ITAT Upholds Relief for Real Estate Developer: No Notional Rent on Unsold Commercial Units

The Delhi bench of the Income Tax Appellate Tribunal (ITAT) has upheld substantial relief granted to a real estate developer by holding that notional rent cannot be computed for the period during which unsold commercial units were held as stock-in-trade. This decision dismissed the Revenue’s appeal challenging the deletion of a major notional rent addition.

The Revenue had challenged the order of the Commissioner of Income Tax (Appeals) (CIT(A)) that deleted most of the addition of Rs. 4.39 crore made towards notional rent in the case of AAkarshan Estate Pvt. Ltd. for the Assessment Year 2018-19.

AAkarshan Estate Pvt. Ltd. had developed a commercial project known as “M2K Corporate Park” in Sector-51, Gurgaon. During the relevant year, the company converted its remaining unsold inventory, measuring 1,84,294.33 square feet, from stock-in-trade into an investment property with effect from January 1, 2018.

During assessment proceedings, the Assessing Officer (AO) observed that part of the commercial space had been let out and generated rental income. The AO reasoned that the balance area was also capable of earning rent. Based on this, the AO computed notional rent of Rs. 4,39,49,118 and added this amount to the assessee’s income.

The CIT(A) partly allowed the appeal. The appellate authority noted that Section 23(5) specifically provides relief in respect of property held as stock-in-trade. The CIT(A) found that the AO had incorrectly computed notional rent for the entire year without distinguishing between the period when the property was stock-in-trade and the period after its conversion into an investment asset.

The CIT(A) further observed that only 48,692 square feet remained vacant during the relevant period and computed notional rent only for the three-month post-conversion period from January to March 2018. After allowing the statutory deduction under Section 24(a), the addition was restricted to Rs. 51,12,660.

Before the tribunal, the Revenue argued that since part of the premises had been leased out and rental income was earned, the unsold portion was also capable of generating rental income and should be subjected to notional rent. The assessee’s counsel relied on the findings of the CIT(A) and various tribunal decisions supporting its case.

The bench comprising Satbeer Singh Godara (Judicial Member) and Naveen Chandra (Accountant Member) observed that the CIT(A) had correctly applied Section 23(5) while determining the annual letting value of the vacant area after the conversion of the property from stock-in-trade to a capital asset.

The tribunal further noted that the findings of the CIT(A) regarding the actual vacant area and computation of notional rent were reasonable and based on correct facts. Finding no reason to interfere with the appellate order, the tribunal dismissed the Revenue’s appeal.

This decision provides clarity and relief to real estate developers, particularly those dealing with unsold commercial units. It emphasizes the importance of distinguishing between the periods when properties are held as stock-in-trade and when they are converted to investment assets, ensuring fair and accurate tax assessments.