Notional Rent on Builder’s Work-in-Progress: ITAT Pune Holds Section 23 Misapplied

The Pune Bench of the Income Tax Appellate Tribunal, in Rushikesh construction Vs ITO, examined whether notional rental income can be assessed on unsold units reflected as work-in-progress in the books of a builder. The Tribunal concluded that invoking Section 23(4)(b) of the Income Tax Act 1961 to compute such notional rent was legally untenable when the property was still under construction and not capable of being let out.

This decision provides important clarity for real estate developers and builders whose unsold inventory is frequently subjected to additions on account of presumed rental income under the head “Income from house property”.

Background of the Dispute

Nature of Business and Assessment Proceedings

The assessee, Rushikesh construction, is a partnership firm engaged in the business of building and development. For the Assessment Year 2014-15, the assessee:

  • Filed its return of income on 18.09.2014
  • Declared total income of Rs.15,48,403/-
  • Reflected certain amounts as closing stock relating to ongoing projects

The assessment was reopened under Section 147 of the Income Tax Act 1961 after recording reasons for reassessment, and an order was eventually passed under Section 143(3) read with Section 147.

During the course of reassessment, the Assessing Officer scrutinised the profit and loss account and balance sheet of the assessee and focused particularly on:

  • Closing stock of Rs.1,29,34,442/-
    • Rs.43,17,766/- for Sai Vrundavan Part Apartment
    • Rs.86,16,676/- for Vaishnavi Super Market
  • A sum of Rs.1,30,808/- credited as income in the profit and loss account

Stand of the Assessing Officer

The Assessing Officer treated the closing stock of the aforesaid projects as finished goods forming part of stock-in-trade. Proceeding on this assumption, he held that these were completed properties lying vacant and capable of being let out and, therefore, liable to notional rental taxation under the head “Income from house property” by invoking Section 23(4)(b).

To quantify the alleged notional rent, the Assessing Officer:

  1. Considered the total closing stock value of Rs.1,29,34,442/-
  2. Applied a notional rate of 7% to derive an estimated gross annual rent
  3. After allowing a 30% standard deduction (presumably under Section 24(a)), calculated the Annual Lettable Value (ALV) at Rs.6,33,787/-
  4. Treated this ALV as income from house property under Section 23(4)(b)
  5. Reduced the Rs.1,30,808/- already disclosed by the assessee (which he considered as rent) from the computed ALV
  6. Made a net addition of Rs.5,02,979/- to the returned income

Post-addition, the assessed income was taken at Rs.20,51,379/-.

First Appellate Proceedings before NFAC

The assessee contested the addition before the National Faceless Appeal Centre, Delhi (NFAC) (CIT(A) equivalent).