2020 (1) TMI 244 - AT - Income Tax

Addition of undervaluation of closing stock - property as recorded in the stock - One of the core reasons of the AO was that the circle rate of the impugned property was higher - HELD THAT - The circle rate of the proportionate land occupied for the rear portion will work out to ₹ 1,69,35,765/-. Further, circle rate of per sq. mtr for the construction would be ₹ 17,400 per sq. mtr which worked out to ₹ 36,37,122/- and accordingly, the actual circle rate as per the Government Notification as on 31.03.2013 would be at ₹ 2,05,72,887/- as compared to the book value of the impugned property which has been taken at a much higher figure, i.e., ₹ 3,37,63,104/-. Accordingly, it has been established by the assessee that market value of the revalued book value was more than its circle rate. Apart from that, one important fact is that in the subsequent year, the assessee had sold the property and has offered tax on the profit and if any such enhancement in the valuation of the closing stock is made then it will lead to double addition which will cause undue hardship to the assessee and that is the reason why the Ld. CIT (A) has directed the AO to give consequential relief in the subsequent year in which property was sold. Further, it was noticed that Assessing Officer while determining the circle rate has considered, the covered area of the impugned property wrongly at 827.8 sq. mtr and valued the cost of the property as per circle rate at ₹ 5,25,65,300/-, whereas the total covered area of the impugned property is 185.80 sq. mtr. which is evident from the purchase deed of the property placed at pages 55 to 77 of the paper book; and if the correct value is determined as per the rate used by the Assessing Officer, then it would be only ₹ 1,17,98,300/-. This also points out the flaw/error and the working given by the Assessing Officer. Thus, the reasoning given by the Assessing Officer to disturb the revaluation of the property is not based on correct premise. Moreover, if the assessee has demonstrated that the revaluation of the closing stock has been done as per cost or market rate whichever is lower, which is an acceptable method of accounting for the closing stock, then no interference is called for. Accordingly, the addition made by the Assessing Officer and sustained by the ld. CIT (A) is directed to be deleted. Addition on account of notional rent u/s. 23(1)(a) - AO noted that there were certain properties which were shown as part of closing stock and one property was taken from stock-in-trade to capital asset and was shown as part of fixed asset as on 31.03.2011 - AO held that provision of Section 23(1)(a) is clearly applicable and no notional rent has been offered to tax even for the flats held as stock-in-trade - HELD THAT - First of all, in the case of property, W-54, 1st Floor, Greater Kailash, the same has been under consideration and was not ready for use and this is evident from the first electricity bill and the date of installment, which was installed in the month of December, 2014. Once the property itself was under construction stage with no electricity connection then there cannot be any deemed or notional rent which can be added u/s. 23(1)(a). Accordingly, the addition of ₹ 8.75 lac for the rear portion of the property and ₹ 4.81 lac for the front portion of the property is directed to be deleted. Regarding other property of B-100, Sarvodaya Enclave, First Floor, same was also not ready to use which has been proved by way of Mutation Certificate dated 19.07.2012 issued by MCD which shows that it was not ready to let out. Further, the said property has been used for the business purpose of the assessee when it was ready for use which was much later and had occupied by the Director of the company. Hence on this property also, there cannot be any addition on account of deemed rent. Lastly, with regard to the property at C-75, 1st and 2nd Floor, Shivalik, again it has been brought on record that the said property was completed after 01.04.2014 for which ld. counsel has filed copy of the assessment order passed by Deputy Assessor Collector of South Delhi Municipal Corporation. Once, this property was not ready for use, there is no question of any deemed rent. Accordingly, no addition on account of notional deemed rent u/s.23(1)(a) can be made, once the property itself was either in the stage of construction or was not ready for use. On the facts of the present case, as discussed above, the ratio of the principle of Hon ble Delhi High court in the case of CIT vs. Ansal Housing Financial and Leasing Co. Ltd. 2012 (11) TMI 323 - DELHI HIGH COURT cannot be applied. - Decided in favour of assessee.

Summary

Issues Involved:
1. Addition of ?1 crore on account of alleged undervaluation of closing stock.
2. Addition of ?20,59,417 on account of notional rent under Section 23(1)(a) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Addition of ?1 crore on account of alleged undervaluation of closing stock:

The assessee, engaged in construction and property investment, faced scrutiny over the valuation of a property at W-54, Greater Kailash. The property’s closing stock value decreased from ?4,37,63,104 to ?3,37,63,104 due to market depreciation and interest capitalization adjustments. The Assessing Officer (AO) rejected this revaluation, citing a higher loan amount sanctioned by NBFC and the government’s circle rate, which suggested a higher property value. The AO added ?1 crore to the assessee’s income, which was upheld by the CIT (A).

The assessee argued that the revaluation was justified based on market conditions and compliance with Accounting Standard-2. The revaluation was necessary due to the high cost from interest capitalization on the loan. The revalued amount was still higher than the circle rate, proving the revaluation’s validity. The assessee also highlighted that the property was sold later, and tax was paid on the profit, preventing double taxation.

The Tribunal found the AO’s valuation flawed, noting incorrect area calculations and the higher revalued book value compared to the circle rate. The Tribunal ruled that the revaluation was based on acceptable accounting methods, and the addition of ?1 crore was deleted.

2. Addition of ?20,59,417 on account of notional rent under Section 23(1)(a) of the Income Tax Act:

The AO added notional rent for properties shown as closing stock and one converted to a capital asset. The AO applied a 2% notional rate, resulting in a total notional rent of ?29,42,025, reduced to ?20,59,417 after standard deduction. The CIT (A) confirmed this addition.

The assessee contended that the properties were under construction and not ready for use, supported by electricity bills and municipal certificates. The properties could not generate rental income during the relevant period, and the deemed rent provisions did not apply.

The Tribunal agreed with the assessee, noting that the properties were not ready for use, as evidenced by the electricity connection dates and municipal certificates. The Tribunal ruled that no deemed rent could be added under Section 23(1)(a) for properties under construction or not ready for use. The addition of ?20,59,417 was deleted.

Conclusion:

The Tribunal allowed the appeal, deleting both the ?1 crore addition for undervaluation of closing stock and the ?20,59,417 addition for notional rent. The judgment emphasized proper valuation methods and the non-applicability of deemed rent provisions for properties not ready for use.