ITAT Ahmedabad Deletes ₹5,79,697 Notional Rent Addition on Unsold Flats Held as Stock-in-Trade: Ramani Brothers vs. DCIT

Overview

The Ahmedabad Bench of the Income Tax Appellate Tribunal has granted significant relief to a real estate developer by deleting an addition of ₹5,79,697 representing notional rental income attributed to eight unsold residential units. The Tribunal, in its order dated 14 October 2026 in I.T.A. No. 2444/Ahd/2026, held that for Assessment Year 2017-18 — a year that predates the statutory amendment introducing Section 23(5) of the Income Tax Act, 1961 — no notional annual letting value could be charged to tax in respect of unsold units held as business inventory by a builder. The Bench comprised Judicial Member Rahul Chaudhary and Accountant Member Gangadhar Panda.

Background: Facts of the Case

Ramani Brothers, a partnership firm carrying on the business of building construction and real estate development, filed its return of income for AY 2017-18 on 14.10.2017, declaring total income of ₹1,32,49,540. The return was processed under Section 143(1) of the Income Tax Act, 1961, following which the case was selected for complete scrutiny under CASS.

In the course of assessment proceedings, the Assessing Officer observed that the firm held eight unsold units in its residential project "Sarita Galaxy", with a closing stock value of ₹1,18,30,563. The building-use permission for this project had been obtained during Financial Year 2013-14. Since no notional rental income from these units had been declared under the head "Income from House Property", the Assessing Officer issued a show-cause notice calling upon the assessee to explain the omission.

In response, Ramani Brothers contended that the unsold flats constituted stock-in-trade of its construction business and that no notional rent was taxable for the year in question — particularly given that Section 23(5) of the Income Tax Act, 1961, which specifically addresses the tax treatment of unsold builder stock, was inserted only with effect from AY 2018-19.

Assessment Order: AO Estimates Annual Letting Value at 7%

The Assessing Officer was not persuaded by the assessee's explanation. He applied an estimated annual letting value of 7% of the closing stock value to compute notional rental income. After allowing the standard deduction of 30%, the house property income was determined at ₹5,79,697.

The assessment under Section 143(3) of the Income Tax Act, 1961, was completed on 21.12.2019, fixing the total assessed income at ₹1,38,29,240 as against the returned income of ₹1,32,49,540. Separately, penalty proceedings under Section 270A were initiated on grounds of under-reporting of income.

First Appeal: CIT(A) Sustains the Addition

Ramani Brothers challenged the assessment before the Commissioner of Income Tax (Appeals). However, the CIT(A) upheld the addition, relying primarily on the principle that Section 22 of the Income Tax Act, 1961 is attracted on the basis of ownership of the property, regardless of how the property is classified in the assessee's books of account.

The appellate authority drew support from the judgment of the Hon'ble Delhi High Court in CIT vs. Ansal Housing Finance & Leasing Co. Ltd. — 354 ITR 180, which held that the annual letting value of unsold flats was taxable under the head "Income from House Property." The CIT(A) further observed that the assessee had not furnished adequate documentary evidence to demonstrate that the Assessing Officer's 7% estimate was unreasonable or excessive. The contention regarding the prospective applicability of Section 23(5) was expressly rejected.

Assessee's Submissions Before the Tribunal

Before the ITAT, the assessee's counsel advanced the following arguments: