DOSTI REALTY LIMITED,MUMBAI vs. DCIT, CIRCLE-1(1)(1), MUMBAI

3. Disallowance of legal and professional fees of Rs. 61,79,780/-

a. On facts and circumstances of the case and in law, Ld CIT(A) erred in not considering appellant's additional ground and additional evidence being sample bills & confirmations filed against the disallowance made of Rs. 61,79,780/- being legal and professional expenses (other than those capitalized). The action of Ld CIT(A) of ignoring the additional grounds of appeal and additional evidence without even referring to those submissions, is in violation of natural justice and such arbitrary order needs to be quashed.

4. Addition u/s. 14A r.w.r 8D of Rs. 92,72,993/- (wrongly stated as Rs. 3,06,36,636/-in Ld CIT(A)'s order):- a. On the facts and circumstances of the case and in law, Ld CIT(A) erred in confirming the action of Ld AO of calculating disallowance u/s. 14A r.w.r 8D of Rs. 98,49,146/- and confirming excess disallowance of Rs. 92,72,993/- without giving any reason for not being satisfied having regard to the books of accounts of the appellant with the correctness of the claim of the appellant. b. On facts and circumstances of the case and in law, Ld. CIT(A) erred in confirming the excess disallowance of Rs. 92,72,993/- u/s. 14A of the Act made by the Ld AO without appreciating and following the decision of Hon'ble Mumbai ITAT (ITA No. 2043/Mum/2022) dated 13.04.2023 in appellant's own case for AY 2016- 17 wherein disallowance u/s. 14A as calculated by Ld AO was cancelled. The addition needs to be deleted. c. Without prejudice to the above and without admitting, on facts and circumstances of the case and in law, Ld. CIT(A) erred in confirming the action of the Ld AO of considering the interest cost of Rs. 10,75,29,743/- while calculating the disallowance u/s. 14A without appreciating the fact that same is incurred for purchase of debentures and also Ld AO had already capitalized this interest cost in WIP. Considering the interest cost twice i.e. once as part of project cost and other while making disallowance u/s. 14A, leads to double disallowance of same interest cost.

5. Addition of Rs. 6,22,821/- (net) on account of House Property income:-

a. On facts and circumstances of the case and in law, Ld. CIT(A) erred in confirming the addition of deemed rent of Rs. 6,22,821/- towards unsold flat lying in the closing stock by ignoring various decisions, particularly jurisdictional decisions relied upon by the appellant & also ignoring that the amendment in s. 23(5) for taxability is applicable from AY 2018-2019 and does not apply to stock in trade. The addition being arbitrarily made, not following the law of precedents, needs to be deleted.”

5.1. According to the assessee, these expenses are not related directly to the construction activities but are incurred for the purpose of increasing the sales and are revenue in nature. It was also submitted that valuation of its inventory is done in accordance with the accounting standard prescribed by ICAI. In respect of disallowance of finance cost of Rs.10,75,29,743/-, claim of the assessee is that the loan on which this interest cost was incurred was never utilised for the purpose of development of its residential project but was invested in the unsecured Optionally Fully Convertible Debentures (OFCD). Breakup of this investment in OFCD and interest income thereon is extracted below as under:

5.2. It was pointed out that part of this investment also included amount of Rs.16,69,889/- made in the form of equity shares of Friends Development Corporation (Imperia) Pvt. Ltd. According to the assessee, it had paid interest of Rs.31,50,67,209/- during the year under consideration. Out of this interest, amount of Rs.10,75,29,743/- is on account of loan utilised for investment in OFCD as well as interest on vehicle. The balance amount of interest was capitalised by the assessee by transferring the same to work in progress. Further, assessee earned interest income of Rs.16,23,78,223/- received by it on OFCD which is offered to tax. Thus, assessee had suo moto capitalised the interest expense for the loan component which has been utilised for the construction of its residential project. The borrowings which were not utilised for the development of residential project has been claimed as revenue expenditure in the profit and loss account against which corresponding interest income is also credited in the same profit and loss account.

5.3. Details of interest debited to profit and loss account of Rs.10,75,29,743/- is as under: Details of Interest debited to P & L Account Name Amount

HDFC Bank - Car Loan 5,46,181 HDFC Ltd (on proportionate loan 10,69,83,562 utilised for purchase of OFCD) ---------------------- 10,75,29,743 ----------------------- 5.4. Further, details of borrowings from HDFC Bank and interest thereon is also extracted below: Details of Borrowing from HDFC Limited and interest thereon Sr. Date of Amount Loan Interest Interest No. Borrowing Borrowed in Account No. Debited to Debited to Rs. W.I.P. in Rs. P&L A/c. in Rs. 1 30-05-2014 30,00,00,000 6210206770 3,63,47,262 2 28-07-2014 95,00,00,000 6210206770 9,28,33,219 A 125,00,00,000 3,63,47,262 9,28,33,219 3 28-07-2014 B 15,00,00,000 6210206763 1,41,50,343 TOTAL A+B 140,00,00,000 3,63,47,262 10,69,83,562 5.5. It was submitted that loan of Rs.125 crores was sanctioned by HDFC Bank vide loan account No.6210206770 for the purpose of construction of residential project “Dosti Ambrosia”, Wadala vide sanction letter dated 11.03.2014. Further, the line of credit finance facility was increased from Rs.25 Crores to Rs.40 Crores for the account no. 6210206763 by another letter dated 11.03.2014 in which also the purpose stated is for the construction of residential project “Dosti Ambrosia”, Wadala. However, according to the assessee, these amounts of credit facilities provided by HDFC Bank were utilised in making investments in OFCD, details already extracted above. In this respect, reference was made to the bank accounts from where the funds moved, first into the account of the assessee and thereafter, to the investments made in OFCD. These bank statements are placed in the paper book forming part of the records. Accordingly, assessee claimed that though the loan was sanctioned for the purpose of construction of residential project, however, factually and evidently, the same were utilised for making investments in OFCD against which assessee had also earned interest income. Thus, owing to the utilisation of borrowed funds not in the construction of residential projects but making investment in OFCD, there is no occasion for capitalising the same to make it part of work in progress inventory, as done by ld. Assessing Officer while making the disallowance.

5.6. Reference is made to Accounting Standard (AS)-2 – ‘Valuation of Inventories’ issued by ICAI wherein in para-6, cost of inventories is defined as “The cost of inventories should comprise all cost of purchase, costs of conversion and the costs incurred in bringing the inventories to their present location and condition”. Para-13 provides for exclusion from the cost of inventories by way of examples. This includes “administrative overheads that do not contribute to bringing the inventories to their present location and condition and selling and distribution costs, among other things”.

5.7. Further, reference is made to AS-16 which deals with ‘Borrowing Costs’. It was submitted that a building project would come under the definition of “qualifying asset”. The method prescribed for treatment of finance cost in respect of qualifying asset in para-6 of AS-16, states that “borrowing cost that are directly attributable to the acquisition, construction or production of qualifying asset, should be capitalised as part of the cost of that asset”.

5.8. Under the mercantile system of accounting, for determining the net income for the year, revenue and other incomes are matched with the cost of resources consumed by applying the matching concept. In the present set of facts based on the verifiable documentary evidences, it is established by the assessee that borrowed funds though sanctioned for the purpose of construction of residential project were utilised in making investments in OFCD against which assessee had earned interest income and offered it to tax. Assessee has offered the interest income on OFCD under the head ‘business income’ against which it has claimed the interest expenses for the borrowed funds utilised for the same. Even if this income is considered under the head ‘income from other sources’, assessee would be eligible to claim deduction against the same u/s.57(iii).

5.9. The issue which remains to be addressed is that when the loan raised for one purpose has been utilised for some other purpose, whether the deductibility of the interest has to be considered based on the actual use rather than the purpose for which it was raised. We draw our force from the decision of Hon'ble Supreme Court in the case of India Cement Ltd. vs. CIT [1966] 60 ITR 52 (SC) wherein it is observed that what is important is the actual use of the loan and not the intention or the motive at the time of raising the loan. This issue was also dealt by the Coordinate Bench in the case of J.F. Laboratories Ltd. vs. ITO [2005] 96 ITD 448 (Mum), wherein it was held that if loan is raised for one purpose but the same is utilised for some other purpose, while considering the deductibility of interest of such loan, the actual use must be considered rather than the motive or intention at the time of raising the loan. Reliance was placed on the decision of India Cements Ltd. (supra). Accordingly, considering the facts of the case, documentary evidences placed on record, explanation furnished and judicial precedents, we hold that interest cost of Rs.10,75,29,743/- capitalised by ld. Assessing Officer is not justified. The same is allowable as a deduction against the interest income earned by the assessee.

6.1. We note that the above stated expenses incurred by the assessee are for the purpose of its business. It cannot be said that any capital assets stand acquired by the assessee by incurring these expenses, giving rise to enduring benefit. There is no dispute on incurring of these expenditure by the assessee. The issue is in respect of their treatment, whether to be treated as capital in nature so as to form a part of work in progress or as revenue in nature deductible for arriving at business income. We refer to the decision of Coordinate Bench in the case of Macrotech Construction Pvt. Ltd. vs. ACIT [2019] 103 taxmann.com 348 (Mum), wherein on similar set of facts, it was held that where the assessee is engaged in the business of construction and is following AS – 2, it is justified in debiting all expenses related to administration, selling, marketing, etc., in the profit and loss account. We also refer to the decision of Hon'ble High Court of Delhi in the case of PCIT vs. DLF Home Development Ltd. [2020] 114 taxmann.com 97 (Del), wherein Hon'ble Court dealt with the issue relating to allowance towards brokerage and commission expenses claimed by the assessee in the context of percentage completion method adopted by the assessee. Hon'ble Court held in favour of the assessee to allow the expenses towards brokerage and commission as revenue in nature.

6.2. Reference is also made to decision of Coordinate Bench in the case of sister concern of the group to which the assessee belongs to, i.e., Dosti Realty Ltd., formerly known as Friends Development Corporation (Imperia) Pvt. Ltd. in for Assessment Year 2014-15, dated 06.09.2022. In this case also, issues relating to similar expenses in the nature of brokerage and advertising expenses were dealt with. The Coordinate Bench held in favour of the assessee by deleting the capitalisation made by the ld. Assessing Officer for which relevant findings and observations in this respect are extracted below for ready reference. “14. We have heard both the parties and perused the relevant findings given in the impugned order as well as relevant material placed on record before us. In so far as issue raised in Ground No. 1 & 3 relating to disallowance of brokerage expenses of Rs. 29,15,168/- and advertisement expenses of Rs. 1,00,00,884/-, the main issue is whether the said expenditure claimed by the assessee in the profit and loss account should be capitalized to work in progress or should be allowed in the year in which such expenditure has been incurred and debited to the profit and loss account. As per Accounting Standard-2 relating to Violation of inventories' and Clause-13 relating to 'Selling in distribution expenditure' are to be recognized as expenses in the period in which they are incurred. Even as per ICDS-11, the selling cost have to recognize as expenses. The selling cost is not considered as part of construction cost and development cost.

6.3. Thus, considering the facts of the case and the discussions made above, fortified by the judicial precedents discussed, capitalisation made by the ld. Assessing Officer towards above stated expenses is not justified. Accordingly, additions made in this respect are deleted. Ground no.2 raised by the assessee is allowed.

8.1. On this aspect of interest, we have already dealt with in ground No.2 whereby the finding arrived at is that borrowed funds had been utilised for the purpose of making investment in OFCD and thus the interest expense incurred by the assessee is allowable as deduction from interest earned from OFCD. Accordingly, no disallowance is justified for the interest component while computing the same u/s.14A r.w.r. 8D(2)(ii). Furthermore, assessee has demonstrated that it had its own funds more than the investments made by it to establish that interest expense cannot be disallowed u/s.14A r.w.r. 8D(2)(ii). Assessee factually stated from its audited financial statements that total investments as on 31.03.2015 was Rs.179,17,09,674/- against the total share capital and resources on the same date at Rs.248,15,39,747/- which is more than the investment. Thus, assessee established that it had own funds available with it which are interest free and the presumption goes in favour of the assessee that investments are made out of interest free funds generated or available with the assessee. Accordingly, no disallowance is called for the interest component while computing the same u/s.14A r.w.r. 8D(2)(ii).

8.2. For the disallowance made by applying Rule 8D(2)(iii), the issue is squarely covered by the findings of the decision of the Coordinate Bench, Mumbai in assessee’s own case for Assessment Year 2014-15 (supra). Assessee has furnished the details for the suo moto disallowance made by it as well as in respect of additions made by the ld. Assessing Officer, the same are reproduced below:

8.3. Based on our findings, the revised calculation for the disallowance u/s.14A for considering those investments on which assessee has earned exempt income is also tabulated below:

8.4. Ld. Assessing Officer is accordingly directed to give effect to the above stated findings. Ground No.4 is thus allowed partly.

9.1. Ld. CIT(A) has in a cryptic manner dealt with this ground raised by the assessee by stating that the view taken by the department for the earlier Assessment Year 2010-11 on similar issue has not been accepted and the appeal before the Tribunal was dismissed on account of low tax effect. He thus, noted that the issue is not settled and justified the action taken by the ld. Assessing Officer, while dismissing the ground. In his operative para-6.3.3, while adjudicating on this ground, there is no discussion about the issue, applicable law and the judicial precedents except for reproduction of submissions made by the assessee. Principles governing the exercise of powers by the First Appellate Authority are contemplated under sections 250 and 251 of the Act, breach of which has far reaching consequences on the administration of justice, culminating in the litigant approaching the higher appellate authority. It is required that the first appellate authority viz. CIT(A) will appreciate the evidence, consider the arguments and apply the law on the given set of facts and circumstances and arrive at findings.

9.2. Before us, on this issue, ld. Counsel for the assessee strongly submitted on the settled position of law whereby taxability with regard to unsold shops/flats held as stock in trade is to be dealt as business income and not under the head ‘income from house property’. He placed strong reliance on the decision of Hon'ble Jurisdictional High Court of Bombay in the case of Classique Associates Ltd. in of 2016, dated 28.01.2019, wherein this issue has been considered in para-4 after discussing the decision of Hon'ble High Court of Gujarat in the case of Neha Builders Pvt. Ltd., [2008] 296 ITR 661 (Guj) and of Hon'ble Supreme Court in the case of Chennai Properties and Investment Ltd. vs. CIT(A) [2014] 377 ITR 673 (SC). In para-4, Hon'ble High Court of Bombay took note of the observation of para-8 of Neha Builders (supra) which is reproduced as under:

“8. True it is, that income derived from the property would always be termed as 'income' from the property, but if the property is used as 'stock- in-trade', then the said property would become or partake the character of the stock, and any income derived from the stock, would be 'income' from the business, and not income from the property. If the business of the assessee is to construct the property and sell it or to construct and let out the same, then that would be the 'business' and the business stocks, which may include movable and immovable, would be taken to be 'stock- in-trade', and any income derived from such stocks cannot be termed as 'income from property'. Even otherwise, it is to be seen that there was distinction between the 'income from business' and 'income from property' on one side, and 'any income from other sources'. The Tribunal, in our considered opinion, absolutely unjustified in comparing the rental income with the dividend income on the shares was or interest income on the deposits. Even otherwise, this question was not raised before the subordinate Tribunals and, all of sudden, the Tribunal started applying the analogy."

9.3. Hon'ble Bombay High Court thus concluded in para-5 that since Hon'ble Supreme Court confirmed the view of Hon’ble High Court that the income generated from such source was assessee’s business income and not the assessee’s house property income, the first substantial question of law was thus not entertained. Accordingly, appeal by the Revenue was dismissed. This decision of Hon'ble High Court of Bombay has been followed in plethora of decisions by Coordinate Bench of ITAT Mumbai as listed below: i. Vrinda Sharad Bal v. Pr. CIT for A.Y. 2014-15 in ii. Haware Infrastructure P. Ltd. v. ITO for Α.Υ. 2013-14 in and 4021/Mum/2019 iii. Haware Infotech Ltd. v. ACIT for A.Ys. 2016-17 and 2017-18 in and 396/Mum/2024 iv. Shyamdarshan Properties P. Ltd. v. DCIT for A.Y. 2019-20 in ITA No. 2798/Mum/2025 9.4. Ld. Counsel for the assessee referred to the decision of Coordinate Bench of ITAT, Mumbai in the case of Vrinda Sharad Bal vs. PCIT (supra) to point out that decision of Hon'ble High Court of Bombay in Classique Associates (supra) was referred to in para-4. Further, decision of Hon'ble High Court of Delhi in the case of Ansal Housing and Finance and Leasing Company (supra) was also dealt with in para-5. Coordinate Bench also took note of the amendment made by the Finance Act, 2017 w.e.f. 01.04.2018 to sub-section 23 by insertion of sub-section (5) which is reproduced as under:

"(5) Where the property consisting any building or land appurtenant thereto is held as stock-in-trade and the property or any part of the property is not let during the whole or any part of the previous year, the annual value of such property or part of the property, for the period up to one year from the end of the financial year in which the certificate of completion of construction of the property is obtained from the competent authority, shall be taken to nil."

9.5. The effect of the above stated amendment in which it was noted that in order to give relief to Real Estate Developers, section 23 has been amended w.e.f. AY 2018-19 (FY 2017-18). By this amendment, it is provided that if the assessee is holding any house property as his stock- in-trade which is not let out for the whole or part of the year, the annual value of such property will be considered as Nil for a period up to one year now two years from the end of the financial year in which a completion certificate is obtained from the competent authority.

9.6. After considering all these judicial precedents and amendments to law, Coordinate Bench gave its finding by holding that since the assessee is a builder and developer and the year under consideration is Assessment Year 2014-15 and the issue is in respect of taxability with regard to unsold flats, in view of the amendment to section 23 by insertion of sub-section (5) w.e.f. 01.04.2018, assessment of unsold inventory to be assessed as income from house property is not applicable to the impugned Assessment Year 2014-15.

9.7. Ld. Counsel thus, asserted that case of the assessee falls on the similar factual pattern, where year under consideration is Assessment Year 2015-16 and the issue relates to taxability of unsold shops/flats on which ld. Assessing Officer has adopted 8.5% of the value to arrive at annual lettable value to tax it under the head ‘income from house property’. He also referred to the decision of Co-ordinate Bench in the case of DCIT v. Inorbit Malls P. Ltd. in dated 11.10.2022 wherein it dealt with the decision of Ansal Housing Finance (supra) and made an observation that view of Hon'ble Delhi High Court is too harsh an interpretation. Further, to distinguish, it was pointed out by the ld. Counsel that in the order of Inorbit Malls, there was discussion on the decision of Hon'ble jurisdictional High Court in the case of Classic Associates Ltd (supra) though dated 28.01.2019. Relevant para 19 from the said order is extracted below for ready reference:

9.8. We find that assessee has reported this stock of completed but unsold shops in the inventories in its audited financial statements at Rs.1,04,67,564/- which is an undisputed fact. Further, assessee is a builder and developer engaged in the business of real estate. The case of assessee draws force from the decision of Hon'ble Jurisdictional High Court of Bombay in the case of Classique Associates (supra) followed by the Coordinate Bench as stated above. Respectfully, following the above judicial precedents and the position of law as applicable to the assessment years prior to the amendment effective from Assessment Year 2018-19, the addition made by the ld. Assessing Officer does not survive. However, it is worth mentioning that the position would be different for years when the amendment to section 23(5) became effective from Assessment Year 2018-19 when legislature in its wisdom brought the income to be taxed under the head ‘income from house property’. Accordingly, ground raised by the assessee is allowed.

Order is pronounced in the open court on 31 July, 2025