ITAT Mumbai Quashes Notional ALV Addition on Unsold Flats Held as Stock-in-Trade by Real Estate Developers
The taxation of unsold inventory held by real estate developers has been a subject of protracted litigation, particularly concerning the levy of tax on a notional basis under the head "Income from house property." In a significant judicial determination, the Income Tax Appellate Tribunal (ITAT), Mumbai Bench, in the case of Osho Developers Vs ACIT, has ruled that the Annual Letting Value (ALV) of unsold flats held as stock-in-trade cannot be assessed on a notional basis.
This decision, covering Assessment Years (A.Y.) 2014-15 and 2015-16, provides critical clarity on the interplay between business assets and house property income, especially for periods preceding the statutory amendments introduced by the Finance Act 2017.
Factual Matrix of the Dispute
The assessee, a firm engaged in the business of civil construction and property development, filed its return of income for A.Y. 2014-15 declaring a nil income, which was initially processed under Section 143(1) of the Income Tax Act 1961. The case was subsequently selected for scrutiny assessment under Section 143(3).
During the assessment proceedings, the Assessing Officer (AO) observed that the assessee held several unsold flats in its closing stock across two distinct projects: Ashwin CHS Ltd. and Infinity Projects. The AO formed a conviction that the ALV of these unsold units was liable to be taxed under Section 22 of the Income Tax Act 1961.
The Assessing Officer's Computation
To justify the taxation, the AO relied heavily on the Delhi High Court's ruling in CIT Vs. Ansal Housing Finance and Leasing Company Ltd., asserting that the incidence of tax under the house property head depends on the factum of ownership rather than the intention to carry on a rental business.
In the absence of a declared rental value, the AO estimated the gross ALV at 8% of the value of the unsold flats, proportionate to the period following the receipt of the occupation certificates.
- For the Ashwin CHS Ltd. project, considering a 7-month period, the gross ALV was calculated at Rs.31,28,296/-.
- For the Infinity Projects, considering a 12-month period, the gross ALV was calculated at Rs.30,36,128/-.
After granting the standard deduction of 30% under Section 24(a), the AO computed the net ALV and made an addition of Rs.43,15,097/- to the assessee's income for A.Y. 2014-15. A similar methodology was adopted for A.Y. 2015-16, resulting in an addition of Rs.49,17,907/-.