SJR PRIME CORPORATION PVT. LTD., ,BENGALURU vs. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-6(1)(1), BENGALURU

IN THE INCOME TAX APPELLATE TRIBUNAL ‘B’ BENCH, BANGALORE BEFORE SHRI WASEEM AHMED, ACCOUNTANT MEMBER AND SHRI KESHAV DUBEY, JUDICIAL MEMBER

ITA No. 2112/Bang/2025 Assessment Year: 2018-19 M/s SJR Prime Corporation Pvt. Ltd., Vs. The Dy. Commissioner of Sy.No.8/2 & 9, The Hub, Income Tax, Sarjapur Road, Bellandur, Circle – 6[1][1], Bengaluru – 560 103. Bengaluru. PAN – AAOCS 0238 B APPELLANT RESPONDENT Assessee by : Shri Narendra Sharma, Advocate Revenue by : Shri Subramanian, JCIT (DR) Date of hearing : 02.04.2026 Date of Pronouncement : .06.2026 O R D E R PER WASEEM AHMED, ACCOUNTANT MEMBER:

The present appeal has been instituted by the assessee against the order of the AO u/s 143(3) r.w.s. 144B of the Act.

ITA No.2112/Bang/2025 Page 2 of 13 for accounting purposes and is subject to tax audit during the period under consideration.

4.1 In order to verify the same, the AO issued notice to the assessee against which it was submitted that the assessee is engaged in the business of development and sale of residential apartments, etc. and assessee follows AS-7 construction contracts and follows Percentage of Completion Method (POCM) for revenue recognition in the financial statements. The assessee further contended that since the said amount neither routed through profit and loss account nor the same has been claimed as a deductible expenditure but has been capitalized to work in progress in the balance sheet of the company. Therefore, the question of invoking provisions of section 40(a)(ia) of the Act does not arise. The assessee also relied on judicial precedent in the case of Commissioner of Income-tax-1, Mumbai vs. Dedicated Healthcare Services (TPA) India (P.) Ltd. reported in [2018] 98 taxmann.com 7 (Bombay)/[2018] 259 Taxman 192 (Bombay)/[2018] 408 ITR 36 (Bombay) dated [17-09-2018] However, the AO rejected the plea of assessee in this regard by observing that even though no direct expenditure has been claimed in the profit and loss account, but it was taken to work in progress, which is a part of trading account. By taking the said expenditures to work in

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ITA No.2112/Bang/2025 Page 3 of 13 progress, the assessee has reduced the gross profit to that extent and thereby reducing the net profit.

4.2 Further, the AO stated that the reliance place by the assessee on Commissioner of Income-tax-1, Mumbai vs. Dedicated Healthcare Services (TPA) India (P.) Ltd. [2018] 98 taxmann.com 7 (Bombay)/[2018] 259 Taxman 192 (Bombay)/[2018] 408 ITR 36 (Bombay)[17-09-2018] is misplaced as in the said judgement, the issues involved were altogether different than that of the assessee. Consequently, the AO made an addition of Rs. 15,61,35,861 u/s 40(a)(ia) of the Act being 30% of total expenditure (Rs. 52,04,52,870/-) claimed by the assessee.

5.1 It was also contended that the AO failed to appreciate that the total Capital Work-in-Progress includes an opening balance of ₹71,31,57,586/-, and therefore, the entire figure cannot be considered for the purpose of disallowance.

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5.2 Further, it was submitted that out of the amounts considered by the AO: Rs. 33,73,06,400/- paid to contractors and Rs 4,07,74,849/- • towards interest which were subjected to TDS and tax was deducted u/s 194C and 194A of the Act. However, the amount paid to contractor and interest were not claimed as expenditure but capitalized into capital work in progress. Rs. 5,60,04,800/- represents expenditure on which TDS was duly • deducted and paid. Rs. 8,63,66,821/- though routed through Profit & Loss account • but forms part of closing stock of Rs. 2,60,17,40,818/- only. 5.3 In view of the above, it was submitted that there was no failure on the part of the assessee for warranting disallowance u/s 40(a)(ia) of the Act. Hence, the addition made by the AO deserves to be deleted.

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ITA No.2112/Bang/2025 Page 5 of 13 6.1 The Ld. CIT(A) further noted that an amount of ₹8,63,66,821/- was debited to the Profit & Loss account, though forming part of closing stock, and hence provisions of section 40(a)(ia) were clearly applicable to such expenditure.

6.2 With regard to the assessee’s contention that expenditure capitalized as WIP is outside the ambit of section 40(a)(ia) of the Act, the Ld. CIT(A) rejected the same by holding that the assessee follows the project completion method and the expenditure capitalized as WIP directly impacts the profitability of the project in the year of revenue recognition. Therefore, such expenditure is intrinsically linked to the Profit & Loss account.

6.3 The Ld. CIT(A) held that once TDS provisions under section 194C/194A are admittedly applicable and tax has been deducted but not deposited, the disallowance u/s 40(a)(ia) is attracted, irrespective of whether the expenditure is routed through the Profit & Loss account or capitalized as WIP. The judicial precedents relied upon by the assessee were held to be distinguishable on facts. Accordingly, the Ld. CIT(A) confirmed the disallowance of ₹15,61,35,860/- made by the AO u/s 40(a)(ia) of the Act and dismissed the grounds of appeal of the assessee.

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ITA No.2112/Bang/2025 Page 6 of 13 was capitalized to work-in-progress and not claimed as deduction in the Profit & Loss account, hence section 40(a)(ia) of the Act is not applicable. It was contended that disallowance u/s 40(a)(ia) of the Act can be only made where expenditure is claimed as deduction in computation of income. Reliance was placed on decisions in Bharti Land Ltd., Mark Auto Industries Ltd. and Tally Solutions (P.) Ltd. It was further submitted that even the amount forming part of closing stock does not result in deduction in the year under consideration. Therefore, the disallowance made by the AO is liable to be deleted.

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10.1 At the outset, we note that the foundation of section 40(a)(ia) is the disallowance of an expenditure otherwise claimed as deduction in the computation of income under the head profits and gains of business or profession. The provision does not create a separate charging fiction. It only restricts deduction of an outgoing amount where tax deductible at source has not been deducted or, after deduction, has not been paid within the prescribed time. Therefore, before invoking section 40(a)(ia), the primary requirement is that the impugned sum must have been claimed as an allowable expenditure in the computation of income.

10.2 In the present case, the consistent stand of the assessee is that a substantial part of the amount considered by the AO was capitalized to work-in-progress and was not claimed as deduction in the Profit & Loss account for the year under consideration. The assessee has also pointed out that certain amounts, though routed through the Profit & Loss account, stood embedded in closing stock. In our considered view, the lower authorities have proceeded mainly on the premise that since the assessee is following project completion method and the expenditure would ultimately affect project profitability, section 40(a)(ia) could be invoked even in the year in which such amount was merely capitalized as WIP. We are unable to buy such approach.

10.3 The Hon’ble Delhi High Court in the case of Principal Commissioner of Income-tax vs. Bharti Land Ltd. reported in [2026] 183 taxmann.com 694 (Delhi) dated [12-01-2026] has held that where the amount in question was not claimed as expenditure in the Profit & Loss account, no disallowance u/s 40(a)(ia) can be made. The Hon’ble High

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ITA No.2112/Bang/2025 Page 8 of 13 Court has clearly observed that disallowance by its very nature presupposes that the amount was claimed and allowed as expenditure. Where the amount was neither claimed as expenditure nor allowed, there arises no question of disallowance. The Hon’ble Court also noticed and rejected the argument of the Revenue that mere reflection of the amount in closing stock would justify disallowance. The relevant para is reproduced below: “9. Heard learned counsel for the parties and perused the material. A simple look at para no.5.1 of the assessment order shows that the AO had disallowed all the expenditure incurred by the petitioner, as no revenue/ income was earned/ accrued by the assessee. 10. The P&L account does not show that the amount of External Development Charges (EDC) paid to HUDA was claimed as an expenditure. A perusal of provisions contained in Section 40A(i) of the Act of 1961, clearly shows that incase the TDS is not deducted from the payment made to any person, the expenditure in this regard shall be disallowed. 11. In the instant case, the amount of Rs. 44,26,40,000/- was neither claimed as an expenditure nor was it allowed. Hence, there arises no question of disallowance. Disallowance by its very name indicates and/or suggests that an expenditure or amount can be disallowed only if it has been allowed.“ 10.4 The above principle, in our view, squarely supports the case of the assessee. Merely because an item forms part of work-in-progress or closing stock and may have an effect on profits in a later year, it does not follow that it was claimed as deduction in the present year. Section 40(a)(ia) of the Act operates in the year of claim. It cannot be stretched to disallow an amount which has not yet entered the computation as a deductible expenditure.

10.5 Further, we also find support from the judgment of the Hon’ble Punjab and Haryana High Court in Commissioner of Income-tax, Faridabad vs. Mark Auto Industries Ltd. reported in [2013] 40 taxmann.com 482. In that case, the Hon’ble Court held that where expenditure on technical know-how was capitalized and no amount was

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ITA No.2112/Bang/2025 Page 9 of 13 claimed as revenue expenditure, disallowance u/s 40(a)(i) of the Act could not be made. The Hon’ble Court specifically approved the view that once the amount was capitalized and not claimed as deduction, there was no reason to invoke section 40(a)(i) of the Act. Though the said case was under section 40(a)(i) of the Act, but the ratio fully applies here because both clauses operate on the same principle of disallowing amounts otherwise claimed as deductible expenditure. The relevant para is reproduced below: 5. Adverting to questions (ii) and (iii), the issue which arises for consideration is whether the assessee could be disallowed claim for depreciation under Section 40(a)(i) of the Act on the ground that the payments made for technical know-how which had been capitalized, no tax deduction at source has been made thereon. The Tribunal while accepting the plea of the assessee, in para 3, had noticed as under:— "3. Ground No.4 is against deletion of an addition of Rs. 6,88,175/- made by the AO on account of deduction of depreciation on technical know-how as the assessee failed to deduct tax in accordance with the provision contained in section 40(a)(i). The finding of the learned CIT(A) was that the assessee had incurred expenditure by way of technical know-how, which was capitalized amount as made in the return of income. Since the assessee had not claimed deduction for the amount paid, the provisions contained in section 40(a) (i) were not attracted. The learned DR could not find any fault with this direction of the CIT(A) also although she referred to page 4 of the assessment order, where it was mentioned that the tax deducted in respect of the payment was made over to the Government in the subsequent year and, therefore, depreciation could not be deducted on the capital expenditure incurred by the assessee. In reply, the learned counsel pointed out that the expenditure by way of technical know-how was capitalized and it was not claimed as revenue expenditure. Therefore, there was also no reason to disallow depreciation on such capitalized amount as the aforesaid provision does not deal with deduction of depreciation. Having considered arguments from both the sides, we are of the view that there is no error in the order of the learned CIT(A) which requires correction from us. Thus, this ground is also dismissed." 6. Learned counsel for the revenue was unable to substantiate that in the absence of any requirement of law for making deduction of tax out of the expenditure on technical know-how which was capitalized and no amount was claimed as revenue expenditure, the deduction could be disallowed under Section 40(a)(i) of the Act. Accordingly, no infirmity could be found in the order passed by the Tribunal which may warrant interference by this Court. Thus, both the questions are answered against the revenue and in favour of the assessee.

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ITA No.2112/Bang/2025 Page 10 of 13 10.6 The Hon’ble Karnataka High Court in Principal Commissioner of Income Tax-7, Bangalore vs. Tally Solutions (P.) Ltd. reported in [2021] 123 taxmann.com 21 (Karnataka) has explained the scheme of section 40 of the Act even in clearer terms. The Hon’ble Court held that section 40(a)(i) and section 40(a)(ia) of the Act provide for disallowance only in respect of expenditure which is revenue in nature. It was further held that where expenditure has been capitalized and no amount was claimed as revenue expenditure, no disallowance under section 40(a)(i) or 40(a)(ia) of the Act can be made. The Hon’ble Court also explained that the expression “amount payable” in section 40 refers to an outgoing amount which is otherwise an allowable deduction. This exposition of law, in our opinion, completely demolishes the reasoning adopted by the Ld. CIT(A) that capitalization as WIP is enough to attract disallowance in the current year. The relevant para is reproduced below: “Thus, from close scrutiny of section 40(a)(i) of the Act, it is axiomatic that an amount payable towards interest, royalty, fee for technical services or other sums chargeable under this Act shall not be deducted while computing the income under the head profit and gain of business or profession on which tax is deductible at source; but such tax has not been deducted. The expression 'amount payable' which is otherwise an allowable deduction refers to the expenditure incurred for the purpose of business of the assessee and therefore, the said expenditure is a deductible claim. Thus, section 40 refers to the outgoing amount chargeable under this at and subject to TDS under Chapter XVII-B. The deduction under section 32 is not in respect of the amount paid or payable which is subjected to TDS; but is a statutory deduction on an asset which is otherwise eligible for deduction of depreciation. Section 40(a)(i) and (ia) of the Act provides for disallowance only in respect of expenditure, which is revenue in nature, therefore, the provision does not apply to a case of the assessee whose claim is for depreciation, which is not in the nature of expenditure but an allowance. The depreciation is not an outgoing expenditure and therefore, provisions of Section 40(a)(1) and (ia) of the Act are not applicable. In the absence of any requirement of law for making deduction of tax out of expenditure, which has been capitalized and no amount was claimed as revenue expenditure, no disallowance under section 40(a)(i) and (ia) of the Act would be made. It is also pertinent to note that depreciation is a statutory deduction available to the assessee on a asset, which is wholly or partly owned by the assessee and used for business or profession. The depreciation is an allowance and not an expenditure, loss or trading liability. The Commissioner of Income Tax (Appeals) has held that the payment has been made by the

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ITA No.2112/Bang/2025 Page 11 of 13 assessee for an outright purchase of Intellectual Property Rights and not towards royalty and therefore, the provision of section 40(a)(ia) of the Act is not attracted in respect of a claim for depreciation. The aforesaid finding has rightly been affirmed by the tribunal. The findings recorded by the Commissioner of Income Tax (Appeals) as well as the tribunal cannot be termed as perverse. In view of preceding analysis, the substantial question of law framed by a bench of this court is answered against the revenue and in favour of the assessee.”

10.7 The Revenue has emphasized that the assessee itself deducted TDS on some of these payments and yet failed to remit the same within time. In our view, that fact itself does not conclude the issue under section 40(a)(ia) of the Act. Deduction or non-payment of TDS may have consequences under the TDS provisions. However, for the limited purpose of section 40(a)(ia) of the Act, the core test still remains whether the related amount was claimed as deduction in computing business income of the relevant year. If it was not so claimed, disallowance cannot be made merely because there was a TDS default.

10.8 We also find merit in the submission of the assessee that the Ld. CIT(A) has mixed up the concepts of accounting treatment and tax deduction. Under the project completion method, expenditure may be accumulated in WIP and taken to the Profit & Loss account only in the year of recognition of project revenue. Until then, such amount remains outside the field of deduction. Therefore, holding that section 40(a)(ia) applies even before such claim arises would amount to accelerating a disallowance contrary to the plain language of the section.

10.9 As regards the amount of ₹8,63,66,821/- which, according to the Ld. CIT(A), was routed through the Profit & Loss account but formed part of closing stock, we are again unable to agree with the conclusion

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ITA No.2112/Bang/2025 Page 12 of 13 of the Ld. CIT(A) that section 40(a)(ia) of the Act automatically applies. The Hon’ble Delhi High Court in Bharti Land (supra) has dealt with an analogous objection of the Revenue and still held that where the amount was not claimed as expenditure, no disallowance could be made. Therefore, the mere routing of entries through the Profit & Loss account cannot be seen in isolation. What has to be examined is whether, in the final computation of income for the relevant year, the amount was in fact claimed as deduction or whether it stood neutralized by its inclusion in closing stock. If the amount only formed part of closing stock and did not result in an allowable deduction in the year, section 40(a)(ia) of the Act cannot be invoked even on that part.

10.10 Accordingly, we hold that the disallowance made u/s 40(a)(ia) of the Act in respect of amounts capitalized to work-in-progress is liable to be deleted. Further, in respect of the amount stated to be forming part of closing stock, the same also cannot be disallowed so long as it has not resulted in a deduction claimed in the computation of income for the year under appeal. We therefore set aside the order of the Ld. CIT(A) on this issue and direct the AO to delete the disallowance. Hence, the ground of appeal of the assessee is allowed. 11. In the result, the appeal filed by the assessee stands allowed.

Order pronounced in court on 29th day of June, 2026 Sd/- Sd/- (KESHAV DUBEY) (WASEEM AHMED) Judicial Member Accountant Member Bangalore Dated, 29th June, 2026 / vms /

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ITA No.2112/Bang/2025 Page 13 of 13 Copy to: 1. The Applicant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR, ITAT, Bangalore. 6. Guard file By order Asst. Registrar, ITAT, Bangalore

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