Unsold Flats Are Not Tax-Free! Mumbai ITAT Explains Notional Rent, Municipal Value and Section 43CA Relief
For a builder, an unsold flat is inventory. For the Income Tax Department, however, it may also become a source of “notional rent”! A recent decision of the Mumbai Bench of the Income Tax Appellate Tribunal has once again brought this interesting issue into the spotlight.
In Haware Engineers and Builders (P.) Ltd. v. ACIT [2026] 185 taxmann.com 118 (Mumbai–Trib.), order dated 2 April 2026, the Tribunal dealt with assessment years 2016-17 and 2017-18 and considered three important issues concerning a builder-developer—taxability of notional rent on unsold inventory, disallowance of unsupported business promotion expenses and the tolerance limit under section 43CA.
The first issue: Can an unsold flat earn “notional rent”?
The assessee was engaged in the business of construction and development. It had completed flats and shops which remained unsold and were shown as stock-in-trade.
The Assessing Officer treated these completed but unsold units as deemed-let-out properties and computed annual letting value at 8.5% of the cost of construction. After allowing the applicable deduction, an addition was made under the head “Income from House Property”.
The assessee argued that the flats were its business stock-in-trade and, therefore, any income relating to them should be considered as business income. It also relied upon earlier decisions, including the decision of the jurisdictional Bombay High Court in PCIT v. Classique Associates Ltd. and the Gujarat High Court decision in Neha Builders (P.) Ltd.
The Tribunal, however, followed the principle laid down by the Delhi High Court in Ansal Housing Finance & Leasing Co. Ltd. and held that notional rental income from vacant unsold properties held as stock-in-trade was taxable under the head “Income from House Property.”
Thus, merely saying “it is my stock-in-trade” does not, by itself, take the property outside the charging provisions applicable to house property.
But there was an important relief for the assessee.
Taxable—but not at an arbitrary 8.5%!
The Tribunal did not approve the Assessing Officer’s method of simply applying 8.5% of the construction cost to determine the annual letting value.
The Tribunal referred to the Bombay High Court’s decision in CIT v. Tip Top Typography, which recognises the relevance of municipal rateable value in determining reasonable rental value. It also referred to the coordinate Bench decision in Dimple Enterprises v. DCIT, where an ad hoc estimate of deemed rent based on a percentage of investment was not accepted.
Accordingly, the Tribunal held that the Annual Letting Value (ALV) should be determined on the basis of the municipal rateable value, rather than by mechanically applying 8.5% to the cost of construction.
This distinction is extremely important.
The Revenue may be entitled to tax notional rent, but that does not give the Assessing Officer a licence to adopt any figure he considers appropriate. The determination of ALV has to have a reasonable and legally sustainable basis.
In simple words:
“Notional rent may be taxable, but notional valuation cannot be arbitrary.”
Second issue: Business promotion expenses need evidence
The assessee had also claimed business promotion expenses. However, the expenses could not be adequately supported by bills, vouchers or other documentary evidence.
The Assessing Officer therefore made an ad hoc disallowance of 10% of the claimed expenditure.
The Tribunal upheld the disallowance, observing that the assessee had failed to substantiate the expenditure with appropriate documentary evidence.
This part of the decision carries a straightforward message for businesses:
An expense may genuinely have been incurred, but genuineness must be capable of being demonstrated.
Bills, vouchers, payment details and supporting records are not merely accounting formalities. They can become the difference between an allowable business expense and a tax disallowance.
For builders and developers, where promotional expenditure can involve advertisements, customer events, brokerage-related activities, promotional campaigns and other expenses, proper documentation becomes particularly important.
Third issue: A small difference between sale price and stamp value
The third issue provides an interesting relief to real estate developers.
The assessee had sold certain flats at consideration lower than the value adopted by the Stamp Valuation Authority. The Assessing Officer invoked section 43CA and made an addition of approximately ₹3.26 lakh, representing the difference between the declared consideration and stamp duty value.
Section 43CA contains a deeming provision for certain transfers of land or building held as non-capital assets. However, a proviso was subsequently introduced providing a tolerance band where the stamp duty value does not exceed a specified percentage of the actual consideration.
The Tribunal noted that the proviso was introduced with effect from 1 April 2019 and that the tolerance limit was subsequently enhanced from 5% to 10%.
The important question was whether this beneficial tolerance provision could apply to the earlier assessment year involved in the case.
The Tribunal relied upon earlier coordinate Bench decisions, including Maria Fernandes Cheryl v. ITO and Karb Associates (P.) Ltd. v. DCIT, and held that the proviso was curative in nature and had retrospective application.
In the present case, the difference between the stamp duty value and actual sale consideration was less than 5%.
The Tribunal therefore deleted the addition of ₹3,26,342 made under section 43CA.
The practical lesson for builders
The decision gives three different messages:
1. Unsold completed inventory can have tax consequences.
A builder cannot automatically assume that vacant unsold flats are outside the scope of income from house property merely because they are held as stock-in-trade.
2. But the Revenue cannot adopt an arbitrary ALV.
If notional rent is to be assessed, municipal rateable value provides an important benchmark. A flat percentage of construction cost cannot be adopted mechanically without a proper basis.
3. Small variations in stamp duty value should not automatically result in section 43CA additions.
The tolerance-band provisions were introduced to avoid hardship in genuine transactions where the difference between the declared consideration and stamp valuation is marginal.
There is also a fourth lesson hiding in the judgment:
Maintain your papers!
The assessee succeeded in obtaining relief on the ALV and section 43CA issues, but failed on the business-promotion expenditure issue because supporting documentary evidence was not produced.
For taxpayers, therefore, the best tax planning advice may sometimes be very simple:
“Don’t just incur the expense. Preserve the evidence.”
A word of caution for builders
The ruling should not be read as laying down a universal rule that every unsold flat of every builder will always attract notional rent. The controversy has evolved considerably over the years, including legislative changes concerning unsold stock-in-trade.
The present decision primarily concerns the law applicable to the assessment years 2016-17 and 2017-18 and the judicial position considered by the Mumbai ITAT in that factual and statutory context.
For a builder, the exact assessment year, nature of the property, whether construction is complete, whether the property is actually let out, the applicable statutory provision and subsequent legislative amendments can all be relevant.
The TAX Talk
The interesting part of this judgment is that the taxpayer neither won everything nor lost everything.
The Tribunal effectively said:
“Yes, notional rent can be taxable—but calculate it properly.”
“Yes, expenses can be claimed—but support them with evidence.”
“And yes, section 43CA can apply—but a genuine transaction with only a marginal stamp-value difference should not be punished merely because of a deeming fiction.”
That is perhaps the broader lesson of tax litigation: the fight is not always about whether tax is payable; sometimes the real fight is about how much, under which head, and on what basis.
The copy of the order is as under:
