ITAT Rules on Notional Rent and Expense Disallowance for Real Estate Developers

The Income Tax Appellate Tribunal (ITAT) has recently ruled on the treatment of unsold inventory and business promotion expenses for real estate developers, specifically in the case of M/s. Haware Engineers and Builders Pvt. Ltd. The company, which filed its income tax returns for Assessment Years (AYs) 2016-17 and 2017-18, faced scrutiny from the Assessing Officer (AO) regarding its unsold flats and shops.

During the assessment, the AO 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.” Additionally, 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.

The main issue before the Tribunal was 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. 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 (ALV) should instead be determined based on Municipal Rateable Value, in line with the settled legal position.

The Tribunal 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.

This ruling provides important clarity for real estate developers on the treatment of unsold inventory and business promotion expenses. It emphasizes the importance of maintaining proper documentation and adheres to the legal standards for determining notional rent and expense disallowance. Real estate developers should take note of these guidelines to ensure compliance with tax regulations and avoid unnecessary disputes with tax authorities.