ITAT Mumbai Confirms PCIT's Revisionary Action Under Section 263 for Failure to Apply Deemed Rent Provisions on Unsold Real Estate Stock
Background and Overview
The Income Tax Appellate Tribunal, Mumbai, delivered a significant ruling in the matter of Bhagwati Abhilsha Conventure Vs PCIT (ITAT Mumbai) concerning the applicability of deemed rental income under Section 23(5) of the Income Tax Act, 1961 on unsold flats held as stock-in-trade by a real estate developer. The Tribunal confirmed the revisionary order passed by the Principal Commissioner of Income Tax under Section 263 of the Income Tax Act, 1961, for Assessment Year 2018-19, thereby dismissing the appeal filed by the assessee.
This decision carries considerable weight for builders and developers who hold unsold inventory beyond the stipulated moratorium period, as it clarifies the precise scope and applicability of the legislative amendment introduced through Section 23(5) from AY 2018-19 onwards.
Profile of the Assessee and Return Filing History
Bhagwati Abhilsha Conventure is a partnership firm operating in the domain of land development and real estate construction. For AY 2018-19, the assessee filed its return of income on 19.10.2018, declaring income at NIL with a reported loss of Rs. 6,98,087/-. The return was subsequently selected for scrutiny under the Computer Assisted Scrutiny Selection (CASS) mechanism and was assessed at the returned income vide order dated 24.02.2021 under Section 143(3) read with Section 143(3A) and Section 143(3B) of the Income Tax Act, 1961.
PCIT's Initiation of Revision Under Section 263
Following the completion of assessment, the office of the Principal Commissioner of Income Tax, Mumbai-41, issued a notice under Section 263 of the Income Tax Act, 1961, dated 24.02.2023. The PCIT observed that the assessee had disclosed a closing stock valued at Rs. 6,50,54,600/- in its Balance Sheet for the relevant year. Despite this, no deemed rental income under Section 23(5) was offered to tax on this amount. Furthermore, the Assessing Officer had accepted the return as filed without making any addition on this count.
The PCIT concluded that the assessment order dated 24.02.2021 was erroneous insofar as it was prejudicial to the interests of the Revenue, thereby satisfying the twin conditions required for exercise of revisionary jurisdiction under Section 263.
Examination of Assessment Proceedings — Section 142(1) Notice
The Tribunal examined the notice issued by the Assessing Officer under Section 142(1) of the Income Tax Act, 1961, dated 28.01.2020, which was part of the assessment proceedings. Two specific queries in that notice were found to be particularly relevant:
Point No. 6 — Required the assessee to furnish the addresses of all premises used for conducting business, along with the name and PAN of the person in charge.
Point No. 17 — Drew attention to the high closing stock held by the assessee. The notice specifically referenced the AY 2017-18 assessment, wherein rent had not been offered under the head "Income from House Property." The assessee was requested to furnish project-wise details of stock-in-trade as on 31.03.2018 in tabular form, with complete addresses and the rent or annual lettable value (where not actually let out), for the purpose of computing income from house property.