2022 (5) TMI 459 - AT - Income Tax

Addition made on account of on-money received by the assessee - on-money was received by the assessee in the year under consideration as found from the relevant documents seized during the course of search, it is observed that the said on-money was received by the assessee in respect of flats sold not in the year under consideration but in other years - HELD THAT - Entire receipts or on-money representing undisclosed sales proceeds of the flats cannot be the income of the assessee and only the income embedded in such on-money can be taxed as the undisclosed income of the assessee. He also relied on the observations made by the AO himself that it was difficult to comprehend how the assessee could meet the cost of construction when he was selling flats on huge discounts, meaning thereby that the construction cost was met by the assessee even from the on-money representing unaccounted sales proceeds of the flats. Profit element embedded in the on-money - As regards the net profit rate of 20% adopted by the learned CIT(A) to estimate the profit element embedded in the on-money, it is observed that the same was arrived at by the learned CIT(A) by relying on the decision of Hon ble Gujarat High Court in the case of Jay Builder 2012 (12) TMI 1194 - GUJARAT HIGH COURT wherein the decision of ITAT adopting the net profit rate of 15% to estimate the income embedded in on-money was upheld by their Lordships. Keeping in view the said decision of the Hon ble jurisdictional High Court and having regard to all the facts of the case, we are of the view that the net profit rate of 20% adopted by the learned CIT(A) to estimate the income of the assessee embedded in on-money of Rs.3,03,50,000/- is fair reasonable and there is noting brought on record by the learned DR to dispute the same. We, therefore, find no infirmity in the order of the learned CIT(A) restricting the addition of Rs.3,03,50,000/- made by the Assessing Officer on account of on-money to Rs.60,70,000/- and upholding the same, we dismiss Ground No.1 of the Revenue s appeal. Addition made on account of deemed rent - unsold units (Flats) in the hands of builder at the year end - property is used as stock-in-trade - Income from house property or income from business -HELD THAT - As observed that this issue is squarely covered in favour of the assessee by various judicial pronouncements relied upon by the learned Counsel for the assessee. In one of such decisions rendered in the case of Neha Builders Pvt. Ltd. 2006 (8) TMI 105 - GUJARAT HIGH COURT as held by the Hon ble Gujarat High Court that if property is used as stock-in-trade, then it would become and partake character of stock and any income derived from stock would be income from business and not income from house property . As rightly contended by the assessee, it therefore follows that the deemed rent concept cannot be applied or invoked in case of property which is stock-in-trade of the business of the assessee and the addition made by the Assessing Officer on account of deemed rent cannot be sustained as rightly held by the learned CIT(A). We, therefore, uphold the impugned order of the learned CIT(A) on this issue and dismiss Ground No.2 of the Revenue s appeal.

Summary

Issues Involved:
1. Restriction of addition on account of on-money received by the assessee.
2. Deletion of addition on account of deemed rent for unsold units.

Issue-wise Detailed Analysis:

1. Restriction of Addition on Account of On-Money Received by the Assessee:
The Revenue challenged the CIT(A)'s decision to restrict the addition of Rs. 9,74,01,310/- made by the Assessing Officer (AO) on account of on-money received by the assessee to Rs. 60,70,000/-. The assessee, a construction and development company, was subjected to a search under Section 132 of the Income-tax Act, 1961, which led to the discovery of documents indicating on-money received from the sale of flats in the 'Krishna Venue' project. The AO concluded that the on-money received in cash for the sale of flats in the year under consideration and in other years amounted to Rs. 9,74,01,310/-, which was treated as undisclosed income.

The CIT(A) accepted the assessee's contention that the on-money of Rs. 6,70,51,310/- related to flats sold in other years should be taxed in those respective years, not in the current year. The CIT(A) directed the AO to ensure that the on-money is taxed in the relevant years when the flats were sold and income was offered to tax. This decision was supported by various judicial precedents, including the Ahmedabad ITAT's decision in Ms. D.R. Construction V/s ITO and the Pune ITAT's decision in ITO V/s Karda Construction Limited.

Regarding the on-money of Rs. 3,03,50,000/- received for flats sold in the current year, the CIT(A) agreed with the assessee's argument that only the net profit embedded in the on-money should be taxed, not the entire amount. Citing several legal precedents, the CIT(A) restricted the addition to Rs. 60,70,000/-, representing 20% net profit on the on-money. The Tribunal upheld the CIT(A)'s decision, agreeing that the entire on-money cannot be treated as income and only the profit element should be taxed.

2. Deletion of Addition on Account of Deemed Rent for Unsold Units:
The AO added Rs. 87,40,000/- to the assessee's income as deemed rent for 133 unsold units, based on the Annual Letting Value (ALV). The AO relied on the decision of the Delhi High Court in Ansal Housing & Finance Ltd., which held that the rental income from vacant flats owned by a builder should be assessed under the head 'income from house property'.

The CIT(A) deleted the addition, citing that the unsold units were treated as stock-in-trade and not as property held for earning rental income. The CIT(A) referred to several judicial pronouncements, including the Gujarat High Court's decision in Neha Builders Pvt. Ltd. and the Mumbai ITAT's decision in ITO vs. Arihant Estate Pvt Limited, which held that properties held as stock-in-trade should be assessed under 'income from business' and not 'income from house property'. The Tribunal agreed with the CIT(A), emphasizing that the deemed rent concept does not apply to properties held as stock-in-trade and upheld the deletion of the addition.

Conclusion:
The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decisions on both issues. The restriction of the addition on account of on-money to Rs. 60,70,000/- and the deletion of the addition on account of deemed rent were found to be justified and supported by relevant judicial precedents. The Tribunal's order was pronounced on 27th April 2022 in Ahmedabad.