2018 (4) TMI 1710 - AT - Income Tax

Genuineness of expenditure - Disallowance of employees expenses and other expenses on account of alleged unverifiability - not filing the proper vouchers in support of the claim - HELD THAT - AO issued show cause notice to the assessee to produce the books of accounts along with vouchers for verification of genuineness of the expenditure claimed. The assessee failed to produce the requisite supporting evidence. Even before the ld. CIT (A) the assessee did not produce the vouchers in support of the claim of expenditure. It is not the case of the AO that the expenditure is excessive. Keeping in view the nature of business activity of the assessee and further the nature of expenditure as claimed by the assessee is also not disputed to be incurred wholly and exclusively for the purpose of business of the assessee therefore in the facts and circumstances of the case we are of the considered view that the disallowance on account of not filing the proper vouchers in support of the claim shall be restricted to 10% instead of 20%. We direct the AO accordingly to restrict the disallowance to 10% of the expenditure. - Decided partly in favour of assessee. Taxability of notional rental income in respect of unsold space held as stock-in-trade -Notional income assessed by the AO u/s 23(1)(a) in respect of unsold stock-in-trade - AO proposed to determine the ALV of the unsold space which is not let out by taking into consideration the rent in respect of the portion let out at ground floor of the complex - HELD THAT - It is mandate that the AO has to determine the annual letting value by considering the reasonable rent expected to be fetched by the property on the basis of the method provided for fixation of standard rent or computation of rateable value. Since in the case in hand the 4th floor of the property is not eligible for fixation of standard rent being unauthorized construction and subjected to demolition action of the Municipal authorities therefore in the normal circumstances the reasonable rent expected to be fetched by such property would be nil. Since the property in question is newly constructed and held as stock-in-trade therefore the vacancy of the property being not let out is not intentional or deliberate act on the part of the assessee but it is beyond the control of the assessee to find a tenant for such unauthorized construction. Once the non-letting of the property is not due to the reason of intentionally keeping vacant by the assessee but it is because of the fact and circumstances that the said space could not be let out despite the best efforts of the assessee the benefit of vacancy under section 23(1)(c) would be available to the assessee. As per the provisions of section 23(1)(c) the property can be vacant during the whole of relevant previous year and therefore both situation cannot co-exist that the property is actually let out and also the same is vacant during the whole year. Accordingly in the facts and circumstances of the case when it was not possible for the assessee to let out the property then the benefit of section 23(1)(c) would be available to the assessee. Hence the initial delay in letting out the property first time cannot be considered as deemed let out as per the provisions of section 23 of the Act. Accordingly we are of the considered view that the ALV of the property in question would be Nil as it was not possible to let out the property during the year under consideration and further the unauthorized construction of the property is otherwise not eligible for determination of standard rent or rateable value and consequently there is no basis for determination of ALV of the property under section 23(1)(a) of the Act. Hence we delete the addition made by the AO. - Decided in favour of the assessee

Summary

Issues Involved:
1. Disallowance of expenses.
2. Notional income from unsold stock of the commercial complex assessed under 'Income from House Property'.
3. Unauthorized constructed area and its impact on rental income assessment.
4. Determination of Average Monthly Rent for unsold area.

Detailed Analysis:

1. Disallowance of Expenses:
The assessee, engaged in real estate development, faced a disallowance of Rs. 2,40,804/- by the AO out of total expenses of Rs. 12,04,021/- due to unverifiability. The AO requested the assessee to produce books of account and vouchers, which were not provided. The CIT(A) upheld this disallowance. The assessee argued that the expenses were fully verifiable and incurred for business purposes, citing various judicial precedents to support their claim. The Tribunal noted that while the expenses were not found excessive, the lack of supporting vouchers justified a partial disallowance. Therefore, the Tribunal directed the AO to restrict the disallowance to 10% instead of 20%.

2. Notional Income from Unsold Stock:
The AO assessed the notional annual letting value (ALV) of the unsold space in the commercial complex 'Silver Square' under sections 22 and 23 of the IT Act, based on rent from a portion let out to M/s. Domino's Pizza. This resulted in an addition of Rs. 1,04,60,370/- after deductions. The assessee contended that the unsold stock, held as stock-in-trade, should be assessed under 'Income from Business' rather than 'Income from House Property', citing judgments from the Gujarat High Court and the Supreme Court. The Tribunal acknowledged divergent views on this issue but leaned towards the assessee's stance, noting that the property held as stock-in-trade should not be subjected to notional rental income under 'Income from House Property'.

3. Unauthorized Constructed Area:
The assessee argued that the 4th floor, measuring 2355.50 sq. ft., was unauthorized and could not be let out, thus should not be considered for ALV determination. The Tribunal found that the 4th floor was indeed unauthorized and subject to demolition by municipal authorities, making it ineligible for standard rent determination. Consequently, the ALV of such property was deemed to be nil.

4. Determination of Average Monthly Rent:
The AO determined the ALV based on the rent of Rs. 77.22 per sq. ft. for the unsold area, which was contested by the assessee. The Tribunal concluded that since the unauthorized construction could not be let out and was facing demolition, the ALV for this area should be nil. Additionally, the Tribunal noted that the property was vacant not due to the assessee's intent but due to circumstances beyond their control, thus allowing the benefit of vacancy under section 23(1)(c).

Conclusion:
The Tribunal partly allowed the appeal, reducing the disallowance of expenses to 10% and deleting the addition of notional income from the unsold stock held as stock-in-trade. Consequently, grounds regarding unauthorized construction and average monthly rent became infructuous. The order was pronounced on 27/04/2018.