Taxability of Notional Rent on Unsold Inventory and Section 14A Limits: ITAT Mumbai's Ruling in Inorbit Malls Case

The present judicial analysis delves into the comprehensive order passed by the Income Tax Appellate Tribunal (ITAT), Mumbai Bench, in the matter of DCIT Vs Inorbit Malls Private Limited. The primary controversy revolved around the taxability of notional rental income on completed but unsold commercial units held as stock-in-trade by a real estate developer. Additionally, the tribunal adjudicated on the permissible limits of disallowance under Section 14A of the Income-tax Act, 1961, and its consequential impact on book profit calculations under Section 115JB.

The revenue department had challenged the appellate relief granted to the assessee for the Assessment Year 2017-18. The original assessment was framed under Section 153A read with Section 143(3) of the Income-tax Act, 1961.

Factual Matrix of the Case

The assessee, engaged in the commercial sphere of real estate development, mall management, and leasing, held a substantial inventory of completed properties.

During the scrutiny proceedings, the Assessing Officer (AO) observed the following financial metrics regarding the assessee's closing stock:

  • Total value of completed units: Rs. 151,13,53,919
  • Advances received against certain properties: Rs. 39,12,96,068
  • Net value of unsold vacant units: Rs. 112,00,57,852

The Assessing Officer's Action

The AO determined that the vacant unsold units retained by the assessee should be subjected to taxation based on their Annual Letting Value (ALV) under the head "Income from House Property". To support this stance, the AO heavily relied on the judicial precedent set by the Delhi High Court in CIT Vs. Ansal Housing Finance & Leasing Company Ltd.

Because the assessee did not provide the municipal ratable value for these specific units, the AO arbitrarily estimated the ALV at 8.5% of the net unsold inventory value. After applying the standard statutory deduction, the AO computed an addition of Rs. 6,66,43,442 as notional house property income.