DEPUTY COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-5(4), MUMBAI, MUMBAI vs. SERVEALL CONSTRUCTION PRIVATE LIMITED, THANE

PER SHRIANIKESH BANERJE, JUDICIAL MEMBER: The instant appeal of the revenue filed against the order of the Ld. Commissioner of Income Tax (Appeals)-53, Mumbai [for brevity “Ld. CIT(A)”], order passed under Section 250 of the Income Tax Act, 1961 for Assessment Year 2017-18, date of order 23.11.2025. The impugned order emanated from the order of the Ld. Assistant Commissioner of Income Tax C.C.-5(4), Mumbai

ITA 1134/MUM/2026 SERVEALL CONSTRUCTION PRIVATE LIMITED (for brevity ‘Ld. AO’), order passed under Section 143(3) of the Act, date of order 28.12.2019.

“1. The Ld. CIT(A) erred in deleting the disallowance under section 14A r.w.r.8D(2) of the Income Tax rules by holding that investment which yielded exempt income are only to be considered for the purpose of disallowance u/s 14A r.w.r. 8D(2) and to exclude such investment which did not earn exempt income from the total investment for the purpose of computation of disallowance u/s 14A, thereby ignoring the clarificatory Explanation of disallowance u/s. 14A(1) inserted vide the Finance Act 2022 that the provisions of this section shall apply and shall be deemed to have always applied even in a case when exempt income has not accrued OR arises OR has not been received during the previous year but expenditure has been incurred during the said previous year in relation to earning of such exempt income. 2. The Ld. CIT(A) erred in deleting disallowance made u/s 43B of the Act without appreciating the fact that assessee company have failed to make interest payment to Punjab and Maharashtra Co-operative Bank on OR before the due date of filing of return of income which was disallowable u/s 43B of the Act. 3. The Ld. CIT(A) erred in deleting disallowance made u/s 43B of the Act by holding that interest payable to a co-operative bank which was brought within the ambit of Section 43B of the Act with effect from A.Y. 2018-19 without appreciating the fact that Punjab and Maharashtra Co-operative bank was included in the Second Schedule to the Reserve Bank of India Act, 1934 and thus comes under definition of Scheduled Bank as per Explanation 4 to Section 43B of the Act. 4. The Ld. CIT(A) erred in deleting disallowance made u/s 43B of the Act by holding that interest payable to a co-operative bank which was brought within the ambit of Section 43B of the Act with effect from A.Y. 2018-19 without appreciating the fact that Punjab and Maharashtra Co-operative bank was included in the Second Schedule to the Reserve Bank of 2

ITA 1134/MUM/2026 SERVEALL CONSTRUCTION PRIVATE LIMITED India Act, 1934 and thus comes under definition of Scheduled Bank as per Explanation 4 to Section 43B of the Act.” 4. We heard the submission of Ld. DR and considered the documents available in the record. The Ld. DR argued and stated that the Ld. CIT(A) erred in deleting the addition made by the Ld. AO u/sec. 14A read with Section 8D(2)(ii) of the Income Tax Rule, 1962 (‘the Rules’), so the addition made by the Ld. AO should be confirmed. The Ld. DR further contended that the assessee had contravening provision of Section 43B had not paid the interest of Punjab of Maharashtra Cooperative Bank which is duly included in Second Schedule of the Reserve Bank of India, 1934 and comes under the definition of Schedule Bank as per explanation 4 to Section 43B. So, the interest deleted by the Ld. CIT(A) is justified. The Ld. DR stands in favor of the orders of Ld. AO.

“Decision: 7. Ground no.1 and 2 are related to disallowance of section 14A r.w. Rule 8D of the IT Act and computing book profit u/s.115JB of the IT Act. 7.1 The AO has made disallowance of Rs.95,423/- u/s. 14A of the IT Act. Also, the AO has calculated MAT on book profits and addition u/s 14A of the Act has been made as per

ITA 1134/MUM/2026 SERVEALL CONSTRUCTION PRIVATE LIMITED explanation 1(f) to section 115JB(2) to compute book profits. The assessee in its submission has mentioned that it has not received any exempt income for the year under consideration and hence, disallowance u/s 14A r.w.r 8D of the IT Act is not applicable. 7.2 Facts of the case and submission of the assessee have been examined. The assessee has not received any exempt income during the year consideration. The assessee has relied upon decision of Hon’ble Mumbai ITAT in the case of Satyam Realtors Pvt. Ltd. (ITA No.2391/Mum/2018 A.Y.2014-15) wherein it is held that if no exempt income is earned during the relevant previous year, then no disallowance u/s.14A of the Act is warranted. The relevant portion of the ITAT is reproduced as under: “5. We have heard the rival submissions and perused the relevant materials on record. The fact remains that in the present case the assessee has not earned any exempt income. We are of the considered view that the legislative intent is more discernable in the judicial decisions. In CIT vs. Chettinad Logistics (P) Ltd. (2017) 80 taxmann.com 221 (Mad), the Hon'ble Madras High Court has held that section 14A cannot be invoked where no exempt income was earned by the assessee in the relevant assessment year. In the case of CIT v. Shivam Motors (P) Ltd. (2015) 55 taxmann.com 262 (All), it has been held that in absence of any tax free income earned by the assessee, disallowance u/s 14A could not be made. In a similar vein, it has been held in Cheminvest Ltd. (supra), Ballarpur Industries Ltd. (2016) (10) TMI 1039 (Bombay High Court) that section 14A will not apply if no exempt income is received or receivable during the relevant previous year. 5.1 Facts being identical, we follow the ratio laid down in the above Judgments of the High Courts instead of the order of the Tribunal in Lally Motors (supra) and confirm the order of the Ld. CIT(A). In the case of ACIT v. Vireet Investment [2017] 82 taxmann.com415 (Delhi Trib.) (SB), it is held that computation under clause (f) of Explanation 1 to section 115JB(2) is to be made without resorting to computation as contemplated under section 14A read with rule 8D. Thus, we confirm the order of the Ld. CIT(A).” 7.3 Since the assessee has not received any exempt income during the year consideration, in view of the decision of the Hon’ble ITAT referred above, disallowance of Rs.95,423/- made u/s.14A of the IT Act by the AO is deleted. Further, AO is also directed to delete disallowance of Rs.95,423/- u/s. 14A r.w.r. 8D while computing book profits u/s 115JB of the IT Act. Accordingly, these grounds of the appeal of the assessee are allowed. 8. Ground no.3 is related to disallowance of other interest expenses. xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx 9. Ground no.4 is related to disallowance u/s.43B of the IT Act.

ITA 1134/MUM/2026 SERVEALL CONSTRUCTION PRIVATE LIMITED 9.1 The AO has noted that the assessee has not paid interest of Rs.14,50,70,465/- on overdraft/loan from PMC Bank and interest of Rs.21,73,09,251/- to IL&FS financial services before due date of filing of its return. Therefore, the AO has disallowed interest expenses of Rs.36,23,79,716/- (Rs.14,50,70,465 + Rs.21,73,09,251) debited to its P&L account u/s.43B of the IT Act and further the WIP has also been reduced by an amount of Rs.36,23,79,716/-. 9.2 The assessee during the course of appellate proceedings has submitted that it had not made payments for outstanding interest amount of Rs.14,50,70,465/- to the Punjab and Maharashtra Cooperative Bank on or before the due date of filing of return. During the course of appellate proceedings, the assessee has mentioned that a similar issue has been covered in its favor in the case of in own associates, Awas Developer & Construction Private Limited for the A.Y. 2016-17 by the decision of the Hon’ble Mumbai ITAT dated 20.07.2022, ITA No. 551/Mum/2021 (A.Y. 2016-17). Relevant portion of the order of the ITAT is reproduced as under: “4. I have heard learned DR and perused the record. I noticed that the provisions of section 43B, as per which certain deductions are to be allowed only on actual payments, is made applicable to the interest payable to a Cooperative bank by the Finance Act, 2017 w.e.f. 1.4.2018. The word "co- operative bank other than primary agricultural credit society or primary co- operative agricultural and rural development bank was inserted in Clause (d) of sub-section 43B w.e.f. 1.4.2018, meaning thereby, interest payable to a cooperative bank which is not paid on or before the due date prescribed for filing of return of income under section 139(1) of the Act shall be liable to be disallowed under section 43B of the Act only w.e.f. A.Y 2018-19. I notice that the year under consideration is A.Y. 2016-17 For this year, interest payable to a co-operative bank has not been included in the provisions of section 43B of the Act. Accordingly, disallowance made by the Assessing Officer and confirmed by learned CIT(A) is not in accordance with law Accordingly. I set aside the order passed by learned CIT(A) on this issue and direct the Assessing Officer to delete the disallowance of interest payable to M/s Punjab and Maharashtra Co-operative Bank made under section 43B of the Act.” 9.2.1 Facts of the case have been examined. The Hon’ble ITAT in the above referred decision has held that provisions of section 43B, as per which certain deductions are to be allowed only on actual payments, is made applicable to the interest payable to a Cooperative bank by the Finance Act, 2017 w.e.f. 1.4.2018 (i.e. A.Y.2018-19). Since the assessment year involved in respect of the appeal under consideration is A.Y.2017-18, provisions of section 43B are not applicable to the assessee for that year. In view of the facts of the case and decision of ITAT as referred above, disallowance of Rs.14,50,70,465/- u/s. 43B of the IT Act in respect of interest expenses to Punjab and Maharashtra Cooperative Bank made by the AO is deleted. 9.3 In respect of disallowance of interest expenses of Rs.21,73,09,251/- u/s 43B of the IT Act to IL&FS, the assessee has submitted that it has not debited interest expenses to the P&L

ITA 1134/MUM/2026 SERVEALL CONSTRUCTION PRIVATE LIMITED account thereby not forming part of computation of total income as per section 28 and it has also relied on case law. However, this contention cannot be accepted for the following reasons: 9.3.1 Nature and Treatment of Interest Cost: Interest expenses on borrowed funds used for construction or development activity form part of the cost of the project under Accounting Standard AS-16 / ICDS-IX, and are capitalized to WIP until the asset or project is ready for intended use or sale. However, the capitalization does not change the inherent character of the expenditure as "interest on borrowed capital" as contemplated under Section 43B. Section 43B is a non obstante provision — it overrides all other sections of the Act. Since the assessee has not paid interest to IL & FS on or before the due date of filing of the return, provisions of section 43B are attracted to it. 9.3.2 Reflection in P&L Account : The fact that the interest cost is reflected in the Profit & Loss Account through WIP valuation does not exempt the assessee from the operation of Section 43B. The legislative intent is clear i.e. unless the interest is actually paid, it cannot be considered as "incurred" for deduction or capitalization purposes under tax law, even though it may be treated differently under accounting principles. 9.3.3 Principle of Matching and Allowability: The matching principle under accounting standards does not override statutory conditions under tax law. While capitalization to WIP is an accounting treatment, allowability under the Income-tax Act is governed by statutory provisions, and Section 43B mandates payment- based allowance irrespective of accounting method. 9.3.4 Accordingly, the argument that interest capitalized to WIP escapes the operation of Section 43B is misplaced. The AO was justified in invoking Section 43B of the IT Act and disallowing unpaid interest liability as on the balance sheet date. Accordingly, the disallowance of Rs. 21,73,09,251/- on account of interest expenses to IL&FS made by the AO is confirmed and reduction of the same from the WIP of the assessee is also confirmed. Accordingly, this ground of the appeal is Partly Allowed. 10. Ground no.5 is related to levying of interest u/s. 234B of the Act. 10.1 The charging of interest is consequential to the assessed income and is mandatory. The levy of interest u/s. 234B of the Act is mandatory and arises as a consequence of the income assessed. The appellant has not explained how the charging of interest is not in accordance with the law. The decision of the Hon'ble Apex Court in the case of CIT v Bhagat Construction Co. Pvt. Ltd. 383 ITR 9 (SC) reiterates this position.

ITA 1134/MUM/2026 SERVEALL CONSTRUCTION PRIVATE LIMITED Accordingly, this ground of appeal is Dismissed. 11. In the result, the appeal of the assessee for A.Y.2017-18 is Partly Allowed.” 7. The issue of disallowance under section 43B for non-payment of interest to Punjab and Maharashtra Co-operative Bank on or before the due date for filing the return has already been decided by a Coordinate Bench of the ITAT, Mumbai, in DCIT v. Satyam Realtors Pvt. Ltd., ITA No. 6283/Mum/2025, pronounced on 13.03.2026, in favour of the revenue. The Bench’s observations on this contention in the relevant paragraph are reproduced below: “8. On contrary to DR’s argument the observations of the Ld. CIT(A) related to this issue is noted in paragraph no.9 to 9.3 which is reproduced as below:- “9. Ground No.4. The Ld. AO during the course of assessment proceedings had asked the assessee to furnish details of interest payment and whether the interest was actually paid on or before the due date of filing return. Further, the AO had asked in case of failure of outstanding interest payment before due date of filing of return, why the same should not be added total income/reduced from WIP as per provisions of section 43B of the IT Act. In response, the assessee in its reply to the AO has submitted as under:

"6. Sir, the Assessee Company had provided copy of ledger account of interest expenses incurred during the year under consideration along with justification why amount of interest expenses should not be disallowed u/s 43B of the IT Act, 1961 vide office letter dated 03/12/2019 (point no. 11). Sir, in this connection, we wish to categorically state that, during the year under considerations the Assessee Company has opening overdraft to the tune of Rs. 75,56,31,607/- & closing overdraft to the tune of Rs.90,31,12,467/-, resulting into net increase in overdraft during the year to the tune of Rs. 14,74,80,860/- The said increase in overdraft of the Punjab & Maharashtra Co-op Bank is nothing but towards finance/interest expenses of Rs. 14,77,80.860/-minus Rs. 3,00,000/- dividend receipt. In other words, there is no additional overdraft facility utilized during the year under consideration by the Assessee Company. Furthermore, interest expenses on the said overdraft were allowed in A.Y. 2012-13 to 2014-15 to the Assessee Company Furthermore, in this

ITA 1134/MUM/2026 SERVEALL CONSTRUCTION PRIVATE LIMITED connection, we wish to state that in the present case since the Assessee has not debited the amount of interest expense incurred to the Profit & Loss Account as expenditure nor has claimed any deduction in respect of the amount, the question of disallowing the expenditures under section 43B of the Act not claimed would not arise.... Sir, in the view of above factual & legal submission, provisions of section 43B of the IT Act, 1961 is not applicable on Interest on Overdraft to the tune of Rs. 14,75,44,300/- and therefore no disallowance should be made." 9.1. After examining the submission of the assessee, the AO has mentioned that since the assessee has not made payment of outstanding interest on overdraft from Punjab & Maharashtra Co-operative Bank on or before the due date of filing of the return, he has applied provisions of section 438 of the IT Act and accordingly. interest expenses of Rs. 14,77,80,860/- debited to P&L account and capitalized towards WIP was disallowed u/s 438 of the IT Act. 9.2. During the course of appellate proceedings, the assessee has mentioned that a similar issue has been covered in its favor in the case of in own associates, Awas Developer & Construction Private Limited for the A.Y. 2016-17 by the decision of the Hon'ble Mumbai ITAT dated 20.07.2022, ITA No. 551/Mum/2021 (A.Y. 2016-17). Relevant portion of the order of the ITAT is reproduced as under: "4. I have heard learned DR and perused the record. I noticed that the provisions of section 43B, as per which certain deductions are to be allowed only on actual payments, is made applicable to the interest payable to a Cooperative bank by the Finance Act, 2017 w.e.t. 1.4.2018. The word "co-operative bank other than primary agricultural credit society or primary co-operative agricultural and rural development bank was inserted in Clause (d) of sub-section 43B w.e.f. 1.4.2018, meaning thereby, interest payable to a cooperative bank which is not paid on or before the due date prescribed for filing of return of income under section 139(1) of the Act shall be liable to be disallowed under section 438 of the Act only w.e.f. A.Y 2018-19.1 notice that the year under consideration is A.Y. 2016-17 For this year, interest payable to a co- operative bank has not been included in the provisions of section 43B of the Act. Accordingly, disallowance made by the Assessing Officer and confirmed by learned CIT(A) is not in accordance with law Accordingly. I set aside the order passed bylearned CIT(A) on this issue and direct the Assessing Officer to delete the

ITA 1134/MUM/2026 SERVEALL CONSTRUCTION PRIVATE LIMITED disallowance of interest payable to M/s Punjab and Maharashtra Co-operative Bank made under section 438 of the Act." 9.3. Facts of the case have been examined. The Hon'ble ITAT in the above referred decision has held that provisions of section 43B, as per which certain deductions are to be allowed only on actual payments, is made applicable to the interest payable to a Cooperative bank by the Finance Act, 2017 w.e.f. 1.4.2018(i.e. A.Y.2018-19). Since the assessment year involved in respect of the appeal under consideration is A.Y.2017-18, provisions of section 43B are not applicable to the assessee for that year. In view of the facts of the case and decision of ITAT as referred above, disallowance of Rs. 14,77,80,860/-u/s. 43B of the IT Act made by the AO is deleted. Accordingly, ground no.4 of the appeal of the assessee is allowed.”

ITA 1134/MUM/2026 SERVEALL CONSTRUCTION PRIVATE LIMITED facts and does not apply to the present case. Therefore, the Ld. CIT(A) erred in deleting the disallowance made by the Ld. AO under section 43B of the Act. Accordingly, we set aside the findings of the Ld. CIT(A) on this issue and restore the order of the Ld. AO. Ground No. 2 & 3 raised by the revenue are allowed.”

Order pronounced in the open court on 30th day of June 2026. Sd/- Sd/- OM PRAKASH KANT ANIKESH BANERJEE (ACCOUNTANT MEMBER) (JUDICIAL MEMBER) Mumbai,िदनांक/Dated: 30/06/2026 SAUMYA Sr.PS Copy of the Order forwarded to: 1. अपीलाथ�/The Appellant , �ितवादी/ The Respondent. 2.

ITA 1134/MUM/2026 SERVEALL CONSTRUCTION PRIVATE LIMITED 3. आयकरआयु� CIT 4. िवभागीय�ितिनिध, आय.अपी.अिध., मुंबई/DR, ITAT, Mumbai 5. गाड�फाइल/Guard file.

BY ORDER, //True Copy// (Asstt. Registrar), ITAT, MUMBAI