2019 (11) TMI 1221 - AT - Income Tax

Income from House Property - addition on account of notional rent of unsold area - taxation of notional rental income relating to the unsold area of the Mall built by the assessee - HELD THAT - It is evident that the real rental income earned by the assessee out of letting of the unsold flats is taxable under the head income from house property and the same is the ratio laid down by the Jurisdictional High Court in the case of CIT vs. Sane Doshi Enterprises 2015 (4) TMI 882 - BOMBAY HIGH COURT and others. Therefore, considering the above settled legal proposition on this issue, we are of the opinion that the ground no.1 raised by the assessee is should be allowed in favour of the assessee. Thus, the ground no.1 raised by the assessee is allowed. Disallowance of expenses relating to the material purchase and labour charges - AO disallowed the same in view of the bona-fide belief that the expenses are not allowable for the reason of claim of deduction allowed u/s 24 in respect of flats rented out which earned the rental income - HELD THAT - AO and the CIT(A) did not appreciate the fact that the impugned repair and maintenance expenses relate to the unsold flats which were never rented out. Therefore, these repair and maintenance expenses are not disallowable. Further, AR on the above referred facts and arguments, submitted that the said issue may be remanded to the file of the Assessing Officer for fresh adjudication. The said prayer of the assessee appears to be fair and reasonable. Disallowance u/s 14A needs to be restricted to the total exempt income which is earned during the year and formed part of the total income of the assessee. In this regard, ld. Counsel relied on the various judicial decisions in support of the claim. Denying of deduction claimed u/s 80IB(10) - HELD THAT - Allowability of the pro-rata deduction u/s 80IB(10) is a decided issue in the own case of the assessee in earlier years. Considering the above settled legal nature of this issue, we find the order of the CIT(A) is fair and reasonable and it does not call for any interference. Thus, the ground is allowed.

Issues Involved:
1. Taxation of notional rental income on unsold area.
2. Disallowance of expenses for material purchase, labor charges, and repairs & maintenance.
3. Disallowance under Section 14A of the Income Tax Act.
4. Denial of deduction under Section 80-IB(10) of the Income Tax Act.
5. Proper head of income for assessing rental income from unsold flats.

Issue-wise Detailed Analysis:

1. Taxation of Notional Rental Income on Unsold Area:
The core issue pertains to the taxation of notional rental income related to the unsold area of the Mall built by the assessee. The assessee had constructed the KPTC Mall and residential flats called "Parmar Garden," where the flats were sold, but the Mall had unsold areas. The Assessing Officer (AO) treated the notional rental income from the unsold area as 'income from house property' rather than 'business income' and made protective additions. The Tribunal referenced its own decision in the assessee's case for AY 2005-06 and various High Court judgments, concluding that notional rental income from unsold/unlet areas, which were never actually let out, constitutes unreal income and is not chargeable to tax. Thus, the ground raised by the assessee was allowed, and the AO's addition was rejected.

2. Disallowance of Expenses for Material Purchase, Labor Charges, and Repairs & Maintenance:
The Tribunal addressed the disallowance of expenses related to material purchase and labor charges, which were erroneously disallowed by the AO despite being capitalized as part of the work-in-progress account. The Tribunal remanded the issue back to the AO for fresh adjudication, emphasizing the need to examine the claim of the assessee thoroughly. Regarding the repair and maintenance expenses, the Tribunal noted that these expenses were related to unsold flats and not rented out, thus should not be disallowed. This issue was also remanded to the AO for a detailed examination.

3. Disallowance under Section 14A of the Income Tax Act:
The assessee argued that the disallowance under Section 14A should be restricted to the total exempt income of ?6,750/- earned during the year. The Tribunal, considering the settled nature of this issue, directed the AO to restrict the disallowance to the said sum of ?6,750/-.

4. Denial of Deduction under Section 80-IB(10) of the Income Tax Act:
The Tribunal examined the denial of deduction claimed under Section 80-IB(10) and found that the issue was identical to one already adjudicated in the assessee's favor for AY 2012-13. The Tribunal upheld the CIT(A)'s decision, allowing the pro-rata deduction under Section 80-IB(10) for the assessee, following the principle of consistency.

5. Proper Head of Income for Assessing Rental Income from Unsold Flats:
The Revenue's appeal challenged the CIT(A)'s decision to assess the rental income from unsold flats under 'income from house property' rather than 'profits and gains of business or profession.' The Tribunal, consistent with its decision in the assessee's appeal, upheld the CIT(A)'s order, confirming that the rental income should be assessed under 'income from house property.' Consequently, the Revenue's grounds were dismissed.

Conclusion:
The appeal of the assessee was partly allowed for statistical purposes, and the appeal of the Revenue was dismissed. The Tribunal's judgment emphasized the principle of consistency and the proper classification of income heads, remanding specific issues back to the AO for detailed examination and fresh adjudication.

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