Loading judgment…
Facts
The revenue appealed against the CIT(A)'s order deleting disallowances made under Section 14A and Section 43B. The assessee, a real estate company, incurred interest expenses on overdraft from Punjab & Maharashtra Cooperative Bank and capitalized it to Work-in-Progress. The AO disallowed this under Section 43B, and also disallowed expenses under Section 14A. The CIT(A) deleted these disallowances.
Held
The Tribunal held that the disallowance under Section 43B was indeed applicable as PMC Bank was a scheduled bank and the amendment making Section 43B applicable to cooperative banks was effective from AY 2018-19, whereas the assessment year was 2017-18. The capitalization of interest to WIP does not circumvent the actual payment requirement under Section 43B. The Tribunal also noted that the CIT(A) correctly relied on previous orders for Ground No.1 regarding Section 14A.
Key Issues
Applicability of Section 43B to interest paid to a cooperative bank for AY 2017-18, and whether capitalization of interest to WIP circumvents the actual payment rule under Section 43B.
Sections Cited
14A, 8D(2), 43B, 139(1), 11(5)(iii)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, MUMBAI BENCH “G”, MUMBAI
DCIT CC-5(4), Mumbai vs Satyam Realtors Private Ltd. Room No.436, 4th floor, Room No.4, 3rd Floor Capri, Anant Kautilya Bhawan, BandraKurla Kanekar Marg Bandra (East) Complex, Mumbai-400051 Mumbai-400051 PAN:AACCS7290P APPELLANT RESPONDENT Assessee by : None, Respondent by : Shri Arun Kanti Datta (CIT DR) Date of hearing : 09/03/2026 Date of pronouncement : 13/03/2026 O R D E R Per: Anikesh Banerjee (JM): The instant appeal of the revenue was preferred against the order of the Ld. Commissioner of Income Tax (Appeal)-53, 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 2017-18, date of order 24.09.2024. The impugned order emanated from the order of the Ld. Assistant Commissioner of Income Tax
Satyam Relations Pvt. Ltd. C.C.-5(4), Mumbai (for brevity the‘Ld. AO’) order passed under section 143(3) of the Act date of order 28.12.2019. 2. The revenue has taken the following grounds: “
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 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."
When the appeal was called for hearing, none appeared on behalf of the assessee to represent the case, nor was any application for adjournment filed. The Ld. DR submitted that bench has directed to service the notice of hearing through the Ld. AO to the assessee. Considering the direction of the Bench the Ld. DR submitted a report on 05.02.2026. The relevant part of this report is reproduced as below:
Satyam Relations Pvt. Ltd. “2. As directed, efforts were being made to Identify the present address of the assessee company and its directors. Upon inquiring from the ITBA database it is found that the assessee is a non-filer and has last filed its return of income for the AY 2018-19 in which address declared by the assessee is same as the address mentioned in the hearing notice. No other alternate address is available on the Income Tax database. Further, as per MCA database and ROC database, no present address is available in their database.
3. In view of the above, notice of hearing could not served on any other alternate address of the assessee, other than service by affixture done by the income Tax Inspector posted with the charge of the under-signed.”
In view of the above facts and circumstances, it is evident that despite sufficient opportunity, the assessee has failed to appear before the Tribunal or seek any adjournment. The report submitted by the Ld. DR also indicates that reasonable efforts were made to serve the notice of hearing, including verification of the address available on the ITBA database and service of notice by affixture through the Income Tax Inspector. However, the assessee has chosen not to respond or participate in the appellate proceedings. So, we proceed to dispose of the appeal on exparte qua for assessee after hearing the Ld. DR and documents available on record.
We heard the submission of the Ld.DR and perused the documents available in the record. During the course of assessment proceeding assessee has submitted a ledger account where the opening balance of overdraft to the tune of Rs.75,56,31,607/- and closing overdraft to the tune of Rs.90,31,12,467/- relating to net increase of interest in overdraft amount of Rs.14,74,80,860/- in overdraft
Satyam Relations Pvt. Ltd. from Punjab and Maharashtra Cooperative Bank (PMC) consisting of the interest expenses of Rs.14,77,80,860/- included dividend of Rs.3,00,000/-. The assessee added this overdraft interest with the work in progress. But Ld. AO during assessment made the addition u/sec. 43B(e) in observations that the said interest on overdraft has contravening provision of 43B(e) of the Act. And also the addition u/sec. 14A(1) related to dividend income of Rs.3,00,000/- was calculated and added back with the total income of the assessee. The aggrieved assessee filed an appeal before the Ld. CIT(A). The Ld. CIT(A) allowed the appeal of the assessee by considering the order of the Coordinate Bench of ITAT. Related to addition u/sec 14A the Ld. CIT(A) relied on the order of the Coordinate Bench of ITAT-Mumbai in assessee company’s own case, A.Y.2014-15 pronounced on 31/07/2019 and deleted the disallowance of expenses u/sec 14A of the Act. But related addition u/sec 43B the Ld. CIT(A) relied on the order of the Coordinate Bench of the ITAT-Mumbai in assessee’s own associates case in Awas Developers & Constructions Private Limited for the A.Y. 2016-17, ΓΓΑ No. 551/Mum/2021 date of pronouncement 20/07/2022. The Ld. CIT(A) has inserted the relevant observatuion of the order of ITAT which is reproduced as below:- "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. 4 Disallowance of interest expenses of Rs. 14,77,80,860/- under section 43B of the IT Act, 1961. The word "cooperative bank" other than primary agricultural credit society or primary cooperative 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 Satyam Relations Pvt. Ltd. liable to be disallowed under section 438 of the Act only we.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 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". So, based on the above factual and legal submission, you are hereby kindly requested to direct the learned AO to delete disallowance made u/s 43B of the Act, 1961 and restore back the WIP as on 31/03/2015 as per the financial statement of the Appellant Company.” Accordingly, the Ld. CITA) deleted the addition made u/sec 43B of the Act. Being aggrieved the revenue filed an appeal before us.
Related to Ground No.1 the assessee claimed that assessee had no exempted income the said dividend was received Rs.3,00,000/- is a taxable income. We find that the Ld. CIT(A) correctly relied on the order of Coordinate Bench of ITAT Mumbai in assessee’s own case and disallowed the additions. The Ld. DR had not made any strong objections against the observations taken by the Ld. CIT(A). Accordingly, the Ground No.1 taken by the revenue is dismissed.
Related to Ground No.2 & 3 the Ld. DR vehemently argued and stands in favour of the order of the Ld. AO. He filed a written submission which is reproduced as below: “2.Disallowance of interest u/s 43B amounting to Rs. 14,77,80,860/-. “2.1. AO's ground: In the course of assessment the AO has found from the copy of the ledger account that the assessee had opening an overdraft to the tune of Rs. 75,56,51,607/- and Satyam Relations Pvt. Ltd. closing overdraft to the tune of Rs. 90,31,12,467/-resulting into net increase in overdraft amounting to Rs. 14,74,80,860/- The overdraft was taken from Punjab & Maharashtra Co-op. Bank (PMC). The said increase in overdraft was nothing but interest expense of Rs. 14,77,80,860/-minus dividend received of Rs. 3,00,000/-.
The AO has specifically asked the assessee whether the interest on overdraft was paid on or before due date of filing of return against which no response have been submitted. The assessee, however, stated that provision of Sec. 43B was not applicable on interest payment to PMC Bank since, it had not claimed any deduction in respect of such amount. The AO was of the opinion that since interest on overdraft has not been paid as per provision of sec. 43B(e) attracts in this instant case. Vide para 5.4 the AO stated that since the interest on overdrafthad been capitalised towards WIP, he reduced the same hy an amount of Ra 14,77,NO,800/-~ 2.9. CTT(A)'s observation :-
The Ld. CIT(A) has decided the case in favour of the assessee. The issue was discussed in para 9 of the CIT(A)'s order. Para 9.5 of the CIT(A)'s order contending the decision is reproduced hereunder- "9.3 Facts of the case have been examined. The Hon'ble ITAT in the above referred decision has held that provisions of Section 49B, 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 we.f. 1.4.2018 (Le. 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."
2.5. The ground of the Revenue, is that the CIT(A) has wrongly considered the PMC Bank as non- scheduled bank. As per Explanation to sec. 11(5)(iii), scheduled bank includes any bank being a bank included in the Second Schedule to the Reserve Bank of India Act, 1934. Now scheduled banks include commercial Indian banks, foreign banks, and certain Multi-state Co-operative banks. The PMC Bank was multi-state co-operative bank founded in the year 1984, and hade 137 branches in Maharashtra, Karnataka, Goa, Delhi, Madhya Pradesh & Gujarat, out of which 100 branches were in Maharashtra. The bank faced financial trouble due to it's exposure in HDIL 2.4. As per RBI website, fifty Urban co-operative banks have been listed as Scheduled banks and name of the Punjab & Maharashtra Co-operative Bank comes at sl.36 of the said list (prepared and published in the year 2014). A copy of the said list is enclosed. Hence the PMC Bank was a scheduled bank within the meaning of sec. 43B(e), and accordingly amendment made w.e.f 01.04.2018 is not applicable in this instant case. The CIT(A) had not examined necessary facts before proceeding towards deletion of the addition claiming that the assessee being a co- operative bank, sec. 43B(e), was not applicable. A copy of list of scheduled co-operative banks is 2.5. Regarding the fact, that the interest was capitalized in the WIP, it is to be noted that the capitalization of interest in revenue W.LP only defers claiming of such expenditure in the P & L a/c, since, the assessee being in real estatebusiness will claim deduction on account of expenditure which are part of the WLP when revenue stream commences. The capitalization of interest, is deduction claimed in an indirect manner, and comes within purview of sec. 438 of the Income tax act 2.6. It is well settled that a finding or conclusion not supported by evidence brought on record or are against the law or suffer from the vice of procedural irregularity are perverse findings. The expression "perverse findings" would mean a finding which is not only against the weight of evidence but is altogether against the evidence itself. A deliberate departure from what is normal and reasonable is also termed a perverse. It is further well settled that a finding/conclusion/verdict arrived at that no reasonable person could have arrived on the basis of the material before him is also termed as perverse. Thus, a finding/conclusion arrived at by the quasi-judicial authorities/Courts by considering irrelevant evidence or ignoring relevant evidence or against not properly weighing the evidence or against the evidence would be perverse and the order would be liable to be set aside on this ground alone.
The Hon'ble Supreme Court in Sudarshan Silk & Sarees v. CIT (2008) 300 ITR 205 169 Taxman 321 (SC) has laid down the attributes of perversity by holding that an order or finding is perverse on facts if it falls under any of the following categories: (a) The finding is without any evidence. (b) The finding is contrary to the evidence. (c) There is no direct nexus between the conclusion of fact and primary fact upon which that conclusion is based?
Satyam Relations Pvt. Ltd. (d) When an authority draws a conclusion which cannot be drawn by any reasonable person or authority on the material and facts placed before it. The import of "perversity" was explained by the Hon'ble Apex Court in PSEB case, in the following terms:
28. If a finding of fact is arrived at by ignoring or excluding relevant material or by taking into consideration irrelevant material or if the finding so outrageously defies logic as to suffer from the vice of irrationality incurring the blame of being perverse, then the finding is rendered infirm in the eyes of law. If the findings of the Court are based on no evidence or evidence which is thoroughly unreliable or evidence that suffers from the vice of procedural irregularity or the findings are such that no reasonable person would have arrived at those findings, then the findings may be said to be perverse. Further, if the findings are either ipse dixit of the Court or based onconjecture and surmises, the judgment suffers from the additional infirmity of non-Municipal Committee, application of mind and thus, stands vitiated.
Hoshairpur v. Punjab State Electricity Board (2010) 13 SCC 216. In this instant case, the all the parameters that makes an appellate order" perverse" have been satisfied. The CIT(A) thus arrived at a conclusion which should not be drawn by a reasonable person on the backdrop of facts stated above. 2.7. It is therefore respectfully submitted that the order of the CIT(A) is erroneous in facts and law and liable to be considered "perverse" in nature and accordingly be set aside.”
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 Satyam Relations Pvt. Ltd. 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 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, (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,
Satyam Relations Pvt. Ltd. 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 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.”
We have carefully considered the rival submissions and perused the material available on record. The Ld. CIT(A) deleted the disallowance made by the Ld. AO under section 43B of the Act by relying upon the decision of the Coordinate Bench of the ITAT, Mumbai in the case of Awas Developers & Constructions Private Limited (supra), wherein it was held that the provisions of Satyam Relations Pvt. Ltd. section 43B relating to interest payable to a co-operative bank were applicable only from A.Y. 2018-19 onwards. However, upon careful examination of the facts of the present case, we find that the reliance placed by the Ld. CIT(A) on the said decision is misplaced. The Ld. DR has specifically brought on record that Punjab & Maharashtra Co-operative Bank (PMC Bank) was a scheduled co-operative bank, and its name appears in the list of scheduled banks maintained by the Reserve Bank of India as per Explanation to Sec 11(5)(iii) under the Second Schedule to the Reserve Bank of India Act, 1934. Therefore, the interest payable to such a bank falls within the ambit of the provisions governing interest payable to a bank for the purpose of section 43B of the Act. Further, it is also observed that the assessee had capitalized the interest expenditure to Work-in-Progress (WIP). Such capitalization merely postpones the claim of deduction and does not take the expenditure outside the purview of section 43B. The requirement of actual payment as contemplated under section 43B cannot be circumvented merely by capitalizing the expenditure instead of debiting it to the Profit and Loss Account. In view of the above factual and legal position, the decision relied upon by the Ld. CIT(A) in the case of Awas Developers & Constructions Private Limited (supra) is distinguishable on 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.