Bombay High Court
THE PR. COMMISSIONER OF TAX - 27versus3NN CORPORATION
- Decided
- Disposal
- DISMISSED
Holding
The Court held that tax on notional rent cannot be levied before an occupancy certificate is obtained, and therefore the appeal is dismissed.
Summary
The Revenue appealed against the ITAT order that allowed 3NN Corporation’s challenge to a revisional assessment that sought to tax notional rent on unsold flats. The Revisional Authority, invoking Section 263, had held that the Annual Letting Value of the completed but unsold flats was assessable as income from house property under Section 23(1)(a) for the period October 2012 to March 2013. The High Court examined whether tax could be levied before an occupancy certificate was issued, relying on the precedent set in Sharan Hospitality (P.) Ltd. v. Deputy Commissioner of Income‑Tax, which held that property not legally occupiable cannot attract notional rent. The Court found that the occupancy certificate was only obtained in May 2016, so the property was not occupiable during the disputed period, and therefore no tax liability arose. Consequently, the appeal was dismissed, affirming the ITAT’s decision.
Issues considered
- Whether the ITAT was correct in relying on CIT Vs. Vegetable Product Ltd. despite its reversal by the Supreme Court in Dilip Kumar and Company.
- Whether the assessee is liable to tax notional rental income under Section 23(1)(a) for a period before an occupancy certificate was issued.
- Whether unsold but completed flats can be treated as ‘income from house property’ for tax purposes.
Legislation cited
- Income Tax Act, 1961 — s. 143(3), 23(1)(a), 263
Subjects
- Income Tax
- Section 263
- Section 23(1)(a)
- Notional rent
- Occupancy certificate
- House property
- Assessment Year 2013-14
- Revisional authority
- Appeal dismissed
Judgment
15. ITXA-129-2020.doc
The Pr. Commissioner of IT Mumbai vs 3NN Corporation
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
INCOME TAX APPEAL NO. 129 OF 2020
The Pr. Commissioner of Income Tax-27 .. Appellant
V/s.
3NN Corporation .. Respondent
______________________________________
Mr. Arjun Gupta for Appellant – Revenue.
Mr. Pankaj Toprani (through VC) a/w Mr. C. M. Lokesh i/b PRH Juris for
Respondent.
_______________________________________
CORAM : B. P. COLABAWALLA AND
FARHAN P. DUBASH, JJ.
DATE : 30th SEPTEMBER 2026
P.C.:
1. The above appeal has been filed by the Revenue seeking to challenge the
order dated 10th April 2019 passed by the Income Tax Appellate Tribunal,
Mumbai (“ITAT”) in ITA No. 2637/Mum/2016. This appeal (before the
Tribunal) was filed by the Assessee challenging the order passed by the Pr.
Commissioner exercising powers under Section 263 of the Income Tax Act,
1961 (“the Act”). The Assessment Year in question is 2013-14.
2. According to the Revenue, the impugned order of the ITAT gives rise to the
following substantial question of law:
“On the facts and circumstances of the case and in law, whether the
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The Pr. Commissioner of IT Mumbai vs 3NN Corporation
Hon’ble Tribunal was correct in relying on the decision of the
Supreme Court in the case of CIT Vs. Vegetable Product Ltd. (1973)
88 ITR 192 (SC) without considering the fact that the said judgement
was reversed by the Hon’ble Supreme Court (5 Member Bench) in the
case of M/s Dilip Kumar and Company and others?”
3. Having gone through the impugned order as well as the order passed by the
Pr. Commissioner exercising his revisional powers under Section 263, we
find that the real issue arising in the present case is whether the Assessee
was liable to pay tax on the rental income of the property from 25 th October
2012 to 31st March 2013, on a notional basis under Section 23(1)(a) of the
Act.
4. The facts of this case reveal that the Assessee is a partnership firm engaged
in the business of building and developing immovable properties. The
Assessee filed its return for Assessment Year 2013-14, declaring its total
income at Rs. 29.86 Lakhs. This assessment was picked up for scrutiny and
an Assessment Order was passed under Section 143(3), determining the
total income of the Assessee at Rs. 31.11 Lakhs.
5. After this, for Assessment Year 2013-14, on verification of the records, the
Pr. Commissioner was of the opinion that the Assessee had one residential
project situated in Taluka Bhiwandi, District Thane in which buildings A, B
and C were completed on 25th October 2012. The Assessee had offered
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The Pr. Commissioner of IT Mumbai vs 3NN Corporation
income of Rs. 8.06 Crores from the sale of the flats. The Revisional
Authority also noticed from the balance sheet and profit and loss account,
that the Assessee had shown a closing stock of Rs. 8.13 Crores. The
Revisional Authority was of the opinion that the Annual Letting Value of
flats/shops built by the Assessee [who is engaged in the construction
business] lying unsold, was assessable as ‘Income from House Property’
and the Assessee was liable to pay income tax on the Annual Letting Value
of the unsold flats/shops. In support of the aforesaid contention, the
Revisional Authority relied upon a decision of the Delhi High Court in the
case of CIT Vs. Ansal Housing Finance & Leasing Co. Ltd. [2012 SCC
OnLine Del 5565] and the decision of the Tribunal in the case of M/s. Om
Prakash & Co. [87 TTJ 183].
6. Accordingly, the Revisional Authority came to the conclusion that the Gross
Annual Value of the rent income came to Rs. 56.97 Lakhs (7% of Rs. 8.13
Crores) and after statutory deductions, the taxable Net Annual Value
worked out to Rs. 39.88 Lakhs. As the project was completed on 25 th
October 2012, the Revisional Authority came to the conclusion that the
notional rent for the five months was assessable and therefore an amount of
Rs. 16.61 Lakhs remained to be assessed and taxed under the head ‘Income
from House Property’. It is on this basis that the Revisional Authority held
that the Assessment Order passed under Section 143(3) was prejudicial to
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The Pr. Commissioner of IT Mumbai vs 3NN Corporation
the interest of the Revenue, which then gave the power to the Revisional
Authority to invoke powers under Section 263.
7. Being aggrieved by this order of the Revisional Authority, the Assessee
preferred an appeal before the ITAT, which was allowed by the impugned
order.
8. From the record, we find that, though the completion certificate was issued
on 25th October 2012, the occupancy certificate was issued only on 25 th May
2016. Until the occupancy certificate was issued, the property was not
legally occupiable and hence the question of levying any notional rent under
the provisions of Section 23(1)(a) could not arise. We find that this very
issue has been considered by this Court in the case of Sharan Hospitality
(P.) Ltd. Vs. Deputy Commissioner of Income-tax, Circle 9(3) [2019] 112
taxmann.com 372 (Bombay). Paragraph 6 of this decision reads as under:
“6. We have heard the learned Counsel appearing for the parties and
perused the documents on record. It is not necessary to enter into the
interpretation of Section 23(1)(c) of the Act, since this issue can be
thrashed out on the facts and the first principles emerging from the
statutory provisions. As noted, the facts are that though the Assessee
acquired the property in question under Conveyance Deed dated 18th
December, 2008, the OC for the property in question was obtained by
the builder only in May, 2009. Under such circumstances, by
operation of law, such property could not have been legally occupied
by either the Assessee or any other person under the license given by
the Assessee. It is a different matter that the Assessee did execute a
lease deed putting the leasee in possession of the property on 1 st April,
2009. The Assessee’s explanation is that the same was only for
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The Pr. Commissioner of IT Mumbai vs 3NN Corporation
completing the furniture and fixtures and not for occupation for
commercial use. We are not in the present Appeal concerned with the
correctness of this explanation. What we are however concerned about
is the fact that the Revenue wishes to tax the Assessee for the so-called
occupation of the property between 1st January, 2009 to 31st March,
2009. This is the period during which the Assessee had neither
occupied the property nor put lessee in possession of the property nor
earned any rental income. The property was in fact during the period
in question legally not occupiable nor occupied. Under the
circumstances, the question of charging tax on notional rental income
during such period does not arise.
(emphasis supplied)
9. As can be seen from the aforesaid decision, until an occupancy certificate
was obtained, there was no question of charging tax on rental income on a
notional basis. Since the issue in the present case is squarely covered by the
decision of this Court in Sharan Hospitality (P.) Ltd. (supra), we find no
merit in the above appeal. The appeal is accordingly dismissed. However in
the facts and circumstances of the case, there shall be no order as to costs.
10. This order will be digitally signed by the Private Secretary / Personal
Assistant of this Court. All concerned will act on production by fax or email
of a digitally signed copy of this order.
( FARHAN P. DUBASH, J. ) ( B. P. COLABAWALLA, J.)
Shubham Gadhavepatil
Digitally signed
by SHUBHAM
SHUBHAM SHESHRAO
SHESHRAO GADHAVEPATIL
GADHAVEPATIL Date:
2026.10.05
12:53:42 +0530
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Order dated 30th September 2026
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