Wadhwagroup Holdings Private Limited Vs ACIT (ITAT Mumbai)
Conclusion: Tribunal granted substantial relief to Wadhwagroup Holdings by deleting tax disallowances aggregating ₹2,13,03,85,960. Tribunal dealt with issues relating to subleasing expenses, reversal of flat sales, project construction costs, interest expenditure, classification of common area maintenance (CAM) charges, and deemed rental income under the Income Tax Act, 1961, and ruled largely in favour of the assessee.
Held: Assessee-a real estate developer was engaged in construction, leasing, and subleasing of commercial properties, filed its return for AY 2020–21 declaring income from various heads including business income and income from other sources. During scrutiny, AO made several additions and disallowances aggregating to substantial amounts, including: disallowance of subleasing expenses of ₹1.67 crore u/s 57(iii); reduction of business loss of ₹3.51 crore due to sales reversal and disallowance of cost of construction of ₹4.04 crore for Project “Nest”; disallowance of interest expenses of ₹204.20 crore u/s 36(1)(iii); disallowance u/s 14A; treatment of common area maintenance (CAM) charges as income from house property instead of business income; and disallowance of unallocable head office expenses and depreciation. CIT(A) partly allowed the assessee’s appeal, granting relief on most issues except for interest capitalization related to “Palm Beach Arcade” project. Both parties—assessee and revenue—filed cross appeals before the ITAT. Revenue contended that CIT(A) erred in deleting the disallowances of subleasing expenses and cost of construction without proper justification; interest deduction u/s 36(1)(iii) was wrongly allowed despite the assessee’s failure to prove business purpose; maintenance charges should form part of rental income under “Income from House Property”; CIT(A) wrongly restricted disallowance u/s 14A to the extent of exempt income, ignoring the retrospective amendment by Finance Act 2022. It was held that regarding subleasing expenses (₹1.67 crore), Tribunal held that the sublease arrangement was a prudent business decision ensuring viability of the Raghuleela Mall. The expenditure was incurred out of commercial expediency; hence allowable u/s 57(iii). On the reversal of sales and construction costs in Project “Nest,” Tribunal noted that assessee had refunded amounts to flat buyers and incurred additional construction costs, and that its accounting treatment under the Percentage Completion Method reflected true income. The disallowances of ₹3,51,44,651 and ₹4,04,89,652 were therefore deleted. Regarding interest expenditure of ₹2,65,27,32,829, Tribunal referred to the Bombay High Court’s decision in Taparia Tools Ltd. v. JCIT (2003) and observed that under the mercantile system, the matching concept must be applied consistently. It held that the AO could not selectively alter the method of accounting for a single project. Regarding Disallowance u/s 14A, Tribunal upheld CIT(A)’s restriction of disallowance to the extent of exempt income, relying on PCIT v. Caraf Builders & Constructions Pvt. Ltd. (414 ITR 122, Delhi HC). Regarding Common Area Maintenance (CAM) Charges-Relying on CIT v. Runwal Developers (P) Ltd. (15 taxmann.com 196, Bom HC), ITAT held that CAM receipts were business income, not part of rent, and upheld CIT(A)’s deletion of disallowance. Regarding Unallocable Expenses & Depreciation-Tribunal found the expenses to be legitimate head-office costs incurred for overall business. CIT(A)’s factual finding that no separate depreciation claim existed was upheld. Regarding assessee’s appeal for Deemed Rental Income- Following the principle of consistency laid down by the Supreme Court in Radhasoami Satsang v. CIT (193 ITR 321), ITAT deleted the addition of ₹23.11 lakh on account of deemed rent, as the property’s status remained unchanged since 2006.
