Validity of addition on Account of Deemed Rent in respect of unsold Flats Held as Stock-in-Trade
An interesting issue arose before ITAT Mumbai in the case of Paramjit Singh Mohansingh Obhan v. ACIT, Circle-28(2), Navi Mumbai –
ITA No. 4863/Mum/2025 | Date of Order: 10 November 2025
– regarding the validity of addition on Account of Deemed Rent in respect of unsold Flats Held as Stock-in-Trade.
Let us have a Short Overview of the Case: –
The assessee, a real-estate promoter and developer, filed his return of income declaring total income of ₹10,36,590. During scrutiny assessment under section 143(3), the Assessing Officer (AO) determined total income at ₹1,25,43,050, inter alia, by making:
• An addition of ₹7,37,275 under the head “Income from House Property” on account of deemed rent on unsold flats,
• An addition of ₹4,07,686 as profit element on capitalisation of shop, and
• Disallowance of ₹3,61,500 as payment to related party (later deleted by CIT(A)).
The CIT(A) confirmed the additions on account of deemed rent and capitalisation profit. The assessee preferred an appeal before the ITAT.
Issue 1 – Deemed Rent on Unsold Flats
The AO computed notional rent at 8% of the value of unsold flats treating them as house property, relying on Delhi High Court decisions in CIT v. Ansal Housing & Construction (389 ITR 373) and CIT v. Ansal Housing Finance & Leasing Ltd. (354 ITR 180).
The assessee contended that such unsold flats constituted stock-in-trade and therefore any notional rental value could not be taxed under the head “Income from House Property”. Reliance was placed on:
• Rajendra Godshalwar v. ITO (ITA No.7470/Mum/2017), and
• Runwal Constructions v. ACIT,
wherein ITAT held that no deemed rent could be taxed on unsold stock-in-trade prior to the insertion of section 23(5) by Finance Act, 2017 (effective 01.04.2018).
The Department relied on Inorbit Malls Pvt. Ltd. v. DCIT (ITA No. 2220/Mum/2021) and CIT v. Sane & Doshi Enterprises (377 ITR 165, Bom).
Tribunal’s Observations
• The Tribunal noted that section 23(5) governs deemed rent on unsold stock-in-trade only from AY 2018-19 onwards; therefore, for earlier years, the issue must be examined in light of judicial precedents.
• The Coordinate Bench in Inorbit Malls Pvt. Ltd. (supra) had reconciled conflicting High Court decisions and held that for pre-2018 years, notional rent, if taxable, should be computed on Municipal Rateable Value (MRV) and not on any arbitrary percentage of investmen
• The Hon’ble Bombay High Court in Sane & Doshi Enterprises had held that rental income from unsold flats is taxable under the head “Income from House Property” and that mere classification as stock-in-trade in the books does not change the tax character.
Following the jurisdictional High Court’s ratio and the coordinate bench decision in Inorbit Malls Pvt. Ltd., the ITAT directed the AO to recompute the deemed rent based on the MRV instead of applying an ad hoc 8% rate.
Held: Ground No. 1 allowed for statistical purposes.
The copy of the order is as under:
