2020 (1) TMI 1202 - AT - Income Tax

Addition on account of notional rental income on unsold stock u/s 23(a) - whether calculation of notional rental income on commercial property is outside the scope of section 23(1)(a)? - HELD THAT - In the case in hand a show-cause notice for cancellation of lease was issued on 25.8.2013 and ultimately lease of plot was cancelled vide order dated 31.12.2015, therefore, we find force in the submission of learned AR of the assessee that after issuance of show-cause notice for cancellation of lease on which building was developed, the assessee was not entitled to let out occupied/constructed portion. Therefore, we find force in the submission of the learned AR that after issuance of show-cause notice the assessee was not entitled to let out the property. Hence, taxing notional income of unoccupied portion of building on the basis of deemed annual letting value is not justified by the AO. Hence, we direct the AO to delete the disallowance. Considering the fact that we have accepted the contention of learned AR that the assessee was legally not entitled to let out the property. Appeal of the assessee is allowed.

Summary

Issues:
1. Addition of notional rental income on unsold stock under section 23(a).
2. Scope of section 23(1)(a) in calculating notional rental income on commercial property.

Analysis:
1. The case involved the addition of notional rental income on unsold stock by the Assessing Officer under section 23(a). The assessee had constructed a commercial building and let out a portion to a tenant. The AO calculated deemed annual letting value for the unoccupied area based on a decision of the Delhi High Court. The assessee contested this, citing an SLP admitted in the Supreme Court against the Delhi High Court decision. Both the CIT(A) and the AO upheld the addition. However, the ITAT found that legal impediments, such as the cancellation of the lease by CIDCO, prevented the assessee from letting out the property. Relying on the decision in Sharan Hospitality Pvt Ltd vs The Deputy Commissioner Of Income, the ITAT concluded that taxing notional income on the unoccupied portion was unjustified, directing the AO to delete the disallowance.

2. The second issue revolved around the scope of section 23(1)(a) in calculating notional rental income on commercial property. The assessee argued that section 23 pertains to residential property, and the unoccupied commercial area should be considered as stock-in-trade income. The AR contended that after the cancellation of the lease, the assessee was legally unable to let out the property. The ITAT agreed with the AR, emphasizing that the legal inability to let out the property invalidated the imposition of notional rental income. The ITAT allowed the appeal, emphasizing that the legal constraints made the assessment of notional income unjustified.

In conclusion, the ITAT ruled in favor of the assessee, directing the deletion of the addition of notional rental income on the unsold stock. The judgment highlighted the importance of legal impediments in determining the tax treatment of unoccupied commercial property and emphasized the necessity of considering such constraints in tax assessments.