2019 (3) TMI 1672 - AT - Income Tax

Income from House Property - imaginary income - hypothetical income - protective addition made by AO on account of notional rent of unsold area - property held as stock-in-trade - HELD THAT - Once it is held that the income of a Builder in respect of letting out of the properties is chargeable under the head Profit and gains of business or profession , the provisions enshrined in Chapter IV-D get magnetized and not those under the head Capital gains . It is no doubt true that section 23 of the Act deems the determination of income from house property, which is not let out, but it is equally trite that a deeming provision cannot be extended beyond its ambit, so as to cover the heads of income or the sections, to which it does not operate. My attention has not been drawn by the ld. DR towards any specific provision under Chapter IV-D of the Act which deems rental income on the properties held as stock in trade, waiting for sale and not actually let out, as chargeable to tax under the head Profit and gains of business or profession . As the assessee admittedly did not earn any rental income from letting out of these two units which position has also not been disputed by the AO, in my considered opinion, taxing any hypothetical income which is otherwise not sanctioned by any provision under Chapter IV-D, cannot be permitted. The legal sanctity drawn pertains to the very spirit and soul of the Income Tax Act, 1961. Meaning thereby, Section 5 of the Act stipulates that a person who is a resident can be subjected to tax in respect of income from whatever source which is received or is deemed to be received in India or accrues or arises or deemed to accrue or arise to him in or outside India during such year but there is no provision for charging any imaginary income. Disallowance u/s.14A to the extent of exempt income - HELD THAT - CIT(Appeals) upheld the addition made by the Assessing Officer relying on the decision of the Hon'ble Bombay High Court in the case of Godrej Boyce 2010 (8) TMI 77 - BOMBAY HIGH COURT which authorizes the Assessing Officer to recompute the disallowance u/s.14A of the Act as per prescribed method under Rule 8D in case he is not satisfied with the claim of the assessee having regard to the accounts. CIT(Appeals) has not brought out any sanctity as to the fact whether disallowance is to be restricted to the extent of exempt income or it can travel beyond that also. It is admitted by the Revenue that the assessee has received exempt income of ₹ 22,000/-. The disallowance, in our view, should be restricted to the extent of exempt income earned. Denial of deduction/proportionate deduction claimed u/s.80IB(10) - HELD THAT - The assessee was held to be entitled to proportionate deduction under section 80IB (10) in respect of units which fulfills the conditions laid down of having built up area of 1500 sq.ft.

Summary

Issues Involved:
1. Maintainability of Revenue's appeal based on monetary limits.
2. Protective addition on account of notional rent of unsold area.
3. Disallowance under Section 14A of the Income Tax Act.
4. Deduction under Section 80IB(10) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Maintainability of Revenue's appeal based on monetary limits:

The Revenue's appeal was contested based on the CBDT Circular No. 3/2018, dated 11.07.2018, which revised the monetary limits for filing appeals by the Department before the Tribunal to ? 20 Lakhs. Both parties agreed that the tax effect in the present appeal was less than ? 20 Lakhs. The Tribunal, considering the circular applicable to both future and pending appeals, dismissed the Revenue's appeal due to the low tax effect. The Tribunal also clarified that the Revenue could seek restoration of the appeal if it falls under the exceptions prescribed in para 10 of the Circular.

2. Protective addition on account of notional rent of unsold area:

The assessee's appeal contested the confirmation of protective addition made by the Assessing Officer (AO) on account of notional rent of unsold area held as 'stock-in-trade'. The Tribunal referred to a similar case in ITA No.1914/PUN/2018, where it was held that properties held as stock-in-trade by a builder should not have their Annual Letting Value determined under Section 23 of the Income Tax Act. The Tribunal noted that the income from such properties should be chargeable under the head "Profits and gains from business or profession" and not as "Income from house property". Consequently, the Tribunal allowed the assessee's grounds 1 and 2, aligning with the precedent that hypothetical income not sanctioned by any provision under Chapter IV-D cannot be taxed.

3. Disallowance under Section 14A of the Income Tax Act:

The assessee contested the disallowance of ? 54,161 under Section 14A, arguing that no deduction was claimed for expenses related to the exempt income of ? 22,000. The AO had invoked Section 14A, observing that the assessee did not maintain separate funds for business and investments yielding exempt income. The Tribunal noted that the CIT(A) upheld the AO's addition based on the decision in Godrej & Boyce (328 ITR 81), authorizing recomputation under Rule 8D. However, the Tribunal found no basis for disallowance exceeding the exempt income and restricted the disallowance to ? 22,000, thus allowing ground No. 5.

4. Deduction under Section 80IB(10) of the Income Tax Act:

The assessee also contested the denial of deduction under Section 80IB(10). The Tribunal referred to its earlier decision in the assessee's case for the assessment year 2005-06 (ITA No.344/PUN/2010), where it was held that the assessee was entitled to proportionate deduction for units fulfilling the conditions of having a built-up area of 1500 sq.ft. Following this precedent, the Tribunal allowed grounds 6 and 7, granting the deduction under Section 80IB(10).

Conclusion:

The Tribunal dismissed the Revenue's appeal due to low tax effect and partly allowed the assessee's appeal, granting relief on the issues of notional rent and Section 80IB(10) deductions while restricting the disallowance under Section 14A to the exempt income earned. Ground Nos. 3 and 4 were dismissed as 'not pressed', and ground No. 8 required no adjudication. The combined result was that the Revenue's appeal was dismissed, and the assessee's appeal was partly allowed.