ITAT Mumbai: Notional Rent on Unsold Flats Taxable as House Property Income; ALV Must Be Based on Municipal Value, Not Ad Hoc Estimates

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has ruled that notional rental income arising from unsold flats and shops held as stock-in-trade is taxable under the head “Income from House Property.” However, the Tribunal clarified that such notional rent cannot be computed on an arbitrary percentage of investment and must instead be determined based on the Municipal Rateable Value.

The decision came in a batch of appeals filed by Haware Engineers and Builders Pvt. Ltd. for Assessment Years 2016–17 and 2017–18, challenging additions made by the Assessing Officer (AO) and sustained by the Commissioner of Income Tax (Appeals).

The assessee, a real estate developer, had disclosed unsold flats and shops as stock-in-trade. During assessment proceedings, the AO treated these unsold units as deemed let-out properties and computed their Annual Letting Value (ALV) at 8.5% of the construction cost, resulting in additions under the head “Income from House Property.”

The Tribunal upheld the principle that even if such units remain vacant, notional rental income is chargeable to tax under the head “Income from House Property.” Relying on the Delhi High Court’s ruling in Ansal Housing Finance and Leasing Co. Ltd., the Bench observed that taxability arises from ownership, and not from actual receipt of rent.

At the same time, the Tribunal found fault with the method adopted by the AO in estimating ALV at a flat rate of 8.5% of investment. Referring to the Bombay High Court’s judgment in CIT v. Tip Top Typography, it held that such ad hoc computation is unsustainable. The AO was directed to determine ALV based on Municipal Rateable Value, which is considered a more reliable benchmark.

On the issue of business promotion expenses, the Tribunal upheld the disallowance of 10% made by the AO. It noted that the assessee had failed to furnish supporting bills, vouchers, or documentary evidence, even during appellate proceedings, to substantiate the expenditure claim.

The Tribunal also granted relief to the assessee on the addition made under Section 43CA of the Income Tax Act. It observed that the proviso inserted by the Finance Act, 2018—providing a tolerance band where stamp duty value does not exceed 105% of the consideration—is curative in nature. Following coordinate bench precedents, it held that the proviso has retrospective application. Since the variation in the present case fell within the permissible limit, the addition was deleted.

Accordingly, the Tribunal partly allowed the appeals—upholding taxability of notional rent but directing proper computation based on municipal valuation, sustaining disallowance of expenses, and deleting the addition under Section 43CA.

Case Details:
Haware Engineers and Builders Pvt. Ltd. vs Assistant Commissioner of Income Tax
ITA No. 6353/Mum./2025 & ITA No. 6354/Mum./2025
Coram: Sandeep Singh Karhail (Judicial Member), Om Prakash Kant (Accountant Member)