Mumbai ITAT Quashes ₹31.57 Lakh Addition on Notional Rent for Unsold Real Estate Inventory Prior to AY 2018-19
The taxation of unsold real estate inventory has long been a contentious issue between tax authorities and developers. The core dispute often revolves around whether an assessee, holding completed but unsold properties as stock-in-trade, should be liable to pay tax on a hypothetical or "notional" rental income. In a significant judicial pronouncement, the Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) in the case of Bhgawati Abhilasha Conventure Vs ACIT (ITA 8591/MUM/2025) has clarified the temporal applicability of Section 23(5) of the Income Tax Act 1961.
The Tribunal ruled that the statutory provision mandating the taxation of deemed rental income on unsold stock-in-trade cannot be applied retrospectively. Consequently, the ITAT deleted an addition of ₹31,56,978 made by the revenue authorities for the Assessment Year (AY) 2017-18.
Factual Matrix of the Dispute
The assessee, Bhgawati Abhilasha Conventure, is a business entity actively engaged in the real estate sector, specifically focusing on property development and construction. During the course of its business operations, the assessee constructed multiple residential units. As is customary in the real estate industry, several completed flats remained unsold at the end of the financial year and were legitimately classified and disclosed as stock-in-trade in the books of accounts.
During the scrutiny assessment proceedings for AY 2017-18, the Assessing Officer (AO) took an adverse view of these unsold flats. The AO computed a deemed rental income on these vacant properties, assuming that they possessed an inherent earning capacity even though they were held purely as business inventory. This resulted in a substantial addition of ₹31,56,978 to the taxable income of the assessee.
Aggrieved by the assessment order passed under Section 143(3) of the Income Tax Act 1961, the assessee escalated the matter to the Commissioner of Income Tax (Appeals) [CIT(A)]. However, the appellate authority upheld the AO's methodology and confirmed the addition, prompting the assessee to file a second appeal before the Mumbai ITAT.