ITAT Mumbai Deletes Deemed Rental Income Addition on Unsold Flats Held as Stock-in-Trade: Pegasus Properties Pvt. Ltd. vs DCIT

Background and Overview

The Mumbai Bench of the Income Tax Appellate Tribunal recently delivered a significant ruling in the consolidated appeals filed by Pegasus Properties Pvt. Ltd. — ITA Nos.350/Mum/2021 to 352/Mum/2021 — covering Assessment Years 2016-17 to 2018-19. These appeals arose from the order of the Commissioner of Income Tax (Appeals)-48, Mumbai dated 29/01/2021, which in turn stemmed from assessment orders framed under Section 153C read with Section 143(3) of the Income Tax Act, 1961.

Since the disputes across all three years revolved around substantially similar questions of law and fact, the Tribunal consolidated the appeals and designated A.Y. 2016-17 as the lead year. The determination in the lead year was made applicable to the remaining years, with appropriate adjustments for differences in figures.

The two primary issues before the Tribunal were:

1. Whether deemed rental income could be assessed on unsold flats/units held as stock-in-trade by a builder/developer.
2. Whether a protective addition under Section 69A could survive in the absence of any corresponding substantive addition in the hands of any other person.

Facts of the Case

Nature of the Assessee's Business

Pegasus Properties Pvt. Ltd. was engaged in the business of building, maintaining, and operating information technology parks, industrial parks, and residential projects. The assessee followed a standard commercial practice of launching projects, accepting bookings, and recognising income from completed flats on the basis of completion. All sale proceeds were returned as business income under the appropriate head.

Search Action and Initiation of Proceedings

Following search and survey operations conducted on the ABIL Group on 21/07/2017, proceedings under Section 153C of the Income Tax Act, 1961 were initiated in the hands of the assessee. Centralisation of the case followed under Section 127(2) of the Act.

Unsold Flats as Stock-in-Trade

Upon completion of projects, flats that remained unsold were classified as stock-in-trade under the head "Inventories" in the assessee's books. As at 31 March 2016, the assessee held 47 unsold flats with a total saleable area of 68,570 sq. ft., distributed across three projects:

The assessee placed on record income computations for A.Ys. 2012-13 to 2018-19, demonstrating that no rental income had been earned from these flats — either in the past or subsequently — and that income from flat sales had consistently been offered as business income.

The Assessing Officer's Action

The Assessing Officer (AO) took the view that notional rental income was chargeable on the unsold flats and proceeded to determine the Annual Letting Value (ALV) under Section 23 of the Income Tax Act, 1961. In doing so, the AO placed reliance on:

• CIT vs. Ansal Housing & Construction (2016) 389 ITR 373 (Delhi)
• CIT vs. Ansal Housing Finance & Leasing Co. Ltd. (2013) 354 ITR 180 (Delhi)
• Mangla Homes P Ltd., 325 ITR 281 (Bombay)

A fair market rent of Rs. 12 per sq. ft. per month was applied to the total unsold area of 68,570 sq. ft. The computation of the addition was as follows:

First Appellate Order — CIT(A)

The Commissioner of Income Tax (Appeals)-48, Mumbai upheld the AO's addition. Notably, the CIT(A) declined to follow the Tribunal's earlier decision rendered in the assessee's own case for A.Ys. 2013-14 and 2014-15 (order dated 09/11/2019), which had in turn relied upon the Gujarat High Court's ruling in CIT vs. Neha Builders Pvt. Ltd., 296 ITR 661. Instead, the CIT(A) chose to follow CIT vs. Ansal Housing Finance & Leasing Co. Ltd. (2013) 354 ITR 180 (Delhi) and Mangla Homes P Ltd., 325 ITR 281 (Bombay), and confirmed the deemed rental income addition.

Submissions Before the Tribunal

Assessee's Arguments

The assessee's representative made the following key submissions: