In a significant ruling for real estate developers, the Income Tax Appellate Tribunal (ITAT) Mumbai Bench has partially set aside an order involving prominent Mumbai-based builder Raheja Universal Pvt. Ltd., directing the Assessing Officer to re-examine the deemed rental income on unsold flats held as stock-in-trade. The decision, pronounced on February 3, 2026, in ITA No. 5344/Mum/2025 (AY 2018-19), highlights ongoing debates around taxation of unsold inventory under Section 23(5) of the Income Tax Act.
Raheja Universal, a leading real estate developer with over four decades in the industry and more than 10 million sq. ft. developed across residential, commercial, and township projects in Mumbai and Navi Mumbai, had challenged several additions made by the tax department during assessment.
The key highlight of the order is the tribunal’s directive on deemed (imaginary/notional) rent for unsold flats. Under Section 23(5) of the Income Tax Act (introduced to provide relief to builders), unsold residential units held as business stock-in-trade are exempt from deemed rental income for the first two years after receiving the completion certificate. After this period, if flats remain unsold, the law requires adding a reasonable deemed rent as taxable income under the head “Income from House Property” — even if no actual rent is earned.
In this case, the Assessing Officer had estimated a high deemed rental value of approximately ₹12.18 lakh by applying 8.5% to the construction cost, citing the Bombay Rent Control Act. Raheja Universal argued that a realistic figure was only ₹2 lakh, considering factors like the age of the property (over 20 years old), need for repairs, and remote location.
The ITAT observed that neither side provided sufficient evidence to justify their figures. The tribunal noted:
- The AO failed to explain the basis for the 8.5% rate or the applicability of the Bombay Rent Control Act.
- The assessee did not fully substantiate the ₹2 lakh offer with objective proof (such as municipal ratable value, comparable market rents, property condition reports, or location details).
The bench, comprising Accountant Member Shri Om Prakash Kant and Judicial Member Shri Raj Kumar Chauhan, set aside the CIT(Appeals)’ order on this point and restored the matter to the Assessing Officer for fresh determination. The AO must now re-calculate the annual lettable value based on verifiable evidence, after giving the company a reasonable opportunity to present documents.
This ruling underscores the need for objective, evidence-based valuation in deemed rent cases involving builders’ unsold inventory, rather than arbitrary percentages or unsupported estimates.
Other Key Outcomes in the Order The tribunal largely favored Raheja Universal on several other grounds:
- Section 14A disallowance (expenses related to tax-free dividend income): Restricted to the actual exempt income of just ₹1,465 (from an AO claim of ₹87.61 lakh), following settled precedents that disallowance cannot exceed exempt income.
- Bad debt write-off (principal loan of ₹9 crore to a wholly-owned subsidiary): Allowed in full under Section 36(1)(vii), as interest portions were previously taxed. The tribunal dismissed Revenue’s grounds as academic since alternative findings (business loss under Section 28/37) went unchallenged.
- Hotel and club expenses (₹18.7 lakh): Fully allowed as business expenditure for networking and meetings, citing low percentage of turnover and Supreme Court precedents.
- Clerical error in return (₹26.84 lakh wrongly shown under Section 44AE): Sent back to AO for verification and possible deletion, as appellate authorities can entertain such fresh claims.
Overall, the tribunal partly allowed the Revenue’s appeal (for statistical purposes on the deemed rent issue) while allowing the company’s cross-objection similarly. The decision provides partial relief to Raheja Universal while emphasizing proper documentation in tax disputes involving unsold stock.
This case is being watched closely in the real estate sector, where unsold inventory taxation remains a contentious area amid market slowdowns.
Also Read: Raheja Universal Reacquires Raheja Centre Point, Kalina for ₹211 Crore
