls within the permissible tolerance limit, no addition can be made under section 43CA of the Act, held the Tribunal.
The Division Bench comprising Sandeep Singh Karhail (Judicial Member) and Om Prakash Kant (Accountant Member) observed that the issue of notional rental income from the unsold units lying vacant in possession of the taxpayer/appellant as stock-in-trade is squarely covered by the decision of the Delhi High Court in Ansal Housing Finance and Leasing Company Ltd [(2013) 354 ITR 180 (Del.)]. The Tribunal noted that the decision of the Gujarat High Court in CIT vs. Neha Builders Pvt Ltd. [(2008) 296 ITR 661 (Guj.)] was rendered in a different factual matrix, wherein part of the property was given on rent and income derived thereon was computed as ‘business income’ by the taxpayer.
The Tribunal held that in cases where unsold stock of units is lying vacant in the possession of the taxpayer as stock-in-trade, the Annual Letting Value needs to be computed and taxed under the head ‘income from house property’. However, regarding the computation of notional rent, the Tribunal observed that the AO is not justified in making an estimate of 8.5% of investment as Annual Letting Value, which is unsustainable in view of the decision of the Hon’ble Bombay High Court in CIT vs. Tip Top Typography. The Tribunal therefore directed the AO to ascertain the Municipal Rateable Value for computing the notional rent.
As far as ad hoc disallowance of business promotion expenses, the Tribunal observed that apart from raising the ground, the taxpayer had not produced any bills/vouchers and necessary documentary evidence in respect of its claim of incurring business promotion expenditure of Rs. 6,63,972/-. In the absence of any documentary evidence in the form of bills/vouchers substantiating the claim of incurring business promotion expenses, the Tribunal found no infirmity in the disallowance of 10% made by the lower authorities.
As far as disallowance under section 43CA of the Income Tax Act is concerned, the Tribunal observed that the Finance Act, 2018 inserted a proviso to section 43CA(1) of the Act, w.e.f. 01.04.2019, stating that if the value adopted by the authority for the payment of stamp duty is not more than 105% of the consideration received, the consideration so received shall be deemed to be the full value of consideration.
Relying on the Coordinate Bench decisions in Maria Fernandes Cheryl vs. ITO and Karb Associates (P.) Ltd. vs. Dy. CIT, the Tribunal observed that the rationale for holding the newly inserted proviso to sub-section (1) to section 50C of the Act as curative in nature, hence having retrospective application, applies equally to the provisions of section 43CA of the Act.
The Tribunal noted that the proviso was inserted and subsequently the tolerance band limit was enhanced to mitigate hardship of genuine transactions in the real estate sector. Since the excess of value determined by the Stamp Valuation Authority was less than 5% of the sale consideration for the properties in question, the Tribunal held that the provisions of section 43CA of the Act are not applicable to the present case and deleted the addition.
Briefly, the appellant, a private limited company engaged in the business of builders and developers, filed its return declaring a loss of Rs. 49,89,196/-, and recorded a turnover of Rs. 57,03,92,192/-, primarily arising from the sale of units in the building. At the close of the year, the appellant had shown closing work-in-progress (WIP) of Rs. 1,65,83,92,183/- on a cost of construction, which consists of WIP of completed projects of Rs. 50,69,66,694/-. The unsold stock of completed units was constructed at an aggregate cost of Rs. 50,69,66,694/-.
The Assessing Officer (AO) computed the Annual Letting Value of these properties at 8.5% of the cost of construction and, after allowing a deduction of 30% under section 24(b) of the Income Tax Act, made an addition of Rs. 3,01,64,518/- under the head ‘income from house property’.
Further, the appellant incurred an amount of Rs. 6,63,972/- towards business promotion expenses but could not substantiate the entire expenditure by producing bills and vouchers. Consequently, the AO held that the expense for a non-business purpose cannot be ruled out and made an ad hoc disallowance of 10%, being Rs. 66,397/-.
Further, the appellant had sold certain flats for consideration which was lower than the value of the property adopted by the Stamp Valuation Authority. The AO, by applying the provisions of section 43CA of the Act, made an addition of Rs. 3,26,342/- being the difference between the consideration received by the appellant and the value of the property adopted by the Stamp Valuation Authority.
Case relied on:
Ansal Housing Finance and Leasing Company Ltd [(2013) 354 ITR 180 (Del.)]
Case distinguished:
CIT vs. Neha Builders Pvt Ltd. [(2008) 296 ITR 661 (Guj.)]
Appearances:
Advocate Bhavik Chheda, for the Appellant/ Taxpayer
CIT-DR, Ritesh Misra, for the Respondent/ Revenue
