No ad hoc estimate allowed; MRV must be basis for deemed rent computation

The present appeal has been filed by a taxpayer named Paramjit Singh Mohansingh Obhan (Appellant) against the Assistant. Commissioner of Income Tax Circle 28(2), Navi Mumbai (Respondent), in the Income Tax Appellate Tribunal (ITAT) Mumbai Bench “C”, Mumbai, before Shri Om Prakash Kant (Accountant Member) and Shri Anikesh Banerjee (Judicial Member). The case is related to the assessment year 2017-18, and the final decision was announced on November 10, 2025.

Background of Case:

The assessee is a real estate developer who filed his income tax return (ITR), declaring a total income of approximately Rs. 10.36 lakh. However, the Assessing Officer (AO) did not accept this income and completed the assessment by determining income at Rs. 1.25 crore after making three additions:

• Rs. 7.37 lakh as deemed rent on unsold flats,
• Rs. 4.07 lakh as profit on the capitalised shop, and
• Rs. 3.61 lakh for payment to a related party.

The assessee, dissatisfied with the action of the assessing officer (AO), then approached the CIT(A). However, the authority only deleted one addition and upheld the other two additions made by AO. Aggrieved by the assessment, they thereafter filed an appeal before the ITAT Mumbai.

Issue 1: Deemed Rent on Unsold Flats

The AO added Rs. 7.37 lakh to the income of the assessee as “income from house property”, saying that the assessee should pay tax on notional rent (imaginary rent) on unsold flats that were kept as stock-in-trade (inventory). To support this point, the AO also cited an earlier judgment of the Delhi High Court, which allowed such additions.

• However, the assessee argued that since the flats were part of business stock and not rented out, they should be treated as business assets, not as house property. Therefore, the assessee flagged this addition as unfair and urged the tribunal to delete this.

Issue 2: Conversion of Shops into Capital Assets

The assessee had converted some shops from stock-in-trade to capital assets and shown them as investments. The AO added Rs. 4.07 lakh to the income of the assessee as notional profit, assuming a 10% margin.

ITAT’s Decision:

On the first issue, the tribunal noted that several Mumbai ITAT benches and courts have held that before A.Y. 2018-19, notional rent on unsold stock cannot be taxed. Section 23(5), which allows such taxation, came into effect only from 01.04.2018. The AO also wrongly used an 8% estimate instead of using the Municipal Rateable Value (MRV) as required by law.

• Therefore, in conclusion, the ITAT Mumbai remanded the case to the AO to recalculate the deemed rent properly using MRV, not an ad hoc percentage.

On the second issue, the tribunal noted that Section 28(via), which deals with such conversions, applies only from A.Y. 2019-20. Therefore, it cannot be applied to A.Y. 2017-18. There was no evidence that the assessee’s books were wrong or that the conversion was illegal.

• Therefore, in conclusion, the tribunal deleted the addition of Rs. 4.07 lakh made of assessee by the AO.

Final Outcome

• For ground 1 of deemed rent, the matter has been sent back to the assessing officer (AO) to recalculate using MRV. Meaning here, the appeal has been allowed for statistical purposes.
• For ground 2 of Conversion to Capital Asset, the tribunal deleted the addition of Rs. 4.07 lakh, meaning the appeal has been completely allowed.

Final Result: Appeal partly allowed.