The Surat Bench of Income Tax Appellate Tribunal ( ITAT ) upheld the Principal Commissioner of Income Tax (PCIT)’s revisionary order under Section 263 after finding that the Assessing Officer(AO) failed to examine notional rent on unsold flats under Section 23(5) of Income Tax Act,1961, in a completed real estate project.

Shree Infra, appellant-assessee, filed its return of income for AY 2018-19 on 27.09.2018, declaring ‘Nil’ income. The case was picked for scrutiny to examine income from real estate business, and the AO completed the assessment under section 143(3) without making any additions.

Later, the PCIT reviewed the records and found that the assessee had completed Phase-1 of its ‘River View Heights’ project in FY 2014-15, obtained the Building Use Certificate, and sold 230 out of 260 flats by 31.03.2018. Thirty flats remained unsold, but the assessee had not offered notional rental income on them, as required under section 23(1) and section 23(5).

The PCIT observed that while the AO had asked for stock and sales details, no inquiry was made about notional rent on the unsold flats. Using the balance sheet value of ₹5.68 crore and an 8.4% rental yield based on a Gujarat High Court ruling, the PCIT calculated notional rent at ₹47.73 lakh.

Holding that the AO failed to apply the correct legal provisions and that the assessment order was erroneous and prejudicial to the department, the PCIT invoked section 263. The assessee challenged this revisionary order before the tribunal.

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The two member bench comprising Siddhartha Nautiyal (Judicial Member) and Bijayananda Pruseth (Accountant Member) reviewed the submissions and examined the record. It found that the Assessing Officer had not made any inquiry about section 23(5) of the Act or asked the assessee for an explanation on this issue.

It noted that section 23(5) allows the annual value of unsold flats held as stock-in-trade to be treated as nil only for two years after the completion certificate is issued. After that, the annual value must be calculated. In this case, the flats were completed earlier, remained unsold, and section 23(5) applied for AY 2018-19.

The appellate tribunal held that the AO failed to look into this matter. It also observed that the assessee’s reliance on the Pegasus Properties Pvt. Ltd. ruling needed a detailed examination, which had not been done.

The ITAT therefore upheld the PCIT’s order and refused to interfere.

Therefore, the appeal was dismissed.

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