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2019 (5) TMI 675 - AT - Income TaxDisallowance u/s 14A - Assessee made suo moto disallowed u/s 14A - non recording of satisfaction by AO - AO rejected on the ground that the disallowance was not worked out as per mandate of Rule 8D of IT Rules and computed the disallowance u/s.14A r.w.r 8D - HELD THAT - On the issue of necessity of recording the satisfaction before proceeding to work out disallowance under Rule 8D of IT Rules, we find that in the case of CIT Vs. Asian Paints Limited 2019 (2) TMI 819 - BOMBAY HIGH COURT and after considering the decision of Godrej and Boyce Manufacturing Co., Ltd., Vs. DCIT reported 2017 (5) TMI 403 - SUPREME COURT has held that Rule 8D of the rules cannot be invoked where suo moto disallowance made by the assessee is not found to be satisfactory by the AO having regard to the account of the assessee. It has further held that in the absence of recording of non-satisfaction in terms of Sec.14A(2), invocation of Rule 8D is not permissible Thus absence of recording of necessary satisfaction in terms of Sec.14A(2), we are of the view that in the present case, no disallowance of expenses under Sec.14A r.w.r 8D is called for - Decided in favour of assessee Taxability of rental income on property held in stock in trade under the head income from house property - 32 unsold flats/shops - Deemed rent in respect of unsold units - AO was of the view that since assessee was owner of two or more house properties, provision of Sec.23(4) would be attracted and as per which assessee should have offered deemed rental income from the aforesaid properties - why the deemed rent in respect of closing stock not be brought to tax? - HELD THAT - We find that in the case of CIT Vs. Neha Builders Pvt. Ltd. 2006 (8) TMI 105 - GUJARAT HIGH COURT has held that when the business of the assessee is to construct the property and sell it or to construct or let out then that would be the business and the business stocks which may include movable and immovable properties would be taken to be stock-in- trade and any income derived from such stocks cannot be termed as income from house property . Following the decision of Co-ordinate Bench of the Pune Tribunal in the case of M/s. Cosmopolis Construction Vs. ITO 2018 (9) TMI 1621 - ITAT PUNE hold that in the present case, no addition on account of deemed rent of 32 unsold flats can be made in hands of the assessee. We therefore set aside the addition made by AO. Thus, the ground of the assessee is allowed.
Issues Involved:
1. Disallowance of indirect expenditure under Section 14A read with Rule 8D(2)(iii) of the Income Tax Act. 2. Addition on account of deemed rent in respect of unsold units held as stock-in-trade. Issue-wise Detailed Analysis: 1. Disallowance of Indirect Expenditure under Section 14A read with Rule 8D(2)(iii): The assessee, a real estate development company, filed its return of income for the assessment year 2012-13, declaring a total income of ?32,74,69,918/-. The case was selected for scrutiny, and the assessment was framed under Section 143(3) of the Income Tax Act, determining the total income at ?37,66,84,050/-. The assessee appealed to the Commissioner of Income Tax (Appeals) [CIT(A)], who granted partial relief. Dissatisfied, the assessee appealed to the ITAT. The primary issue was the disallowance of ?1.40 crores on account of indirect expenditure under Section 14A read with Rule 8D(2)(iii), as opposed to ?5,00,000/- disallowed by the assessee. The assessee argued that the Assessing Officer (AO) did not record any objective satisfaction to demonstrate that the disallowance made by the assessee was incorrect. The AO concluded that the provisions of Section 14A were applicable and, using Rule 8D, worked out a disallowance of ?4,82,14,704/-, giving credit for the ?5,00,000/- already disallowed by the assessee. The CIT(A) upheld the disallowance of indirect expenses under Rule 8D(2)(iii) but reduced the amount to ?1.40 crores. The CIT(A) noted that the AO had recorded his satisfaction and that the Circular No. 5/2014 clarified that disallowance under Section 14A should be considered even if no income is earned during the year. Before the ITAT, the assessee reiterated that the AO had not recorded the necessary satisfaction as required by Section 14A(2) before invoking Rule 8D. The ITAT referred to the decision of the Hon’ble Bombay High Court in CIT Vs. Asian Paints Limited and the Hon’ble Supreme Court in Godrej & Boyce Manufacturing Co. Ltd. Vs. DCIT, which mandated that the AO must record non-satisfaction with the assessee’s claim before applying Rule 8D. The ITAT found that the AO had not recorded such satisfaction and, therefore, directed the deletion of the disallowance made by the AO and upheld by the CIT(A). 2. Addition on Account of Deemed Rent in Respect of Unsold Units: During the assessment proceedings, the AO noticed that the assessee held 32 unsold flats/shops as closing stock and invoked Section 23(4) to tax the deemed rental income from these properties. The AO relied on the decision of the Hon’ble Delhi High Court in CIT Vs. Ansal Housing and Construction and computed the deemed rent at ?14,10,590/-. The CIT(A) upheld the AO’s decision. The assessee argued that the unsold units were held as stock-in-trade and, therefore, no deemed rental income should be taxed. The ITAT referred to several decisions, including the Hon’ble Gujarat High Court in CIT Vs. Neha Builders Pvt. Ltd., which held that income derived from stock-in-trade should be considered as business income, not income from house property. The ITAT also considered the decisions of the Mumbai Tribunal in C.R. Developments Pvt. Ltd. Vs. CIT and the Pune Tribunal in M/s. Cosmopolis Construction, which supported the assessee’s view. The ITAT concluded that the notional annual rental value on unsold flats held as stock-in-trade cannot be taxed as income from house property. Therefore, the addition made by the AO and confirmed by the CIT(A) was set aside. Conclusion: The appeal of the assessee was allowed, with the ITAT directing the deletion of the disallowance under Section 14A and the addition on account of deemed rent for unsold units. The ITAT emphasized the necessity of AO’s satisfaction recording under Section 14A(2) and upheld the principle that unsold units held as stock-in-trade should not be taxed as income from house property.
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