No Section 23(5), 69, or 68 Additions Allowed Without Completion Proof or Real Cash Credits

By | October 21, 2026
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No Section 23(5), 69, or 68 Additions Allowed Without Completion Proof or Real Cash Credits

Issue

  1. Section 23(5) (Notional Rent on Vacant Unit): Whether notional rent under Section 23(5) can be added to house property income for a vacant commercial unit held as stock-in-trade when the unit is incomplete, undergoing modification, and not lawfully occupiable during the relevant previous year.
  2. Section 69 (Unexplained Investment): Whether an amount of ₹42,00,000 received as a refundable security deposit from a lessee can be treated as an unexplained investment under Section 69.
  3. Section 68 (Cash Credit on Opening Stock): Whether a brought-forward opening stock balance can be treated as a fresh unexplained cash credit under Section 68 merely due to an omission or incorrect disclosure of closing stock in the immediately preceding year’s return.

Facts

  • Assessee Profile: The assessee is a partnership firm engaged in real estate development holding commercial units as stock-in-trade.
  • Issue I – Section 23(5) Addition:
    • For AY 2020–21, one commercial unit was let out while another unit remained vacant.
    • The AO invoked Section 23(5), adopted a monthly rent of ~₹2.00 lakhs based on an online listing, and added ~₹16.84 lakhs under “Income from house property”.
    • The CIT(A) deleted the addition because the unit was undergoing reconfiguration/modification under a revised plan, and the Revenue failed to prove completion or occupiability during the year.
  • Issue II – Section 69 Addition:
    • The AO proposed an addition of ₹42,00,000 under Section 69 alleging the assessee purchased an immovable property from HDFC Bank Ltd.
    • Examination of the registered lease deed (dated 13.09.2019) revealed that the assessee had actually let out premises to HDFC Bank Ltd. and received ₹42,00,000 as a security deposit, which was properly recorded in its books.
  • Issue III – Section 68 Addition:
    • The assessee carried forward an opening stock of ₹27,49,50,173 as on 01.04.2019 representing three commercial units.
    • Observing that closing stock was omitted in the preceding year’s return, the AO treated the entire opening stock balance of ~₹27.49 crores as an unexplained cash credit under Section 68.
    • Concurrently, the AO accepted the sale proceeds and rental income arising from the very same stock in the current year.

Decision

  • Issue I (In favor of Assessee – Para 11): Deletion of the addition under Section 23(5) was upheld as the Revenue failed to produce evidence showing that the reconfigured commercial unit was complete, legally occupiable, or capable of being let out during the year.
  • Issue II (In favor of Assessee – Para 12): The addition under Section 69 was deleted because the ₹42,00,000 was a recorded lease security deposit received by the assessee, not an investment/purchase made by it.
  • Issue III (In favor of Assessee – Para 14): The addition under Section 68 was deleted. Omission of closing stock in the prior year’s return does not convert a brought-forward opening inventory balance into a fresh cash credit during the current year, especially when the AO accepted commercial transactions arising from that stock.

Key Takeaways

  • Pre-requisite for Section 23(5): Notional rent on stock-in-trade under Section 23(5) applies only if the property is completed, lawfully occupiable, and capable of being let out during the relevant previous year.
  • Classification of Receipts: A refundable lease security deposit received from a tenant and duly accounted for in books cannot be misconstrued as an unexplained investment under Section 69.
  • Scope of Section 68 regarding Opening Inventory: Section 68 applies to credits arising during the relevant year; brought-forward opening stock balances cannot be arbitrarily taxed as cash credits in the current assessment year.
  • Statutory Alignment:
    • Section 23 (1961 Act) $\rightarrow$ Section 21 (2025 Act)
    • Section 68 (1961 Act) $\rightarrow$ Section 102 (2025 Act)
    • Section 69 (1961 Act) $\rightarrow$ Section 103 (2025 Act)
IN THE ITAT MUMBAI BENCH ‘A’
ACIT
v.
Ace Associates
Smt Beena Pillai, Judicial Member
and Jagadish, Accountant Member
IT Appeal No. 3760 (Mum.) of 2025
[Assessment year 2020-21]
SEPTEMBER  23, 2026
Harsh Kapadia and Nitin Khinchi, CAs for the Appellant. Manoj Kumar, CIT-DR for the Respondent.
ORDER
Jagadish, Accountant Member – This appeal by the Revenue is directed against the order dated 24.03.2025 passed by the learned Commissioner of Income-tax (Appeals), National Faceless Appeal Centre, Delhi [hereinafter referred to as ‘the learned CIT(A)’], arising out of the assessment order dated 28.09.2022 passed under section 143(3) read with section 144B of the Income-tax Act, 1961 (‘the Act’) for the assessment year 2020-21.
2. The Revenue has raised the following grounds of appeal:
“1. On the facts and circumstances of the case and in law, the learned CIT(A) has erred in deleting the addition made towards income from house property in respect of unsold flats under section 23, ignoring the fact that the assessee had not offered rental income in respect of the unsold flat.
2. On the facts and circumstances of the case and in law, the learned CIT(A) has erred in deleting the addition made under section 69 of the Act, ignoring the fact that the assessee had failed to prove the genuineness of the receipt of Rs.42,00,000 with corroborative evidence and the nexus of the transaction with the receipt.
3. On the facts and circumstances of the case and in law, the learned CIT(A) has erred in deleting the addition made under section 68 of the Act, ignoring the fact that the assessee had failed to prove the genuineness of the credit of Rs.27,49,50,173 with corroborative evidence and the nexus of the transaction with the receipt.
4. The appellant craves leave to add, amend, alter, substitute or modify any of the above grounds or to raise an additional ground at or before the time of hearing.”
3. Briefly stated, the assessee is a partnership firm engaged in the business of real-estate development. It had undertaken redevelopment of the project known as ‘Divyajyot’ at Goregaon (West), Mumbai. The assessee filed its return of income on 30.12.2020 declaring total income of Rs.88,30,660. The case was selected for complete scrutiny. The Assessing Officer noticed that, out of the commercial units forming part of the assessee’s stock-in-trade, one unit admeasuring 4,436.16 sq. ft. had been let out and another unit admeasuring 5,167.04 sq. ft. remained vacant. He invoked section 23(5), adopted monthly rent of Rs.2,00,500 on the basis of an internet search on the website ‘NoBroker’, computed annual value at Rs.24,06,000 and, after allowing deduction under section 24(a), added Rs.16,84,200 under the head ‘Income from house property’.
4. The Assessing Officer further observed that opening stock of Rs.27,49,50,173 was reflected in the trading account for the year, whereas no closing stock was shown in the return for the immediately preceding assessment year. Treating the opening stock as an unexplained credit, he made an addition of Rs.27,49,50,173 under section 68 of the Act. In the body of the assessment order, he also proposed an addition of Rs.42,00,000 under section 69 on the premise that the assessee had purchased an immovable property from HDFC Bank Ltd.; however, this amount was not included in the final computation of assessed income.
5. In appeal, the learned CIT(A), after examining the documents and reconciliation furnished by the assessee, deleted the addition of Rs.16,84,200. The learned CIT(A) recorded that the commercial premises were undergoing reconfiguration and modification under a revised plan, that an application for issuance of the building completion certificate in respect of such work was made before the competent authority only on 27.01.2023 and that the Assessing Officer had brought no material on record to establish completion of the relevant unit so as to attract section 23(5). The addition under section 68 was also deleted after recording that the opening stock stood reconciled with stock carried forward from earlier years, including stock accepted in scrutiny assessment for assessment year 2010-11. As regards Rs.42,00,000, the learned CIT(A) found from the registered indenture of lease dated 13.09.2019 that it represented a security deposit received from HDFC Bank Ltd. and not investment in purchase of property. The learned CIT(A) also noticed that no such addition formed part of the final computation in the assessment order.
6. The learned Departmental Representative supported the assessment order. On the first ground, he submitted that the assessee had not furnished the date of the occupation certificate and, therefore, the learned CIT(A) was not justified in holding that section 23(5) was inapplicable. He submitted that the assessee itself had stated before the Assessing Officer that the project was completed in financial year 200809 and that the occupation certificate was received in the same year. Since the vacant unit was held as stock-in-trade and was not let out, its annual value was chargeable under section 23(5). On the remaining grounds, he submitted that the assessee had failed to discharge the onus regarding the amount of Rs.42,00,000 and the opening stock of Rs.27,49,50,173 and that the learned CIT(A) had accepted the assessee’s explanation without adequate verification.
7. Per contra, the learned Authorised Representatives supported the order of the learned CIT(A). It was submitted that the original occupation certificate dated 31.03.2009 concerned the building in its earlier configuration, whereas the commercial premises forming the assessee’s stock were subsequently required to be re-planned and sub-divided. Approval for the revised work was granted on 30.09.2019 and a memorandum of understanding dated 12.12.2019 was entered into with the society permitting re-planning, alteration and sub-division. The work in the impugned unit was incomplete during the relevant previous year and the application for completion of the revised work was made only on 27.01.2023. Hence, the unit was not capable of being lawfully occupied or let during the year. It was further submitted that the sum of Rs.42,00,000 was a lease deposit duly evidenced by the registered lease deed and that the opening stock was fully reconciled with the closing stock of earlier years. The learned Authorised Representatives accordingly submitted that no interference with the order of the learned CIT(A) was called for.
8. We have heard the rival submissions and perused the material available on record. Ground No.1 concerns the addition of Rs.16,84,200 under section 23(5). The provision applies where a property consisting of a building or land appurtenant thereto is held as stock-in-trade and is not let during the whole or any part of the previous year. The statute takes its annual value at nil for the specified period reckoned from the end of the financial year in which the certificate of completion of construction is obtained from the competent authority. Thus, for invoking the provision, the Revenue must first establish that the particular property or part thereof was a completed property capable of being let and identify the relevant completion certificate and the date from which the statutory period is to be reckoned.
9. The argument of the learned Departmental Representative that the assessee did not furnish the date of the occupation certificate does not advance the Revenue’s case. The assessment order itself records that the original project was completed and an occupation certificate was received in financial year 2008-09. The assessee’s case, accepted by the learned CIT(A), is not that no certificate ever existed for the original building. Its case is that the commercial premises in question underwent a subsequent re-planning, sub-division and modification pursuant to the revised approval dated 30.09.2019 and the memorandum of understanding dated 12.12.2019, and that the impugned unit was incomplete during the previous year relevant to assessment year 202021. The application dated 27.01.2023 for completion of the revised work was specifically taken note of by the learned CIT(A). The original occupation certificate for the building in its earlier configuration cannot, by itself, establish that the subsequently reconfigured commercial unit was complete and capable of being let during financial year 2019-20.
10. The learned CIT(A) has recorded the following material finding:
‘However, considering that the application for issuance of Building Completion Certificate was made by the appellant before the Executive Engineer, Special Planning Authority only on 27.01.2023, which reflects that the building was not complete, the amended provisions of section 23(5) will not apply in the case of the appellant. The Assessing Officer has failed to bring any material on record to show that the project stood completed a year prior to the end of the financial year 2020-21. ….. In the absence of the date of completion, notional rent cannot be charged as per the provisions of section 23(5) of the Act.’
11. The Revenue has not brought before us any material to dislodge the above factual finding or to show that the revised commercial unit was complete, lawfully occupiable and capable of being let during the relevant previous year. The Assessing Officer merely proceeded on the date of completion of the original project and estimated rent through a general internet search. Such material does not answer the specific factual issue arising from the subsequent reconfiguration of the commercial premises. Even the annual value adopted by the Assessing Officer is based on an online listing and not on municipal rateable value or any comparable instance verified with reference to the condition and configuration of the impugned unit. In these circumstances, we find no infirmity in the conclusion of the learned CIT(A) deleting the addition of Rs.16,84,200. Ground No.1 raised by the Revenue is dismissed.
12. Ground No.2 relates to the sum of Rs.42,00,000. At the outset, the learned CIT(A) has recorded that although the Assessing Officer discussed this amount in the body of the assessment order, it was not added in the computation of total income. To that extent, the ground is academic. Even otherwise, the learned CIT(A) examined the registered indenture of lease dated 13.09.2019 and found that the assessee had let the premises to HDFC Bank Ltd. and received Rs.42,00,000 as a security deposit, which was duly recorded in the books. The Revenue has placed no material before us to demonstrate that the document was a purchase deed or that the amount represented an investment made by the assessee. Therefore, the order of the learned CIT(A) on this issue calls for no interference. Ground No.2 is dismissed.
13. Ground No.3 concerns the addition of Rs.27,49,50,173 under section 68. The amount represents the value of three commercial units appearing as opening stock on 01.04.2019. An opening stock is a debit item brought forward from the immediately preceding year; it is not, by its nature, a sum credited during the relevant previous year. The learned CIT(A) examined the year-wise reconciliation, financial statements and bank records and noticed that closing stock of the project had been accepted in the scrutiny assessment for assessment year 2010-11 and had thereafter been carried forward with the relevant project and interest costs. During the year under consideration, one unit was sold, one was let out and the remaining unit continued in closing stock. The Assessing Officer accepted the sale proceeds as business receipts and the rent from the let-out unit, and also sought to tax notional rent on the vacant unit. These accepted transactions themselves proceed on the existence of the very stock which was simultaneously treated as an unexplained credit.
14. The omission or incorrect disclosure of closing stock in the return for the immediately preceding year may call for examination in accordance with law, but it does not convert an opening inventory balance into a fresh cash credit in the books for the year under appeal. The Assessing Officer has not brought any material to show that the units comprising the opening stock had been sold or otherwise disposed of in an earlier year. The Revenue has also not controverted the reconciliation and documentary evidence examined by the learned CIT(A). We, therefore, find no infirmity in the deletion of the addition of Rs.27,49,50,173 made under section 68. Ground No.3 is dismissed.
15. Ground No.4 is general in nature and requires no separate adjudication.
16. In the result, the appeal filed by the Revenue is dismissed.