2020 (9) TMI 1128 - AT - Income Tax

Revision u/s 263 - addition in respect of notional annual letting value on unsold flats held as stock in trade - assessee contended that notional annual letting value of unsold flats held as stock-in-trade is a debatable issue - HELD THAT - In the present case we are of considered view that the assessment order sought to be revised does not suffer from error as pointed by the PCIT. Merely for the reason that PCIT does not agree with one of the possible view taken by the AO, would not make the assessment order erroneous. PCIT has erred in invoking the provisions of section 263 therefore, the impugned order is liable to be quashed. We may also like to add here that sub-section (5) to Section 23 has been inserted by the Finance Act, 2017 w.e.f. 01-4-2018, whereby notional annual value of property/part of property held has stock-in-trade has been brought to tax subject to conditions specified in the newly inserted sub-section. The amendment is substantive in nature and hence, would be effective prospectively i.e. it would no application in the impugned assessment year. No addition on account of notional rental value of the flats held as stock in trade by the assessee could have been made by the Assessing Officer in the impugned assessment year. We hold that the PCIT clearly fell in error in invoking revisonal jurisdiction u/s 263 of the Act. Consequently, the impugned order is quashed and the appeal of assessee is allowed. Revision u/s 263 - Income from House Property - AO being satisfied with the reply made no additions on account of notional rental value of flats in inventory - HELD THAT - We find that facts in the assessment year under appeal are pari-materia to the facts in the assessment year 2014-15. The reasons for invoking revisional jurisdiction under section 263 of the Act in both the assessment years are identical. The findings given by us while adjudicating the appeal of the assessee for assessment year 2014-15 would mutatis mutandis apply to the present appeal. In the result, the impugned order is quashed and the appeal of the assessee is allowed.

Issues Involved:
1. Invocation of revisional jurisdiction under Section 263 of the Income Tax Act, 1961.
2. Taxability of notional rental income on vacant flats held as stock-in-trade.
3. Applicability of divergent High Court decisions on the issue.
4. Conditions for invoking Section 263 of the Act.
5. Applicability of amendments introduced by Finance Act, 2017.

Issue-wise Detailed Analysis:

1. Invocation of Revisional Jurisdiction under Section 263:
The Principal Commissioner of Income Tax (PCIT) invoked revisional jurisdiction under Section 263 of the Income Tax Act, 1961, for the Assessment Years 2014-15 and 2015-16. The PCIT issued a show cause notice on 15/03/2019, stating that the Assessing Officer (AO) failed to consider the addition of notional rental income on vacant flats, making the assessment order erroneous and prejudicial to the interest of revenue. The assessee contended that the AO had applied his mind during the assessment proceedings and made no addition regarding notional annual letting value on unsold flats held as stock-in-trade.

2. Taxability of Notional Rental Income on Vacant Flats Held as Stock-in-Trade:
The PCIT relied on the decision of the Hon’ble Delhi High Court in CIT vs. Ansal Housing Finance & Leasing Co. Ltd., which held that notional rental income on vacant flats should be added to the total income. However, the assessee argued that the AO was aware of the nature of the business and the closing inventory of flats, and after applying his mind, made no addition for notional rental value. The assessee cited the Hon’ble Gujarat High Court's decision in CIT vs. Neha Builders Pvt. Ltd., which held that income derived from property held as stock should be treated as business income, not income from house property.

3. Applicability of Divergent High Court Decisions:
The assessee pointed out that there were divergent views from non-jurisdictional High Courts on the issue. The Delhi High Court in Ansal Housing Finance & Leasing Co. Ltd. held that notional annual lettable value of unsold flats should be assessed as 'Income from House Property,' while the Gujarat High Court in Neha Builders Pvt. Ltd. held that such income should be treated as 'Business Income.' The Tribunal noted that the AO had taken one of the possible views, and the assessment order would not become erroneous just because the PCIT preferred a different view.

4. Conditions for Invoking Section 263 of the Act:
The Tribunal emphasized that for invoking Section 263, the twin conditions must be satisfied: (i) the order of the AO is erroneous, and (ii) it is prejudicial to the interests of the revenue. The Tribunal found that the AO had considered the issue during the assessment proceedings and had taken a possible view. The Hon’ble Supreme Court in Malabar Industrial Co. Ltd. v. Commissioner of Income-tax and Commissioner of Income-tax (Central) v. Max India Ltd. held that when two views are possible, the order of the AO cannot be considered erroneous.

5. Applicability of Amendments Introduced by Finance Act, 2017:
The Tribunal noted that sub-section (5) to Section 23, which taxes the notional annual value of property held as stock-in-trade, was inserted by the Finance Act, 2017, effective from 01-04-2018. This amendment is substantive and applies prospectively, not to the assessment years under consideration. Therefore, the AO could not have made any addition on account of notional rental value of flats held as stock-in-trade for the impugned assessment years.

Conclusion:
The Tribunal concluded that the PCIT erred in invoking the provisions of Section 263 of the Act. The assessment orders for both assessment years were not erroneous, and the PCIT's orders were quashed. The appeals by the assessee were allowed, and the Tribunal reiterated that the AO's view was one of the possible views and not erroneous in law.

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