ITAT Mumbai Verdict: Unsold Real Estate Stock-in-Trade Exempt from Deemed Rental Income Taxation Prior to AY 2018-19

In a significant judicial pronouncement, the Income Tax Appellate Tribunal (ITAT), Mumbai Bench, has clarified the taxability of unsold properties held by real estate developers as stock-in-trade. The ruling in the case of Modern Abodes Pvt. Ltd. Vs ITO establishes that prior to the prospective amendment introduced by the Finance Act 2017, assessing authorities cannot levy tax on deemed or notional rental income for unsold flats maintained as business inventory.

This comprehensive analysis delves into the factual matrix, appellate arguments, and the foundational legal principles established by the Tribunal for Assessment Year (A.Y.) 2014-15.

Background of the Dispute

The assessee, Modern Abodes Pvt. Ltd., is a corporate entity primarily engaged in the business of purchasing and selling immovable properties. For the A.Y. 2014-15, the assessee filed its return of income on 30.09.2014, declaring a total loss of ₹.12,65,200/-.

During the scrutiny assessment proceedings initiated via notices under Section 143(2) and Section 142(1) of the Income Tax Act 1961, the Assessing Officer (AO) observed the following key facts:

  • The assessee held closing inventories valued at ₹.9,14,17,477/- as of 31.03.2013.
  • No income was generated from the sale or leasing of premises during the relevant financial year.
  • The assessee had taken possession of certain properties/bungalow plots but had not offered any income under the head "Income from Other Sources" or "Income from House Property".

The Assessing Officer's Additions

The AO took the stance that since the assessee had possession of certain unsold properties, these should be treated as "deemed to be let out." Consequently, the AO invoked Section 23(1) of the Act to determine the annual letting value (ALV) of these properties. The AO estimated the notional rent at 10% of the property value, leading to an addition of ₹.20,61,170/- as deemed rental income.

Furthermore, the AO noted that the assessee had earned interest income of ₹.8,41,240/- from Fixed Deposit Receipts (FDRs) and claimed business expenditures amounting to ₹.23,05,889/-, alongside depreciation under Section 32 of ₹.2,72,210/-. The AO disallowed the business expenses under Section 37(1), arguing that no actual business activity occurred during the year other than property acquisition and maintenance. The AO also noted that since the assessee was granted a standard deduction under Section 24(1) at 30% for house property income, additional business expenditures could not be claimed.