ITAT Fixes ALV on Unsold Inventory; Disallows Unsupported Expenses

ITAT Fixes ALV on Unsold Inventory; Disallows Unsupported Expenses

M/s. Haware Engineers and Builders Pvt. Ltd., a real estate developer, filed its income tax returns for AYs 2016-17 and 2017-18. During the assessment, the Assessing Officer noted that the company had several completed flats and shops that remained unsold and were reflected as stock-in-trade. The AO treated these unsold units as “deemed let out” properties and calculated notional rental income at 8.5% of the construction cost under the head “Income from House Property”.

Apart from this, certain business promotion expenses were disallowed on the ground that the assessee failed to produce proper bills and vouchers. The AO also made additions under Section 43CA by adopting the stamp duty value of properties sold. These findings were affirmed by the Commissioner (Appeals), leading to the present appeal before the Tribunal.

Main Issue: The primary questions were whether unsold inventory held by a builder can be subjected to notional rent and whether business promotion expenses can be allowed in the absence of adequate documentary support.

Tribunal’s Decision: The Tribunal partly allowed the appeal. On the issue of notional rent, it held that prior to the introduction of Section 23(5), such unsold units could be taxed under “Income from House Property”. However, it found the AO’s method of applying a flat 8.5% rate to be arbitrary and directed that the Annual Letting Value should instead be determined based on Municipal Rateable Value, in line with the settled legal position.

It also clarified that no notional rent would apply to units where advances had already been received or which were still under construction. As regards business promotion expenses, the disallowance was upheld since the assessee could not substantiate its claim with proper evidence. On Section 43CA, the Tribunal directed the AO to allow the benefit of the 10% variation between sale consideration and stamp duty value, treating the amendment as retrospective in nature.

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