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TMI Blog2019 (5) TMI 675X X X X Extracts X X X X X X X X Extracts X X X X ..... view that in the present case, no disallowance of expenses under Sec.14A r.w.r 8D is called for - Decided in favour of assessee Taxability of rental income on property held in stock in trade under the head income from house property - 32 unsold flats/shops - Deemed rent in respect of unsold units - AO was of the view that since assessee was owner of two or more house properties, provision of Sec.23(4) would be attracted and as per which assessee should have offered deemed rental income from the aforesaid properties - why the deemed rent in respect of closing stock not be brought to tax? - HELD THAT:- We find that in the case of CIT Vs. Neha Builders Pvt. Ltd. [ 2006 (8) TMI 105 - GUJARAT HIGH COURT] has held that when the business of the assessee is to construct the property and sell it or to construct or let out then that would be the business and the business stocks which may include movable and immovable properties would be taken to be stock-in- trade and any income derived from such stocks cannot be termed as income from house property . Following the decision of Co-ordinate Bench of the Pune Tribunal in the case of M/s. Cosmopolis Construction Vs. ITO [ 2018 (9) TMI 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5,00,000/- offered by the assessee was more than sufficient to cover the indirect expenditure incurred, if any, for earning exempt income and hence, the disallowance confirmed by the CIT(A) should be deleted. 4. Without prejudice to the above grounds, the learned CIT(A) erred in not appreciating that the investments made by the appellant company in partnership firms and group companies were out of commercial expediency and the same was not made with an intention to earn tax free income an hence, if at all, any disallowance u/s 14A r.w.r 8D is to be made, then the amount of investments made in group concerns should be excluded of computing the disallowance. 5. Without prejudice to the above grounds, the learned CIT(A) failed t appreciate that the investments on which no tax free income was earned b the assessee in this year should have been excluded while determining the disallowance u/s 14A r.w.r. 8D. 6. Without prejudice to the above grounds, the assessee submits that the investment made in partnership firms is not a tax free investment since the income earned by the firm is subjected to income tax and hence, the investm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /s 14A of the Act. 4. During the course of assessment proceedings, on perusing the computation of income, AO noticed that assessee had earned exempt income in the form of dividend and share of profits to the extent of 13.20 crores (rounded off). It was the claim of the assessee that no expenditure was incurred for earning exempt income but however ₹ 5 lakhs was suo moto disallowed u/s 14A of the Act by the assessee on adhoc basis. Assessee was asked to explain as to why disallowance u/s 14A of the Act not be made u/s 14A r.w.r. 8D of Income Tax Rules, to which assessee inter-alia stated that it has not incurred any expenditure for earning exempt income, the investments are out of own funds and no borrowed funds have been used for making the investments. The submissions of the assessee were not found acceptable to the AO. AO thereafter concluded that the provisions of Sec.14A of the Act are applicable to assessee. He thereafter, on the basis of method prescribed under Rule 8D of I.T. Rules, worked out the disallowance at ₹ 4,82,14,704/- and after giving credit of ₹ 5,00,000/- being the suo moto disallowance made by the assessee, disallowed the bal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which the AO appear to have included, The appellant claims that as per the ITAT decision only those investments should be considered from which the appellant had actually received income/dividend. However I find that the honourable ITAT had confirmed the disallowance of ₹ 10 lakh on an ad hoc basic. Further, the CBDT circular no 5/2014 was not brought to the notice of the honourable ITAT. The circular makes it very clear that even if no income is actually earned during the year, disallowance u/s 14A should be considered. 4.18 I cannot indulge in disallowance on an ad-hoc basis. Therefore I hold that it will be proper to apply Rule 8D (2)(iii) to work out the disallowance out of the indirect expenditure, The working is as under: 281.17 cr X .5% = 1.40 Cr. Accordingly disallowance of ₹ 1.40 Cr. is confirmed as against the disallowance of ₹ 4.82 cr made by the AO u/s 14A. Aggrieved by the order of Ld.CIT(A), assessee is now in appeal before us. 5. Before us, Ld.A.R. reiterated the submissions made before AO and Ld.CIT(A) and further submitted that in the present case, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee. It has further held that in the absence of recording of non-satisfaction in terms of Sec.14A(2) of the Act, invocation of Rule 8D is not permissible. The relevant question before the Hon ble High Court and its observation are as under : 2. The Revenue urges the following questions of law for our consideration :- ( a) .. ( b) .. ( c) Whether on the facts and in the circumstances of the case and in law, the Tribunal was right in deleting addition of ₹ 1,10,72,191/- being disallowance made u/s 14A r/w Rule 8D, without giving the AO opportunity to remove any defect, if at all caused by non-mention of the satisfaction. Any such requirement was wrongly read by the Tribunal ? 3 . 4. Regarding question no.(c):- ( a) In its return of income, the respondent made a suo-moto disallowance of ₹ 15.21 lakhs being the expenditure incurred to earn exempt income under Section 14A of the Act. The Assessing Officer disregarded the same and proceeded to disallow an amount of ₹ 1.10 crores und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In view of the aforesaid facts and relying on the decision of Hon ble Bombay High Court cited supra and in view of the absence of recording of necessary satisfaction in terms of Sec.14A(2) of the Act, we are of the view that in the present case, no disallowance of expenses under Sec.14A r.w.r 8D is called for. We therefore direct the deletion of addition made by AO and upheld by Ld.CIT(A). Thus, the ground of the assessee is allowed. 8. Now, we take other issue of deemed rent in respect of unsold units. 8.1. During the course of assessment proceedings, AO noticed that assessee was holding closing stock of 32 unsold flats/shops. AO was of the view that since assessee was owner of two or more house properties, provision of Sec.23(4) of the Act would be attracted and as per which assessee should have offered deemed rental income from the aforesaid properties. The assessee was therefore asked as to why the deemed rent in respect of closing stock not be brought to tax. The submission of the assessee made before AO was not found acceptable to AO. AO thereafter relying on the decision of Hon'ble High Court in the case of CIT Vs. Ansal Housing and Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich were unsold, which were neither given on rent nor the assessee had intention to let out the flats, no deemed rental income could be considered in assessee s hands. We further find that the Co-ordinate Bench of Pune Tribunal in the case of M/s. Cosmopolis Construction (in ITA Nos.230 and 231/PUN/2018 dt.12.09.2018) after considering the decision of Hon ble Gujarat High Court in the case of CIT Vs. Neha Builders (P) Ltd., (supra), the decision of Mumbai Tribunal in the case of C.R. Developments Pvt. Ltd., (supra) after also considering the decision in the case of CIT Vs. Ansal Housing and Construction reported in [2013] 29 taxmann.com 303 has held that no notional annual rental value on unsold flats held in stock-in-trade can be made in assessee s hands. The relevant findings of the Co-ordinate Bench of the Tribunal is as under : 7. The issue before us for adjudication is whether the notional annual rental value on unsold flats held as stock-in-trade by the assessee is to be assessed under the head Business Income or under the head Income from House Property . The Hon ble Gujarat High Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a 'stock-intrade . 8 . In the case of Commissioner of Income Tax Vs. Ansal Housing Finance And Leasing Co. Ltd. (supra) the Hon ble Delhi High Court taking a contrary view has held that annual rental value on unsold flats built by assessee engaged in construction business is assessable as income from house property. It is a well settled law that when two divergent views of non-jurisdictional High Courts are available and there is no decision on the issue from the Jurisdictional High Court, the view in favour of the assessee has to be adopted [Commissioner of Income Tax Vs. Vegetable Products Ltd.(supra)]. 9. In so far as the decision of Hon ble Bombay High Court in the case of Commissioner of Income Tax Vs. Sane Doshi Enterprises (supra) is concerned we find that the facts in the said case are at variance. In the said case the assessee was engaged in construction business. The assessee rented out unsold flats and suo-motu offered rental income from the flats under the head Income from House Property . On the contrary the Revenue wanted to tax rental income under the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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