RARE REALTY DEVELOPMENT PVT LTD( FORMERLY ATITHI BUILDERS AND CONSTRUCTORS PVT LTD),MUMBAI vs. INCOME TAX OFFICER WARD -11(1)(1), MUMBAI

IN THE INCOME-TAX APPELLATE TRIBUNAL, MUMBAI “D” BENCH, MUMBAI BEFORE SHRI SANDEEP GOSAIN, JUDICIAL MEMBER AND SHRI BIJAYANANDA PRUSETH, ACCOUNTANT MEMBER ITA No.923/MUM/2025 (AY: 2017-18) Rare Realty Development Pvt. Ltd. vs. Income Tax Officer, Ward 11(1)(1), (formerly Atithi Builders & Room No.201, Aaykar Bhavan, Constructors Pvt. Ltd.) Maharshi Karve Road, New Marine 8th floor, Ariisto House, N. S. Lines, Mumbai-400020. Phadke Road, Andheri (East), Mumbai-400069. PAN/GIR No: AAACD2412L (Appellant) (Respondent) Assessee by Shri V.G. Ginde Revenue by Shri Umashankar Prasad (CIT-DR) & Shri Annavaram Kosuri (Sr. AR) Date of Hearing 20.05.2026 Date of Pronouncement 14.08.2026 O R D E R PER BIJYANANDA PRUSETH, AM:

This appeal filed by the assessee emanates from the order passed u/s250

of the Income-tax Act, 1961 (in short, ‘Act’) by the Commissioner of Income Tax,

Appeal-48, Mumbai [in short, ‘CIT(A)’], dated 28.11.2025 for the assessment

year (AY) 2017-18.

“1.1 On the facts and in the circumstances of the case, and in law, the Ld. CIT(A) erred in confirming the addition of Rs.2,51,88,043/ made by the Ld. AO on account of disallowance under section 40(a)(ia) of the Act.

1.2 The Ld. CIT(A) erred in not granting any relief to the appellant though he appreciated the appellant's contention that since the appellant has capitalized all these underlying expenses to Project-WIP under the Project Completion Method', therefore, the quantum of disallowance 1

ITA No.923/MUM/2026 Rare Realty Development Pvt. Ltd. ought to have been deducted from the WIP instead of adding it as a separate item of income.

1.3 The Ld. CIT(A) also erred in travelling beyond the ground of appeal when he considered the issue of utilization of borrowed funds by the appellant, and that too, without providing to the appellant any opportunity of being heard. The Ld. CIT(A), thus, was not justified in sustaining the aforesaid addition on a different ground.

1.4 The Ld. CIT(A) failed to appreciate, and ought to have held, that whatever may be the ground for disallowance of expenses, ultimately, the same was to be reduced from the project-WIP only, and not to be added as a separate item of income.

Your appellant, therefore, prays that the aforesaid addition of Rs.2,51,88,043/- be deleted and/or for such other relief, as the Hon'ble Appellate Tribunal may deem fit in the circumstances of the case.”

of income for the AY 2017-18 on 30.10.2017 declaring total income at Rs.Nil. The

case was selected for scrutiny under CASS and various notices were issued to the

assessee. The assessee is engaged in the business of builders and follows the

project completion method of accounting. During the course of assessment

proceedings, the AO noticed from the tax audit report that the assessee had

deducted tax at source on certain payments aggregating to Rs.8,39,60,140/- but

had not deposited the same within the prescribed time. The assessee explained

that the relevant expenditure formed part of the work-in-progress (WIP) relating

to its real-estate projects and, since the assessee was following the project

completion method, the expenditure had been capitalised to WIP and had not

been debited to the profit and loss account. The AO, however, did not accept the

ITA No.923/MUM/2026 Rare Realty Development Pvt. Ltd. explanation of the assessee. He invoked the provisions of section 40(a)(ia) of the

Act and disallowed 30% of the expenditure, amounting to Rs.2,51,88,043/-, and

added the same to the income of the assessee. The AO also did not allow set-off

of the brought-forward unabsorbed losses against the income so assessed. 4. Aggrieved by the order of AO, the assessee filed appeal before the CIT(A).

The CIT(A), after considering the submissions of the assessee, accepted the

principle laid down in the decision of the Mumbai Tribunal in case of Savala

Associates vs. ITO [2010] 35 SOT 148 (Mum.). However, the CIT(A) observed that

the assessee had substantial investments in joint ventures and other entities and

had also obtained interest-bearing secured loans. According to the CIT(A), the

assessee had failed to establish by cogent evidence that the expenditure

disallowed u/s 40(a)(ia) of the Act was exclusively relatable to its incomplete

projects accounted for under the project completion method. The CIT(A),

therefore, held that in the absence of evidence establishing a direct nexus

between the disallowed expenditure and the incomplete projects, the contention

of the assessee that the disallowance would merely reduce WIP could not be

accepted. Accordingly, Ground No. 1 raised by the assessee was not allowed.

Tribunal. The Ld. AR filed a paper book containing 56 pages and submitted that

the ratio of the decision in case of Savala Associates (supra) would apply

notwithstanding the ground for which disallowance of interest is to be made, 3

ITA No.923/MUM/2026 Rare Realty Development Pvt. Ltd. because the logic underlying this principle is that the relevant expenditure is not

claimed during the year as it was accumulated in WIP. He submitted that its

impact would be felt when the project is completed. In such situation, only WIP

could be reduced and the disallowance of expenditure itself cannot be assessed

as an item of taxable income on standalone basis. He submitted that the CIT(A)

was not right in observing that the appellant did not furnish any evidence either

before him or the AO to demonstrate utilization of borrowed funds for the

projects, because (i) this issue was never raised by the AO during the assessment

proceedings; and (ii) the CIT(A) travelled beyond the ground of appeal by suo

motu raising this issue without providing any opportunity of being heard to the

assessee. He further submitted that even if the new issue raised by the CIT(A)

about utilization of borrowed funds is to be examined, the same would not alter

the end result because the assessee has not debited any interest to its profit &

loss account, nor claimed any deduction for the same in the year under appeal,

since it forms part of WIP. He submitted that the impugned amount cannot be

assessed as the income of the subject year on standalone basis.

ITA No.923/MUM/2026 Rare Realty Development Pvt. Ltd. project completion method of accounting. It is also not in dispute that the expenditure in question was subjected to TDS and that the corresponding tax was not deposited within the prescribed time, resulting in invocation of section 40(a)(ia) of the Act by the AO. The Ld. AR contended that the expenditure formed part of WIP and, therefore, the disallowance would not give rise to any new taxable income but would result in reduction of WIP. For this proposition, he has relied on the decision of in the case of Savala Associates (supra). The relevant part of the decision is reproduced below for ready reference: “6.2 The above provision is related to amount not deductible while computation of income chargeable under the head ‘Profits and gains of business or profession’. Basically, income chargeable under the head ‘Profits and gains of business or profession’ or ‘Income from other sources’, be computed in accordance with cash or mercantile system of accounting regularly employed by the assessee. Recognition/identification of income under the Income-tax Act is attainable by several methods of accounting considering the nature of business activities. It may be noted that the same result could be attained by any one of the accounting methods. “Completed contract method” is one such method. Similarly, “percentage of completion method” is another such method. Under the “completed contract method”, the revenue is not recognized until the contract is complete. Under the said method, costs are accumulated during the course of the contract period. As per the accepted accounting principle, it is accumulated under one head of account, ‘work-in-progress’. The project constituted the stock-in-trade of the assessee. The project did not constitute a fixed asset of the assessee. In the last accounting period when work is completed, the profit and loss account is prepared, that ‘work-in-progress’ account is to be transferred in profit & loss account. Thus, the “completed contract method” determines profits/loss only when contract is completed. Now question arises how the profit is to be calculated in case of ‘completed contract method’. One of the important aspects to be seen is Cost incurred by a contractor which can be divided into Cost that relate directly to a specific contract; Cost that can be attributed to the contract activity in general and can be allocated to specific contracts and Costs that relate to the activities of the contractor generally, or that relate to contract activity but cannot be related to specific contracts. Examples of costs that relate directly to a specific contract include: site labour costs, including supervision; materials used for project construction; depreciation of plant and equipment required for a contract; costs of moving plant and equipment to and from a site. Examples of costs that can 5

ITA No.923/MUM/2026 Rare Realty Development Pvt. Ltd. be attributed to the contract activity in general and can be allocated to specific contracts include: insurance; design and technical assistance; construction overheads. Examples of costs that relate to the activities of the contractor generally, or that relate to contract activity but cannot be related to specific contracts, include: general administration and selling costs; finance costs; research and development costs; depreciation of plant and equipment that cannot be allocated to a particular contract. In case of “completed contract method”, the above expenses related to individual project have to be capitalized in work-in-progress which is similar to stock-in-trade, of respective individual project. Opening balance of work-in-progress of individual project will go up in the relevant year. When these projects were completed, in that year, income has to be computed after considering increased opening work-in-progress and receipts of the relevant project. Accordingly, in the year when these projects were completed, income on account of those projects is be computed after considering increased opening balance of work-in-progress due to addition of expenses for the period of project in work-in-progress. Contrary, if certain expenditures are not allowable under the Act, the work-in-progress will not increased by that amount. Such expenses are to exclude from the work-in- progress if same were included by the assessee. For the above purposes, the Assessing Officer has to examine the work-in-progress account in each assessment year. If on examination the Assessing Officer did not find any mistake in work-in-progress account then said work-in-progress is to be carried forward in the next year and so on till completion of project. If on examination, the Assessing Officer found that the work-in-progress shown in books of account is not correct, the Assessing Officer is empowered to correct the same. In other words, it can be said that work-in-progress is just like one side of profit & loss account, i.e., debit side, the Assessing Officer can have all powers to examine this debit side of profit & loss account including the power of examination of allowability/disallowability of expenditure under section 40(a) of the Act. In the case under consideration, we find that the Assessing Officer has rightly noted that the expenditure claimed by the assessee which are subject to TDS liability but TDS was no paid in time; therefore, these were disallowable under section 40(a). In principle we agree with above view of revenue that in case of “completed contract method” the Assessing Officer is empowered to examine the expenditures incurred during the year which increases the opening work-in- progress or addition in work-in-progress. But we do not agree with the view of revenue that addition is to be made in total income, if some expenditure were found not allowable. The correct procedure in “completed contract method” is that instead of making addition, the Assessing Officer should correct the amount of work-in-progress by reducing or enhancing work-in-progress as the case may be. Such corrected WIP will be finally considered in profit and loss account/contract account for the year in which work is completed. The result of calculation of correct profit in case of “completed contract method” could be attained by this procedure. In the case under consideration, the Assessing

ITA No.923/MUM/2026 Rare Realty Development Pvt. Ltd. Officer made addition in all the projects including incomplete projects, which is not warranted. Such addition in total income is warranted only in respect of project which is completed during the year. The learned AR has conceded the additions in respect of completed works. Necessary calculation is required after verification from original record. The original record is not readily available at this stage under the circumstances we send back this matter to the file of the Assessing Officer with direction to delete the additions made in total income in respect of incomplete projects. However, the addition in respect of completed project is to confirm subject to verification of calculation of the amount. The Assessing Officer is further directed to correct the amount of work-in-progress of incomplete works/projects in accordance with the above discussion and after providing opportunity of hearing to the assessee. 7. In the result, the appeal of the assessee is partly allowed for statistical purposes.” 7.1 The ld. Sr. DR has not been able to distinguish the decision either on fact

or in law. However, the assessee cannot claim adjustment of the entire

disallowance against WIP merely on the basis of the accounting method followed

by it. The assessee is required to establish, with supporting documentary

evidence, the project-wise utilisation and accounting treatment of the

expenditure on which disallowance under section 40(a)(ia) has been made. It is

not clear from the details on record as to whether the projects include both

completed projects and incomplete projects. The AO has made addition in

respect of all projects which is not warranted. The addition is needed in case of

the projects which were completed during the subject year. The addition in

respect of incomplete projects is not warranted. Hence, the order of CIT(A) is set

aside and the matter is remanded back to the file of AO for verification as to

whether, the impugned addition pertains only to incomplete projects. If the

projects were completed during the year, the addition is liable to be sustained. In

ITA No.923/MUM/2026 Rare Realty Development Pvt. Ltd. case of incomplete projects, such addition is not warranted. The ground is

allowed for statistical purpose.

Order is pronounced on 14.08.2026.

Sd/- Sd/- (SANDEEP GOSAIN) (BIJYANANDA PRUSETH) JUDICIAL MEMBER ACCOUNTANT MEMBER

*Aniket Chand; Sr. PS MUMBAI Date: 14.08.2026 Copy of the Order forwarded to: 1. The Assessee 2. The Respondent 3. The CIT(A) 4. CIT 5. DR/AR, ITAT, MUMBAI 6. Guard File

By Order

Assistant Registrar ITAT, MUMBAI