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Facts
The assessee developer appealed against the CIT(A)'s order upholding additions made by the AO regarding under-reported profit, sale of parking plots, and interest paid on loans. The AO's additions were based on survey findings and discrepancies in accounting for project profits and land acquisition interest.
Held
The Tribunal held that the addition on account of under-reported profit was unsustainable as the AO computed it suo motu without rejecting books of account and without providing the assessee an opportunity to explain the expenses. The addition for parking plots was set aside and remanded for fresh adjudication due to lack of proper verification. The disallowance of interest paid on loans for land acquisition was deleted, holding it as a business expenditure capitalized in Work-in-Progress, following established jurisprudence.
Key Issues
Whether additions made by AO based on survey statement without rejecting books of accounts and without proper opportunity to assessee are valid. Whether interest paid on loans for land acquisition can be capitalized as part of Work-in-Progress in real estate business.
Sections Cited
143(3), 250
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Income Tax Appellate Tribunal, MUMBAI BENCH “G”, MUMBAI
Before: SHRI ANIKESH BANERJEE & SHRI JAGADISH
Date of hearing : 09/03/2026 Date of pronouncement : 16/03/2026 O R D E R Per Bench : Both the appeals were preferred by the assessee against the order of the ld. Commissioner of Income Tax appeal 52, Mumbai [for brevity the “Ld. CIT(A)”], order passed under section 250 of the Income Tax Act 1961 (for brevity ‘the Act’) for assessment year 2018-19 and 2019-20, date of order 05.07.2025. The impugned order emanated from the order of the Ld. Assistant Commissioner of Welkin Developers Income Tax C.C.-4(3) Mumbai (for brevity the “Ld. AO”) order passed under section 143(3) of the Act date of order 27.05.2021 for A.Y. 2018-19 and 28.09.2021 for A.Y. 2019-20.
Both the appeals are arising out from the same assessee by the separate orders of the Ld. CIT(A). for the convenience both the appeals are taken together and heard together due to the common factual issue. With the consent of both the parties A.Y. 2018-19 is taken as lead case and the decision rendered therein shall apply mutatis mutandis to other appeals before us.
The assessee has taken the following grounds: “
Grounds 1. Ld. CIT(A) has erred in law and on fact to upheld AO's addition of Rs. 41,14,625/-, on account of remaining profit of project of Welkin Star, only on presumptions-surmises and ignoring the fact that the AO has made addition only on appellant's survey statement and without providing details and evidences of construction cost and other expenses reported by him the para 3.4(i) in assessment order.
2. Ld. CIT(A) has erred in law and on fact to upheld AO's addition of Rs. 20,00,000/-w.r.t. alleged sales of four parking plots without there being a single piece of evidence for sale and receipt of four parking spaces.
3. Ld. CIT(A) has erred in law and on fact to upheld AO's method of valuation of closing stock at market rate of Rs. 9000/- per sq.ft. (commercial rate at Dhansoli), which is contrary of provisions of section 145A of the Act.
4. Ld. CIT(A) has erred in law and on fact to upheld AO's addition of Rs.79,42,978/-being interest paid to Indiabulls Finance on their loans is capital expenditure as there is no revenue is generated in Ghansoli Project.”
Welkin Developers 4. The brief facts of the case are that the assessee had filed the return u/sec. 139(1). A survey was conducted by the revenue on 15.01.2019. During the survey proceedings certain discrepancy was found for A.Y. 2018-19. Therefore, the case was selected for scrutiny. During the assessment proceeding the Ld. AO found the discrepancy in claiming of interest on loan related to advance payment for purchasing land at ‘Ghasholi’ which comes amount to Rs.79,42,978/-. Accordingly Ld. AO disallowed the interest paid for the advance payment for purchasing the land. The addition was confirmed by the Ld. AO related to sale of parking spaces Rs.20,00,000/- and under reported profit amount to Rs.41,14,625/-. Being aggrieved assessee filed an appeal before the Ld. CIT(A). The Ld. CIT(A) uphold the order of the Ld. AO . Being aggrieved the assessee filed an appeal before us.
The Ld. AR argued and filed a paper book comprising pages 1 to 121 which has been placed on record. The ground wise argument is as below:
Ground No.1 The addition was made on account of the alleged non-representation of profit amounting to Rs. 41,14,625/- in respect of the Welkin Star project. The Ld. AR contended that the Ld. AO made the addition merely on the basis of surmises and conjectures while ignoring the relevant facts of the case. It was further argued that the Ld. AO had not rejected the books of account of the assessee and yet proceeded to compute the net profit suo motu. The relevant observations of the Ld. AO regarding the computation of net profit of Rs. 41,14,625/-, as recorded in paragraphs 3.3 to 3.4 of the assessment order, are reproduced below:
Welkin Developers “3.3 The assessee was once again confronted with the anomaly of under-reporting of project profits in its books of account on 18.01.2019 in his statement recorde under Oath. In his reply, the assessee has stated that there are 2 shops andparking lots which are unsold and the said income shall be offered in the year of realization of sale. The relevant extract is reproduced below:
Q.7 Total sales of the A.Y. 2017-18 shown at Rs. 241,37,950/- and for the A.Y. 2018-19 is Rs. 2,34,93,150/- totaling to Rs. 4,76,31,100/-and total expenses of Welkin Star shown is Rs. 1,39,84,221/- + cost of land Rs. 88,34,400/-(purchased land for welkin star) leading to a profit of Rs.2,48,12,479/-, however you have shown profit at Rs. 2,06,97,854/- In the return of income. Hence, there is a difference of Rs. 41,14,625/- which should have been offered to tax. Please Explain. Ans. There are 2 shops in stock and 4 parking slots in stock as and when it will be sold it will be shown as a profit, as in general commercial property get more profit than the residential one. The actual profit realized on sale of above property will be offered in year of realization of sale. 3.4 The above submission is not found acceptable on the following grounds:
(1) The assessee has stated that the profits will arise on sale of remaining inventory of two shops and four parking lots. However, the above calculation is out of the SALES recognised by the assessee and does not concern the closing stock-in-trade. Thus, from the revenue recognised by the assessee, by deducting the expenses incurred and given the fact that the Occupancy Certificate has been received and no further expenses are to be incurred, the remaining profit to be offered is independent of the revenue to be realised from the closing stock, which shall be additional profit to be offered to income-tax, as and when realised/receivable. The calculation w.r.t. Welkin Star is given below for ready reference:
Sl. No. Description Amount(Rs.) 1 Add: Sales recognized for FY 2016-17 24137950/- 2 Add: Sales recognized for FY 2017-18 23493150/- 3 Less: Purchase of Land 8834400/- 4 Less: Construction and Other Expenses 13984221/- 5 Net Profit 24812479/- 6 Net Profit disclosed in P&L A/c so far 20697854/- 7 Balance Profit to be shown in A.Y. 2018-19 4114625/-
Welkin Developers The assessee follows mercantile system of accounting. Without prejudice to anything else, the contention of the assessee that the income shall be offered in the year of realization of sale is not at all acceptable since the assessee is not following cash system of accounting and needs to offer the income as soon as revenue is realised and sales are booked.”
The Ld. AR contended that during the course of the survey proceedings, a statement was recorded in January 2019, wherein the expenses amounting to Rs. 1,39,84,221/- were declared as construction and other related expenses. However, the books of account were finalized only in March 2019, and therefore a variation in the accounting figures had occurred. The year-wise details of turnover and expenses, as furnished by the assessee, were duly placed in the APB at page 22, which is reproduced below:
The Ld. DR relied upon the orders of the revenue authorities and supported the findings recorded therein.
We have heard the rival submissions and perused the material available on record. It is observed that during the course of the assessment proceedings, the Welkin Developers Ld. AO computed the net profit suo motu without rejecting the books of account of the assessee. During the appellate proceedings, the Ld. AR contended that no details regarding the basis for computing the expenses of Rs. 1,39,84,221/- were ever furnished to the assessee for its explanation. Consequently, the assessee was denied a reasonable opportunity of being heard. It is further noticed that both the Ld. AO as well as the Ld. CIT(A) remained silent regarding the basis of computation of the said expenses of Rs. 1,39,84,221/- while determining the net profit. The Ld. AR further submitted that the said figure was merely adopted from the statement of the partner recorded on 16.01.2019 during the survey proceedings. Subsequently, within a period of two months, the assessee’s accounts were duly finalized after incorporating the correct figures of expenses and other accounting data, and the books were audited before filing the return of income. In these circumstances, computing the net profit without rejecting the books of account is arbitrary and unsustainable in law. In our considered view, the Ld. AO determined the net profit suo motu without granting a reasonable opportunity to the assessee and solely relying upon the statement recorded during survey, which cannot be the sole basis for such determination. Accordingly, we set aside the order of the Ld. CIT(A) on this issue. The addition made by the Ld. AO amounting to Rs. 41,14,624/- is hereby deleted. Accordingly, the Ground No.1 of the assessee’s appeal is allowed.
Ground No. 2 pertains to the addition of Rs. 20,00,000/- made by the Ld. AO. During the course of the survey proceedings, the statement of the assessee was recorded wherein it was stated that the assessee had sold a garage for a consideration of Rs. 2,00,000/-. During the survey, the revenue authorities
Welkin Developers observed that out of five parking spaces, the assessee had sold one parking space. However, the revenue treated the remaining four parking spaces as deemed sales. The Ld. AR contended that the remaining four parking spaces were still unsold and therefore no addition could be made on that account. However, relying on the survey documents, the Ld. AO, at page 7 of the assessment order, determined the value of each parking space at Rs. 5,00,000/-. Accordingly, the Ld. AO treated four parking spaces as deemed sales and made an addition of Rs. 20,00,000/- (4 × Rs. 5,00,000/-) to the total income of the assessee. During the course of hearing before the Bench, the Ld. AR strongly denied the alleged sale of the four parking spaces, submitting that the assessee cannot be expected to produce evidence to prove a negative fact, i.e., a transaction which had never taken place.
The Ld. CIT(A) examined and taken the view recorded to this addition in para no.7.3 of the appellate order. The relevant paragraph is reproduced as below: “7.3 Sales of parking plot: During the course of survey proceedings it was held that the Appellant has sold only one parking space out of 5 (five) spaces available for sale. Further, it was presumed that parking space was sold out with the flats sold. Therefore, the sale amount should be offered for taxation. The main question arose here that whether the Stilt parking is sold or not and whether the cost of WIP and or unsold stock is inclusive of cost of parking space or not? The answer of first query is very clear from the statement recorded on oaths that the said stilt parking slot is unsold and the answer of second query is that the valuation of unsold stock should be as per the accounting policies generally accepted by the person and the same is cost or net realizable value whichever is lower. Further, the books of accounts are duly audited by the Chartered Accountants so the doubt on valuation may not be warranted. Moreover, no evidence from bank statements or sales agreements supported the AO's contention. However, it is pertinent to note here that the appellant is a builder and engaged in the business of construction and development of real estate. Further as the project of the appellant had Welkin Developers completed and the appellant is in the possession of OC of the project. Therefore, the appellant should recognize the revenue from the unsold inventory even. In the present case during the course of survey proceedings there were finding with respect to the sales consideration of parking space. The sales consideration of the parking slot ranging from Rs. 3,50,000/- to Rs. 5,00,000/-, Further it is seen from the impounded material as pastedin para 4.7 of assessment order passed that the appellant has valued the parking slot Rs. 5,00,000/- for each parking for a customer. The A.O. in its order provided the benefit to the appellant with respect to sales value of commercial unit under the para supra i.e. under reporting of profit. The A.O. has not again taxed the entire unsold commercial units here which are right approach by the A.O. Therefore, the A.O. is rightly added the sales value of parking slot as undisclosed income of the project having OC. Hence the grounds of appeal are hereby dismissed. The A.O. is directed to take appropriate action for penalty on account of the addition made.”
The Ld. DR submitted that out of the five parking spaces, the assessee had admittedly sold one parking space, while the remaining four parking spaces were stated to be unsold. However, the assessee had not furnished any stock details of the parking spaces before the revenue authorities. The Ld. DR contended that the Ld. AR had merely denied the sale of the four parking spaces without producing any supporting evidence to substantiate such claim. The Ld. DR further argued that parking spaces constitute immovable assets, and therefore the assessee is required to establish the final status of such assets upon completion of the project, particularly whether the same remained as closing stock or had been transferred. In the absence of any documentary evidence or stock records, the contention of the assessee could not be accepted. In the alternative, the Ld. DR submitted that if the parking spaces had indeed remained unsold and had not generated any revenue, then the corresponding expenses attributable to such parking spaces should be disallowed or added back, as no income had been derived there from. Accordingly, the Ld. DR supported the orders of the revenue authorities.
Welkin Developers 12. We have heard the rival submissions and perused the material available on record. From the survey proceedings it is evident that the assessee had five parking spaces, out of which one parking space was admittedly sold for Rs. 2,00,000/-. In respect of the remaining four parking spaces, the Ld. AO determined the value at Rs. 5,00,000/- per parking space on the basis of documents impounded during the course of survey proceedings and accordingly treated the same as deemed sales. The assessee, however, has categorically denied the sale of the remaining four parking spaces. However, it is observed that the assessee has not furnished any documentary evidence, stock details, or records in the books of accounts to substantiate the claim that the said parking spaces remained unsold. Further, considering the fact that the project has already been completed and the Occupation Certificate (OC) has been obtained, it becomes necessary to verify the final status of the parking spaces, particularly whether they remained as unsold inventory, were transferred to the society/community, or were otherwise disposed of. Since these relevant facts have not been properly verified from the records, the issue requires fresh examination. In view of the above facts and in the interest of justice, we deem it appropriate to restore this issue to the file of the Ld. AO for fresh adjudication (de novo) after proper verification of the relevant documents and records. The assessee is directed to produce all relevant documentary evidence, including stock records, books of account, project completion details, and any other supporting material to substantiate its claim that the remaining parking spaces were not sold. The Ld. AO shall provide reasonable opportunity of being heard to the assessee before deciding the issue in accordance with law.
Ground 4 of AY 2018-19 & Ground-1 of AY 2019-20 15. During the course of hearing before the Bench, the Ld. AR submitted that the assessee had paid loan interest amounting to Rs. 79,42,978/- to India Bulls Finance in connection with the purchase of land at ‘Ghasholi’ for both the assessment years which was duly accounted for under Work in Progress (WIP). The assessee had paid an amount of Rs. 21,40,41,673.82 to CIDCO Ltd. as advance for acquiring of land for AY 2018-19. The Ld. AR further submitted that the land was purchased for the business purpose of developing the said property, and accordingly all related expenditures, including interest, were capitalized and added to the Work in Progress. The Ld. AR invited our attention to APB pages 82– 83, which contain copies of the Balance Sheet and Profit & Loss Account for the financial year 2017–18, reflecting the relevant transactions. The Ld. AR contended that the addition made by the Ld. AO in respect of interest on unsecured loans is bad in law, as the same had already been properly accounted for in the books of account as part of the project cost.
In support of the above contention, the Ld. AR respectfully relied upon the order of the Coordinate Bench of the ITAT, Mumbai in the case of M/s. Ashish Land & Property Developers vs. ITO, for A.Y. 2013–14, order dated 06.04.2022. The relevant observations of the Coordinate Bench are reproduced as under:
Welkin Developers “11. Considered the rival submissions and material placed on record, we observed that similar issue was considered and adjudicated by the Coordinate Bench in assessee's own case for the A.Y. 2012-13 and decided the issue in favour of the assessee. While holding so the Coordinate Bench held as under: - 8. We have considered the rivol submission of the parties and have gone through the orders of the authorities below. There is no dispute that the assessee has given advance for acquisition of developments rights of certain properties. The assessee is engaged in the business of property development. The Hon'ble Delhi High Court in case of CIT vs. Dhoomketu Builders & Developers (supra) held that setting up of business is enough for claiming deduction under section 36(1)(iii). It was further held that commencement of the real estate business starts with the acquisition of land or immovable property. Further, single bench of Jaipur Tribunal in Aditya Propcon P. Ltd. (supra) held that purchase and holding of inventory is a business activity. The proviso has been inserted to disentitle claim of interest on funds borrowed for acquisition of capital asset for the period upto the asset is put to use. The term 'put to use' here applies to capital asset only because a capital asset is held to facilitate the business activity and some time it need to be prepared after acquisition for being used to facilitate the business activity. Therefore, the interest on funds borrowed to purchase land (Α.Υ: 2013-14) M/s. Ashish Land & Property Developers Pvt. Ltd., which is a part of inventory of assessee-company is an allowable deduction.”
The Ld. AR respectfully relied on the order of Hon'ble Madras High Court in the case of CCIT vs M/s. Ceebros Hotels P. Ltd. reported in (2022) 440 ITR 200 (Mad). The Hon'ble High Court has also considered the issue related to allowable interest u/sec. 36(1)(iii) the relevant para no.19 to 21 is reproduced as below: “19. Further, the Tribunal noted that the inventory in the business/holding of inventory in the business by itself is a business activity in the normal course and in continuation of business of construction pursued by the assessee. Therefore, it held that the attempt to apply the proviso to the case of the assessee would lead to wrong interpretation of law and therefore, the reasons given by the Assessing Officer to disallow the interest expenditure by applying the provisions of Section 36(1)(iii) is not in accordance with law. Further, the Tribunal noted that the assessee is into the business of Real Estate Development and in the process of executing two projects at different places and the Assessing Officer was not justified in treating the two projects on stand- alone basis and also that the property in MRC Nagar was not put to use. Further, the Tribunal
Welkin Developers observed that the purchase of inventory in the course of carrying on business should be reckoned as continuation of same business activity in the normal course and cannot be equated or termed as extension of business activity. Furthermore, the Tribunal noted that the assessee has offered substantial income from the Atlantic project and the attempt to apply Matching Concept principle is misconceived. 20.So far as the decision of the Special Bench of the Tribunal in Wallstreet Construction Ltd. is concerned, the issue was whether, where the assessee has followed the Project Completion Method of accounting, the interest identifiable with that project should be allowed as deduction in the year when the project is completed and the income is offered from the project or it should be allowed on a year to year basis. In our considered view, the said question does not arise in the case on hand and therefore, the said decision cannot be applied to the facts before us 21. Thus, we are of the view that the Tribunal was right in allowing the appeal filed by the assessee and holding that the term "put to use" applies to capital asset only because capital osset is held to facilitate the business activity and sometimes, it needs to be prepared after it is acquired for being used to facilitate the business activity and in the instant case, the assessee was able to establish that substantial activities had been done in the project, which would go to show that the property purchased has been put to use.”
The Ld. DR argued in respect of the disallowance of interest expenses for both the assessment years. He submitted that for AY 2018–19, the assessee had merely made an advance towards procurement of land at Ghasholi, which was not reflected under the head of current assets in the books of account. The Ld. DR contended that the asset had not satisfied the condition of being “put to use.” Consequently, the interest expenditure claimed by the assessee could not be allowed. However, with respect to Assessment Year 2019–20, the Ld. DR fairly submitted that the said asset had been recorded in the balance sheet under current assets, indicating that the property had been acquired by the assessee. Accordingly, the Ld. DR conceded that the assessee would be eligible to claim the interest
We have carefully considered the rival submissions and perused the material available on record. It is an undisputed fact that the assessee is engaged in the business of real estate development and that the acquisition of land constitutes part of its regular business activity. The records placed before us, particularly APB pages 82–83, clearly demonstrate that the assessee had made substantial advance payments to CIDCO Ltd. for acquisition of land at ‘Ghasholi’ and had also incurred interest expenditure on the borrowed funds utilized for such business purposes. The assessee has consistently capitalized the said expenditure as part of Work-in-Progress (WIP), treating the land as part of its business inventory. The Coordinate Bench of the ITAT-Mumbai in the case of Ashish Land & Property Developers Pvt. Ltd. (supra) has categorically held that in the case of a real estate developer, the acquisition of land constitutes a normal business activity and the land forms part of the inventory of the assessee. Consequently, the interest incurred on borrowed funds for acquisition of such land cannot be disallowed by invoking the proviso to section 36(1)(iii), as the concept of “put to use” is applicable only to capital assets and not to inventory held in the course of business. A similar view has also been taken by the Hon’ble Madras High Court in Ceebros Hotels Pvt. Ltd. (supra), wherein it was held that holding of inventory in the course of construction business is itself a continuation of business activity and the proviso to section 36(1)(iii) cannot be invoked to disallow interest expenditure merely on the ground that the project or asset has not been ‘put to use’.