2022 (7) TMI 741 - AT - Income Tax

Deemed rental income - Addition on account of notional rent being 8% of the value of the property held as stock in trade in books of accounts - HELD THAT - We find that the issue in dispute is no longer res integra in view of the co-ordinate bench decision of this tribunal in the case of Shri Rajendra Godshalwar 2019 (1) TMI 1879 - ITAT MUMBAI wherein after considering the various decisions in the case of CIT vs Neha Builders Pvt Ltd 2006 (8) TMI 105 - GUJARAT HIGH COURT tribunal had rendered the decision in favour of the assessee stating that the deemed rental income cannot be assessed on value of unsold stock of flats. Thus we hold that the addition made towards deemed rental income is hereby directed to be deleted. Accordingly, the Ground No. 1 raised by the assessee is allowed. Addition made on account of interest on fixed deposits earned by the assessee by treating the same as Income from Other Sources - HELD THAT - We find that since the bank guarantees (both performance and financial guarantees) were obtained for the purpose of project, investment in fixed deposits also would have to be construed for the purpose of the project undertaken by the assessee, as admittedly the fixed deposits were invested only as cash margins for the purpose of obtaining those bank guarantees. Hence the business nexus is clearly proved. Under these circumstances, the interest income earned on fixed deposits should have to be construed as inextricably linked with the project and should be treated as recovery of part of the project cost and cannot be treated as income from other sources. As we hold that the interest income earned on fixed deposits should be treated as capital receipt and to be reduced from the project cost. Hence we do not find any infirmity in the treatment given by the assessee in the instant case. Accordingly, the Ground No.2 raised by the assessee is allowed.

Summary

Issues Involved:
1. Condonation of delay in filing appeals.
2. Taxability of notional rent on unsold stock of property.
3. Treatment of interest income on fixed deposits.

Issue-wise Detailed Analysis:

1. Condonation of Delay in Filing Appeals:
The assessee filed appeals with a delay of 743 days. The delay was attributed to the illness of the partner in charge of income tax affairs, who was hospitalized multiple times, and the subsequent COVID-19 lockdown. The Tribunal accepted the explanation provided in the affidavit, noting that the delay was due to reasons beyond the control of the assessee and none of the contents of the affidavit were found to be false by the revenue. Consequently, the delay was condoned, and the appeals were admitted for adjudication.

2. Taxability of Notional Rent on Unsold Stock of Property:
The assessee, engaged in construction and redevelopment, had unsold property held as stock in trade. The Assessing Officer (AO) taxed the deemed rental income on this unsold stock based on the Annual Lettable Value (ALV), citing the Delhi High Court decision in CIT vs Ansal Housing Finance & Leasing Company Ltd. The Tribunal, however, referred to several precedents, including the Mumbai Bench decision in Shri Rajendra Godshalwar vs ITO and Pune Bench decision in Shree Balaji Ventures vs ITO, which held that deemed rental income cannot be assessed on unsold stock of flats. The Tribunal concluded that the unsold flats, being stock in trade, should not be subject to notional rent taxation. Thus, the addition made by the AO was directed to be deleted.

3. Treatment of Interest Income on Fixed Deposits:
The AO treated the interest income on fixed deposits as 'Income from Other Sources.' The assessee contended that the fixed deposits were made as margin money for securing bank guarantees necessary for business operations, and hence the interest should be treated as a capital receipt and credited to work in progress. The Tribunal agreed with the assessee, citing the Supreme Court decision in CIT vs Karnal Cooperative Sugar Mills Ltd, which held that interest earned on deposits directly linked to the acquisition of assets for setting up a plant should be treated as incidental to the acquisition and not as income from other sources. The Tribunal directed that the interest income be treated as a capital receipt and reduced from the project cost.

Application to Other Cases:
The Tribunal applied the same rationale to other cases with similar facts and issues:
- Sai Siddhi Developers (ITA No. 2190/Mum/2021 for A.Y. 2014-15): Similar to Ground No. 1 in Shree Sai Sagar Consultants.
- Shree Sai Consultants (ITA No. 2187/Mum/2021 for A.Y. 2014-15): Similar to Ground No. 2 in Shree Sai Sagar Consultants.
- Shree Sai Consultants (ITA No. 2188/Mum/2021 for A.Y. 2015-16): Similar to Ground No. 2 in Shree Sai Sagar Consultants.
- Sai Siddhant Developers (ITA No. 2192/Mum/2021 for A.Y. 2014-15): Similar to Ground No. 2 in Shree Sai Sagar Consultants.
- Sai Siddhant Developers (ITA No. 2193/Mum/2021 for A.Y. 2012-13): Similar to Ground No. 2 in Shree Sai Sagar Consultants.

Conclusion:
All appeals were allowed, with the Tribunal directing the deletion of additions made towards deemed rental income and treating the interest income on fixed deposits as a capital receipt. The order was pronounced on 15/07/2022.