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

ITA 6128/MUM/2024

AI Insights

Dosti Realty Limited appealed against the order of the CIT(A), which confirmed the disallowances and additions made by the Assessing Officer under various heads including finance costs, advertisement and marketing expenses, legal and professional fees, and brokerage expenses. The Tribunal examined the nature of these expenses, the accounting standards applicable, and the specific use of borrowed funds. It was found that certain expenses should not have been capitalized and that some disallowances under section 14A were not justified based on the actual use of funds and the availability of interest-free funds. The Tribunal also noted the need for a detailed examination of the legal and professional fees and remitted this issue back to the CIT(A).

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 713304 (ITAT-MUMBAI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-07-2025
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Assessment Year: 2015-2016
• Other Referred Cases: India Cement Ltd. vs. CIT, J.F. Laboratories Ltd. vs. ITO, Macrotech Construction Pvt. Ltd. vs. ACIT, PCIT vs. DLF Home Development Ltd., Classique Associates Ltd. vs. CIT, Vrinda Sharad Bal vs. Pr. CIT, Haware Infrastructure P. Ltd. vs. ITO, Shyamdarshan Properties P. Ltd. vs. DCIT, Inorbit Malls P. Ltd. vs. DCIT
• Laws Referred To: Income-tax Act, 1961
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: INCURRING THESE EXPENSES; DELETING
• Keywords: Business income; Capital asset; Opportunity of being heard; Proportionate interest; Additional evidence; Revenue expenditure; Question of law; Tax effect; Principle of natural justice; Earning of tax free income; Competent authority; Rule 8D
• Section: 143(3); 14A

Judgement Text

"IN THE INCOME TAX APPELLATE TRIBUNAL “D” BENCH MUMBAI BEFORE SHRI SAKTIJIT DEY, HON'BLE VICE PRESIDENT AND SHRI GIRISH AGRAWAL, ACCOUNTANT MEMBER ITA No. 6128/MUM/2024 Assessment Year: 2015-16 Dosti Realty Limited 1st Floor, Lawrence & Mayo House, 276 Dr. D. N. Road, Fort, Mumbai – 400001 (PAN : AACCD7714K) Vs. Deputy Commissioner of Income Tax, Circle-1(1)(1), Mumbai (Appellant) (Respondent) Present for: Assessee : Shri Vijay Mehta, CA Revenue : Shri Annavaran Kosuri, Sr. DR Date of Hearing : 29.07.2025 Date of Pronouncement : 31.07.2025 O R D E R PER GIRISH AGRAWAL, ACCOUNTANT MEMBER: This appeal filed by the Assessee is against the order of Ld. CIT(A), National Faceless Appeal Centre (NFAC), Delhi, vide order no. ITBA/NFAC/S/250/2024-25/1069254125(1), dated 30.09.2024, passed against the assessment order by Deputy Commissioner of Income-tax-1(1)(1), Mumbai, u/s. 143(3) of the Income-tax Act, 1961 (hereinafter referred to as the “Act”), dated 28.12.2017, for Assessment Year 2015-16. 2. Grounds taken by the Assessee are reproduced as under: Printed from counselvise.com 2 ITA No. 6128/Mum/2024 Dosti Realty Ltd. Assessment Year 2015-16 “1. On facts and circumstances of the case and in law, the order passed by Ld. CIT(A) ignoring the requests of personal hearing before passing the impugned appellate order in a violation of principles of natural justice as well as mandatory procedure prescribed N In \"Faceless Appeals Rules 2021,\" is an arbitrary order and is bad in law. The same needs to be quashed and the grounds of appeal needs to be allowed. 2. Expenditure capitalized to Work In Progress of Rs. 18,05,16,647/- (and not 18,08,06,792) a. On facts and circumstances of the case and in law, Ld CIT(A) erred in confirming the action of Ld AO of disallowing the expenditure debited to P&L A/c and capitalizing it to WIP account totalling to Rs.18,05,16,647/- being interest (Rs.10,75,29,743/-), advertisement & marketing expense (Rs.6,33,55,619/-), legal & professional fees (Rs. 35,41,650/-) and brokerage fees (Rs.60,89,635/-) by merely holding that copy of bills/supporting are not submitted and appellant failed to justify how this expenditure are related to revenue expenditure. Confirming such treatment of capitalizing the expense without appreciating the submissions of the appellant and favourable decisions of Hon'ble Mumbai ITAT in appellant's own case for AY 2014-15 and AY 2016-17, is arbitrary action and without application of mind and against the judicial discipline. The expenses need to be considered as part of Profit and Loss Account and allowed during this year only. b. On the facts and circumstances of the case and in law, the Ld CIT(A) erred in confirming capitalization of the expenses amounting to Rs. 18,05,16,647/- ignoring the accounting treatment laid down in Guidance Note for accounting of Real Estate Transactions & Accounting Standard 2 issued by the Institute of Chartered Accountants of India, ICDS notified by Central Government and without appreciating the fact that same is allowable u/s. 37(1). 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 Ld AO wherein the profit on percentage of completion of project is calculated at 69% instead of 64.29% due to the fact that Ld. AO illegally capitalised expenses of Rs. 18,05,16,647/-. to WIP and not considered for estimating total project cost. The methodology adopted for calculating revenue is incorrect and excess addition made therein needs to be deleted. d. Without prejudice to the above and without admitting, Ld CIT(A) erred in assuming that 91% of the project is completed whereas as per percentage completion method only 64.29% is completed. 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 Printed from counselvise.com 3 ITA No. 6128/Mum/2024 Dosti Realty Ltd. Assessment Year 2015-16 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.” 3. Grounds raised by the assessee for adjudication are taken up seriatim. Ground No.1 raised by the assessee is not pressed. Accordingly, the same is dismissed as not pressed. 4. Assessee filed its return of income on 29.11.2015 reporting total income at Rs.23,00,03,840/-. Assessment was completed and total Printed from counselvise.com 4 ITA No. 6128/Mum/2024 Dosti Realty Ltd. Assessment Year 2015-16 income was assessed at Rs.48,65,96,050/- by making the following additions/disallowances:- (a) Disallowance of Finance Cost - Rs. 10,75,29,743/- (b) Disallowance of advertisement and marketing expenses - Rs.6,33,55,619/- (c) Disallowance of Legal & Professional Fees by capitalisation - Rs.35,41,650/- (d) Disallowance of brokerage expenses - Rs.60,89,635/- (e) Disallowance of Legal & Professional Fees - Rs. 61,79,780/- (f) Addition u/s. 14A r.w.r 8D - Rs. 3,06,36,636/- (g) Addition on account of House Property Income (Net) - Rs.6,22,821/- 4.1. Items at Sr. No. (a) to (d) are dealt in by ground no.2, item at Sr. No. (e) is dealt in ground no.3, item at Sr. No. (f) is dealt in ground no.4 and item no.(g) is dealt in ground no.5. Assessee is in the business of development of properties and had undertaken project for development of residential building at Wadala. Assessee has prepared its financial statements in accordance with provisions of Companies Act. Further, it follows Accounting Standards prescribed by the Institute of Chartered Accountants of India (ICAI). For the purpose of revenue recognition, it follows percentage/proportionate completion method in accordance with guidance note on accounting for real estate transactions issued by ICAI. 5. Ld. Assessing Officer noted from the financial statements of the assessee that items at (a) to (d) listed above, were claimed as deduction by way of debit in profit and loss account. Explanations were called for as to why these were not taken to work in progress instead of claiming Printed from counselvise.com 5 ITA No. 6128/Mum/2024 Dosti Realty Ltd. Assessment Year 2015-16 it as revenue expenditure in the profit and loss account, since these expenses directly relate to the project undertaken by the assessee. 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: Printed from counselvise.com 6 ITA No. 6128/Mum/2024 Dosti Realty Ltd. Assessment Year 2015-16 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 ----------------------- Printed from counselvise.com 7 ITA No. 6128/Mum/2024 Dosti Realty Ltd. Assessment Year 2015-16 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. No. Date of Borrowing Amount Borrowed in Rs. Loan Account No. Interest Debited to W.I.P. in Rs. Interest Debited to 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 Printed from counselvise.com 8 ITA No. 6128/Mum/2024 Dosti Realty Ltd. Assessment Year 2015-16 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 Printed from counselvise.com 9 ITA No. 6128/Mum/2024 Dosti Realty Ltd. Assessment Year 2015-16 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. In respect of expenses incurred towards advertisement, marketing, legal and professional fees and brokerage expenses, claim of Printed from counselvise.com 10 ITA No. 6128/Mum/2024 Dosti Realty Ltd. Assessment Year 2015-16 the assessee is that same are revenue in nature. For the expenses towards advertisement, marketing and selling, the purpose is for increasing the sales and are debited to profit and loss account in compliance with the accounting treatment laid down in guidance note issued by ICAI for accounting of real estate transactions. These expenses are allowable u/s.37(1). Further, these expenses are to be excluded from the cost of inventories in accordance with the AS-2 on valuation of inventories. In respect of legal and professional fees, these are not specific to the project and are not prerequisite for completion of construction work. For the brokerage expenses, the same are selling expenses incurred on closure of sales deal and accounted in accordance with the accounting standards issued by ICAI. 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 Printed from counselvise.com 11 ITA No. 6128/Mum/2024 Dosti Realty Ltd. Assessment Year 2015-16 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 ITA No. 7374/Mum/2019 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. 15. Further, as pointed by Ld. Counsel for the assessee that the Hon'ble Delhi High Court in PCIT v. DLF Home Development Ltd. (2020) 114 taxmann.com 97 (Delhi) (HC) held that brokerage and commission claimed by the assessee following percentage completion method is allowed in the year in which they are incurred. 16. Further, it has also been pointed out that in AY 2011-12, the said expense has been allowed by the AO and again in AY 2013-14 too. Thus, we do not find any infirmity in the order passed by Ld. CIT(A) and the same is confirmed.” Printed from counselvise.com 12 ITA No. 6128/Mum/2024 Dosti Realty Ltd. Assessment Year 2015-16 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. 7. In respect of ground no.3 relating to legal and professional fees of Rs.61,79,780/- which has been disallowed by observing that assessee failed to produce corroborative documentary evidences for proof of service rendered by the service providers to whom these payments were made. In this respect, assessee has furnished additional evidences by raising additional ground before the ld. CIT(A) who failed to consider the same. Ld. CIT(A) did not adjudicate upon the additional ground raised by the assessee vide application dated 21.09.2019. Accordingly, in the interest of justice and fair play, we find it appropriate to remit this particular issue back to the file of ld. CIT(A) for meritorious adjudication after taking into consideration the additional ground raised by the assessee as well as the additional evidences furnished on record. Ld. CIT(A) may call for remand report, if so desired or make any further enquiries as deem fit. Needless to say, assessee be given reasonable opportunity of being heard and make any further submission, if so required. Accordingly, ground no.3 raised by the assessee is allowed for statistical purposes. 8. Ground No.4 is in respect of disallowance of Rs.92,72,993/-made u/s.14A r.w.r. 8D. The issue raised in this ground is similar to what we have already dealt in the appeal vide order of Coordinate Bench of Mumbai, in assessee’s own case in appeal No.6130/Mum/2024, dated 24.07.2025 for Assessment Year 2014-15 with the same undersigned Printed from counselvise.com 13 ITA No. 6128/Mum/2024 Dosti Realty Ltd. Assessment Year 2015-16 constitution. The only difference is towards proportionate interest expense disallowed in this year amounting to Rs.79,28,667/-. What ld. Assessing Officer has done while making addition for the year under consideration when compared with Assessment Year 2014-15 is that he has taken proportionate interest expense by applying Rule 8D(2)(ii) for computing the disallowance. In this respect, ld. Assessing Officer has taken into account interest expenditure of Rs.10,75,29,743/- and computed the proportionate disallowance towards interest of Rs.79,28,667/-. Contrary to this, submission of the assessee is that this interest expense pertains to borrowings made by the assessee though for the purpose of construction of residential project but in fact had been utilised for the purpose of making investments in OFCD. Investment made by the assessee in OFCD has yielded interest income, which has been offered to tax. Thus, the interest expense on these borrowed funds cannot be subjected to disallowance u/s.14A by applying Rule 8D. 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/- Printed from counselvise.com 14 ITA No. 6128/Mum/2024 Dosti Realty Ltd. Assessment Year 2015-16 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: Printed from counselvise.com 15 ITA No. 6128/Mum/2024 Dosti Realty Ltd. Assessment Year 2015-16 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. Ground No.5 is in respect of addition of Rs.6,22,821/- on account of house property income towards unsold shops lying in the closing stock of the assessee. Claim of the assessee is that addition has been made by ignoring the amendment brought in section 23 by way of sub- section (5) which is effective from Assessment Year 2018-19 and is not applicable for the year under consideration. Further, ld. Assessing Printed from counselvise.com 16 ITA No. 6128/Mum/2024 Dosti Realty Ltd. Assessment Year 2015-16 Officer has placed reliance on the decision of Hon'ble High Court of Delhi in the case of Ansal Properties Infrastructure Ltd vs DCIT [354] ITR 180 (Del) wherein it was held that Annual Letting Value (ALV) even of work in progress in the hands of builders has to be taxed. He thus took 8.5% of the value of unsold shops reported by the assessee in its balance sheet as on 31.03.2015 at Rs.1,04,67,564/- by considering it as the rental yield. Thus, ld. Assessing Officer after allowing deduction u/s.23(1)(a) arrived at the income from house property at Rs.6,22,821/. 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 Printed from counselvise.com 17 ITA No. 6128/Mum/2024 Dosti Realty Ltd. Assessment Year 2015-16 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 ITA No.1216 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 Printed from counselvise.com 18 ITA No. 6128/Mum/2024 Dosti Realty Ltd. Assessment Year 2015-16 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 ITA No. 2846/Mum/2019 ii. Haware Infrastructure P. Ltd. v. ITO for Α.Υ. 2013-14 in ITA Nos. 2543 and 4021/Mum/2019 iii. Haware Infotech Ltd. v. ACIT for A.Ys. 2016-17 and 2017-18 in ITA Nos. 395 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.\" Printed from counselvise.com 19 ITA No. 6128/Mum/2024 Dosti Realty Ltd. Assessment Year 2015-16 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 ITA No. 2220/Mum/2021 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 Printed from counselvise.com 20 ITA No. 6128/Mum/2024 Dosti Realty Ltd. Assessment Year 2015-16 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: 19. Now, that specific provision has been brought in the statute which provides that, if building or land held as stock in trade and the property has not been let out during the whole or any part of the previous year, then annual value of such property after the period of one year (which was increased 2 years), shall be computed as income from house property and up to period of one year /two years income shall be taken to be 'nil'. Thus, when specific provision has been brought with the effect from 01.04.2018 which cannot be applied retrospectively, then in our humble opinion it cannot be imputed that ALV of the flats held as stock in trade should be taxed on notional basis prior to AY 2018-19. Without any legislative intent or specific provision under the Act, such notional or deeming income should not be taxed as cardinal principle, because assessee is not aware that any hypothetical income is to be shown when he has not received any real or actual income. In our view of Hon'ble Delhi High Court is too harsh an interpretation.” 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 Printed from counselvise.com 21 ITA No. 6128/Mum/2024 Dosti Realty Ltd. Assessment Year 2015-16 brought the income to be taxed under the head ‘income from house property’. Accordingly, ground raised by the assessee is allowed. 10. In the result, appeal of the assessee is partly allowed. Order is pronounced in the open court on 31 July, 2025 Sd/- Sd/- (Saktijit Dey) (Girish Agrawal) Vice President Accountant Member Dated: 31 July, 2025 MP, Sr.P.S. Copy to : 1 The Appellant 2 The Respondent 3 DR, ITAT, Mumbai 4 5 Guard File CIT BY ORDER, (Dy./Asstt. Registrar) ITAT, Mumbai Printed from counselvise.com "