Bangalore ITAT: Provision for Future Losses of Real Estate Developers Requires Substance Over Label; Matter Remanded for Verification

Embassy Property Developments Private Limited Vs ACIT (ITAT Bangalore)

Bangalore ITAT: Provision for Future Losses of Real Estate Developers Requires Substance Over Label; Matter Remanded for Verification

In a significant ruling on the tax treatment of provisions made by real estate developers, the Bangalore ITAT held that the true nature of a provision must be determined based on its substance and not merely the nomenclature used in the financial statements. The assessee had claimed a deduction of ₹119.56 crore described in its books as a “provision for expected losses” relating to ongoing real estate projects executed under the percentage completion method. The Assessing Officer treated the amount as an expected loss hit by sections 36(1)(xviii), 40A(13) and the ICDS framework, while the CIT(A) confirmed the disallowance by holding that ICDS did not permit recognition of such losses.

The Tribunal observed that neither the assessee nor the tax authorities had actually examined the composition of the provision, its methodology, project-wise working, supporting evidence, or whether it represented an anticipated loss or merely the cost required to complete projects for which revenue had already been recognised. Merely because the amount was described as a “provision for future losses” in the accounts could not conclude the issue. The Tribunal emphasised that ICDS-I itself requires transactions to be governed by their substance rather than their legal form or accounting description.

The Tribunal held that if the provision genuinely represents future losses or mark-to-market losses, the statutory bar under sections 36(1)(xviii) and 40A(13) would operate, particularly after the retrospective amendments introduced by the Finance Act, 2018. However, if on verification the amount actually represents accrued expenditure required to complete construction corresponding to revenue already recognised under the percentage completion method, it would constitute a provision for expenses, deductible under section 28 read with the matching principle and ICDS X, and would not fall within the mischief of section 40A(13). The Tribunal further observed that there is a fundamental distinction between an “expected loss” and an “accrued expenditure”, and the latter cannot automatically be disallowed merely because of the terminology used in the books.

Since the lower authorities had never examined the project-wise computation, cost already incurred, costs yet to be incurred, inventory write-downs, or the basis of the provision, the Tribunal restored the matter to the Assessing Officer for fresh verification. It directed the Assessing Officer to segregate the provision into (i) inventory or work-in-progress write-downs allowable under ICDS II, (ii) accrued provisions for expenses allowable under ICDS X and section 28, and (iii) purely anticipatory expected losses hit by section 40A(13). The Tribunal also directed that if any amount is disallowed in the present year, the corresponding actual expenditure should be allowed in the year of incurrence and any subsequent write-back should not again be taxed. The appeal was accordingly partly allowed for statistical purposes.

FULL TEXT OF THE ORDER OF ITAT BANGALORE

1. These are the two appeals for two assessment years filed by Embassy Property Developments Private Limited (“the assessee”/ “the appellant”) for assessment year 2017-18 and 2018-19 against the appellate order dated 6 October 2025 passed by the Principal Commissioner of Income Tax (Appeals)-11, Bengaluru [“the learned CIT(A)”]. The said consolidated appellate order covered assessment years 2016-17 to 2018-19 and some common issues, both the parties argued them together and therefore these are disposed of by this common order.

2. ITA No 2865/bang/2025 – This appeal has been filed by Embassy Property Developments Private Limited (“the assessee”/ “the appellant”) for Bengaluru [ear 2017-18 against the appellate order dated 6 October 2025 passed by the Principal Commissioner of Income Tax (Appeals)-11, Bengaluru [“the learned CIT(A)”]. The said consolidated appellate order covered assessment years 2016-17 to 2018-19 and arose from the assessment order dated 25 December 2019 passed by the Assistant Commissioner of Income Tax, Central Circle-1(3), Bengaluru [“the learned Assessing Officer] under section 143(3) of the Income-tax Act, 1961 (“the Act”), determining the assessee’s total income at 2150,13,26,289 as against the returned income of Rs Nil. The assessee’s appeal was partly allowed.

3. The assessee is aggrieved by the appellate order and has preferred the present appeal on the following grounds:

(i) The learned Commissioner of Income Tax (Appeals) erred in rejecting the grounds of appeal and upholding the assessment order. The order is bad in law and liable to be quashed for want of jurisdiction, erroneous assumption of jurisdiction, and failure to comply with the principles of natural justice.

(ii) The learned CIT(A) erred in confirming the assessment order, wherein Rule 8D was applied mechanically to compute the disallowance in an arbitrary manner without satisfying the mandatory preconditions prescribed under section 14A of the Act. The learned CIT(A) further erred in partly allowing the appeal and upholding the disallowance made under section 14A merely by directing recomputation of the disallowance. The learned CIT(A) failed to appreciate that, on the facts and circumstances of the case, no disallowance under section 14A was warranted and the disallowance is wholly unsustainable in law.

(iii) The learned CIT(A) erred in confirming the assessment order, wherein the learned Assessing Officer disallowed 2119,56,53,057 in respect of the provision created by the appellant for onerous contracts.

(iv) The learned CIT(A) erred in confirming the arbitrary disallowance of 2119,56,53,057 in respect of the provision made in accordance with applicable law by treating it as mark-to-market losses and other expected losses.

(v) The learned CIT(A) erred in confirming the assessment order, which was passed without considering the facts, explanations, and submissions made by the appellant during the assessment proceedings.

(vi) The learned CIT(A) erred in confirming the assessment order, which was based on mere conjectures, surmises, and unfounded assumptions, without cogent reasoning or credible evidence.

4. Briefly stated, the assessee is a company engaged in real estate development, including the development of integrated office spaces and parks. It filed its return of income for assessment year 2017-18 on 30 November 2017 declaring a loss of 2522,94,35,085. The case was selected for scrutiny, and the requisite notice under section 143(2) was issued on 29 August 2019. The assessment proceedings culminated in the determination of total income at 2150,13,26,289. The learned Assessing Officer made disallowances of 215,64,17,242 under section 14A of the Act, 214,92,55,990 under section 40(a)(ia), and 2119,56,53,057 by invoking sections 40A (13) and 36(1)(xviii).

5. On appeal, the learned CIT(A) reduced the disallowance made under section 14A and confirmed the disallowance of 2119,56,53,057. The disallowance made under section 40(a)(ia) of the Act was, however, deleted. The assessee is aggrieved by the confirmation of the above two disallowance, whereas the Revenue has not filed any appeal against the deletion of the disallowance by the learned CIT(A).

6. Ground no. 1 is general in nature, and no arguments were advanced in support of it. Similarly, no arguments were advanced in respect of grounds nos. 6 and 7. Accordingly, these grounds are dismissed.

Issue No 1: – When assessee has earned exempt income, whether any disallowance u/s 14A of the Act can be made by invoking computation mechanism provided u/r 8D of the Income Tax Rules, 1962 [ The Rules] without recording satisfaction by the Id. AO about correctness of suo moto disallowance offered by assessee in terms of section 14A (2) of the Act

7. The issue raised in grounds 2 and 3 of the appeal, relates to the disallowance made under section 14A of the Act. Briefly, the learned Assessing Officer noted that the assessee had debited interest expenditure of 2404,08,90,647 in its profit and loss account and, therefore, called upon the assessee to furnish details of the disallowance under section 14A of the Act. The assessee provided month-wise investment figures, based on which the learned Assessing Officer computed the disallowance under section 14A read with Rule 8D (2), as reflected in the table reproduced in the assessment order. Although the disallowance so computed was 215,78,30,453, the learned Assessing Officer reduced the voluntary disallowance of 214,16,211 offered by the assessee in its return of income and, accordingly, made a net disallowance of 215,64,17,242 under section 14A of the Act.

8. The assessee, being aggrieved, preferred an appeal before the learned CIT(A) and challenged the disallowance. It was contended that the learned Assessing Officer had not recorded the requisite satisfaction before invoking section 14A of the Act. The assessee further submitted that, in any event, the computation should have considered only investments yielding exempt income and that the disallowance ought to have been restricted to the amount of exempt income earned. The learned CIT(A) rejected the assessee’s contentions and held that the disallowance made by the learned Assessing Officer was proper. However, he directed the learned Assessing Officer to recompute the disallowance by considering only investments that yielded exempt income.

9. Before us, the assessee submitted that

i. the disallowance made by the learned Assessing Officer under section 14A of the Act is devoid of merit. It was contended that the learned Assessing Officer had not recorded the mandatory satisfaction required before invoking Rule 8D and making a disallowance under section 14A. In the absence of such satisfaction, the disallowance could not have been made.

ii. The assessee further submitted that the voluntary disallowance made in the return of income represented 5% of the exempt income, and the learned Assessing Officer had not explained why such disallowance was incorrect.

iii. It was also submitted that the assessment order contains no reference to any examination of the assessee’s accounts before invoking Rule 8D; therefore, the disallowance is unsustainable.

iv. The learned authorized representative relied on the decisions of the Hon’ble Supreme Court in Maxopp Investment Ltd. v. CIT, 402 ITR 640, and Godrej & Boyce Manufacturing Co. Ltd. v. Deputy Commissioner of Income Tax, 394 ITR 449, as well as the decisions in Commissioner of Income Tax v. Abhishek Industries Ltd., 380 ITR 642, and CIT v. Hero Cycles Ltd., 323 ITR 518.

v. The principal submission of the assessee is that the learned Assessing Officer failed to record valid satisfaction, as mandatorily required under section 14A (2), before invoking Rule 8D.

vi. The observations in the assessment order are general and mechanical, and do not constitute substantive or objective satisfaction in law.

vii. Further, no nexus was established between borrowed funds and investments yielding exempt income, and the Suo motu disallowance made by the assessee was neither specifically examined nor rejected by the learned Assessing Officer.

Accordingly, the assessee submitted that the disallowance made under section 14A read with Rule 8D deserves to be deleted in its entirety.

10. The learned CIT-DR vehemently submitted that the learned Assessing Officer had recorded proper satisfaction and computed the disallowance in accordance with law. He contended that no infirmity could be pointed out by the assessee in the Assessment order. According to him, the learned CIT(A) had correctly considered all the assessee’s submissions, including those relating to the recording of satisfaction under section 14A (2) of the Act. He further submitted that Rule 8D is mandatory once the statutory conditions are satisfied, and that the assessee’s voluntary disallowance of only 5% of exempt income had no proper basis and was rightly rejected by the learned Assessing Officer. Therefore, the assessee could not now contend that the disallowance was incorrect. He also submitted that disallowance under section 14A of the Act is mandatory in nature, and no further exercise was required to be undertaken by the learned Assessing Officer.

11. We have considered the rival contentions and perused the orders of the lower authorities. In the present case, the assessee offered a disallowance of 214,16,211 under section 14A of the Act, as stated in paragraph 21(h) of the tax audit report. The assessee explained that this represented 5% of the exempt income and was offered as a voluntary disallowance. During the assessment proceedings, the learned Assessing Officer noted that the assessee had debited interest expenditure of 2404,08,90,647 to its profit and loss account and called upon the assessee to furnish details of the disallowance under section 14A. The assessee provided month-wise investment figures by letter dated 17 December 2019. On that basis, the learned Assessing Officer computed the disallowance under section 14A read with Rule 8D (2) of the Income Tax Rules. He determined 1% of the annual average value of investments at 215,78,33,453 and, since no direct expenditure was identified, made no disallowance on that account. After reducing the voluntary disallowance of 214,16,211 already offered by the assessee in its return of income, the learned Assessing Officer made a net disallowance of 215,64,17,242.

12. In appeal, the learned CIT(A) rejected the assessee’s objection regarding absence of satisfaction, holding that the satisfaction requirement was met once the learned Assessing Officer had referred to the expenditure incurred. Before us, the assessee has challenged the disallowance on the grounds that the learned Assessing Officer failed to record proper satisfaction regarding the correctness of the assessee’s claim, relying on the decisions of the Hon’ble Supreme Court and other judicial precedents.

13. We had occasion to consider an identical issue in the assessee’s own case for assessment year 2016-17 in M/s. Embassy Property Developments Private Limited v. The Assistant Commissioner of Income Tax, Central Circle-1(3), Bengaluru, reported in 2026 (7) TMI 40 – ITAT Bangalore. On the issue of recording satisfaction, the Tribunal held as under:

“14. Section 14A of the Act provides that, notwithstanding anything contained contrary in the Act, expenditure incurred in relation to income not forming part of total income is not allowable as a deduction. Sub-section (2) empowers the Assessing Officer to determine such expenditure in accordance with the prescribed method. However, this power can be exercised only after the Assessing Officer has examined the assessee’s accounts, records dissatisfaction with the correctness of the assessee’s claim regarding the expenditure incurred, or the claim that no expenditure was incurred, in relation to exempt income. Therefore, before rejecting the assessee’s explanation and making a higher disallowance, the Assessing Officer must examine the accounts, consider the assessee’s claim, and record reasons showing why the claim is incorrect. Only after satisfying this statutory requirement can the prescribed computation mechanism under Rule 8D of the Income Tax Rules, 1962 be invoked.

15. To determine whether the Assessing Officer recorded the required satisfaction, paragraph 3.8 of the assessment order is relevant. The Assessing Officer rejected the assessee’s claim of having incurred no expenditure merely “for want of evidence,” without identifying any specific details that the assessee had failed to furnish. Although the assessee claimed that no interest expenditure was attributable to the exempt income, the Assessing Officer recorded no finding linking any interest cost to the mutual fund investments that yielded such income. Since the assessee’s interest-free funds exceeded those investments, the presumption would operate in its favour. The annual accounts before the Assessing Officer showed share capital and free reserves of about 2900 crore, a fact noted in the assessment order. However, he examined neither the amount invested in mutual funds yielding exempt income nor verified the fund-flow and cash-flow statements forming part of the audited accounts. The Authorized Representative also demonstrated that the cash-flow statement was certified by the auditors, approved by the shareholders, and filed with the Ministry of Corporate Affairs, but it was not considered by the Assessing Officer. Further, although the profit and loss account showed expenses other than finance costs in Schedule 26, no specific item was examined to rebut the assessee’s claim.

16. When the issue came before the Commissioner of Income Tax (Appeals), he did not record any findings on whether the Assessing Officer had complied with section 14A (2) of the Act by examining the assessee’s accounts and recording proper satisfaction. Instead, he merely upheld the Assessing Officer’s conclusion on the same facts reiterated before him, without explaining how the recorded satisfaction met the requirements of law. Since the assessee’s accounts and the correctness of its claim were not properly examined before applying Rule 8D, the order of the Commissioner of Income Tax (Appeals) sustaining the disallowance under section 14A is also unsustainable.

17. Thus, the Assessing Officer invoked section 14A (2) without properly examining the assessee’s accounts or identifying the specific evidence that had not been produced. The rejection of the assessee’s claim merely for want of evidence is, therefore, unsupported on any cogent basis. Consequently, the orders of the lower authorities cannot be sustained and are set aside.

18. In Maxopp Investment Ltd. v. Commissioner of Income Tax, New Delhi [2018] 91 com 154 (SC) / 254 Taxman 325 (SC) / 402 ITR 640 (SC) / 301 CTR 489 (SC), the Hon’ble Supreme Court held that, having regard to section 14A (2) read with Rule 8D, the Assessing Officer must record satisfaction before applying the principle of apportionment. Where the assessee has made a Suo motu disallowance under section 14A and the Assessing Officer does not accept it, he must record reasons showing why the assessee’s apportionment is incorrect. While doing so, the Assessing Officer must also examine the nature of the loans, if any, taken for acquiring shares or making investments.

19. In Principal Commissioner of Income-tax vs. Hindustan Aeronautics Ltd. [2022] 143 com 357 (Karnataka)[14-06-2022] and Hindustan Aeronautics Ltd. vs. Assistant Commissioner of Income Tax-3(1)(2), Bangalore [2021] 125 taxmann.com 80 (Karnataka)/[2021] 278 Taxman 266 (Karnataka)[09-12-2020] Where Assessing Officer did not record any non-satisfaction about assessee’s claim that it had not incurred any expenditure in relation to exempt dividend income earned by it, impugned disallowance under section 14A made by Assessing Officer was unjustified.

20. Same is also the views of the Honourable Karnataka High court in Essilor India (P.) Ltd. vs. Deputy Commissioner of Income-tax [2022] 137 com 60 (Karnataka)/ [2022] 286 Taxman 385 (Karnataka) [28-01-2022] where in it has been held that: –

“7. We have considered the submissions made on both sides and have perused the record. Section 14A of the Act deals with expenditure in relation to income not includable in total income. Section 14A (2) provides that assessing officer shall determine the amount of expenditure incurred in relation to such income which does not form part of total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer having regard to the accounts of the assessee is not satisfied with the correctness of the claim of assessee in respect of such expenditure in relation to income which does not form part of total income under this Act. It is well settled in law that assessing officer has to record reasons for disagreeing with the claim of the assessee that it had incurred no expenditure for earning such exempt income. Even rule 8D (1) requires the assessing officer to mandatorily record his satisfaction that the claim made by the assessee that no expenditure has been incurred in earning the exempt income is incorrect. [See. Godrej & Boyce Mfg. Co. Ltd. (supra)]”

21. In view of the facts discussed above, we have found that the Assessing Officer did not record the required satisfaction, after examining the assessee’s accounts, regarding the correctness of the assessee’s claim that expenditure incurred in relation to exempt income did not exceed 5% of such income. The decisions of the Hon’ble Supreme Court and the jurisdictional High Court cited before us support the assessee’s case that, in the absence of such satisfaction, any disallowance under section 14A of the Act read with Rule 8D of the Income Tax Rules, over and above the amount voluntarily disallowed by the assessee, is not sustainable. Accordingly, the Assessing Officer is directed to delete the disallowance made under section 14A to the extent it exceeds the assessee’s voluntary disallowance of 27,30,100.

22. Accordingly ground number 2 of the appeal of the Assessee which challenges the absence of satisfaction as stated above is allowed.”

14. In that decision, after considering the assessee’s reliance on Honourable supreme court decision in case of Maxopp Investment Ltd. (supra) and of Honourable Karnataka High court in Hindustan Aeronautics Ltd. (supra), the Tribunal deleted the disallowance because the learned Assessing Officer had failed to record the requisite satisfaction.

15. In the present case, apart from noting that the assessee had debited interest expenditure of 24,08,90,647 to its profit and loss account, the assessment order contains no discussion of any specific expenditure incurred by the assessee or any reason for rejecting the voluntary disallowance of 5% of exempt income offered in its computation of total income. Even noting the amount of interest expenditure is even before calling for explanation. The order also does not refer to the exempt income earned, the voluntary disallowance made, or any other expenditure allegedly incurred in relation to such income. Instead, the Ld. Assessing Officer merely proceeded to disallow 1% of the annual average value of investments. Accordingly, the facts of the present case are even more favourable to the assessee than those in its own case for assessment year 2016-17.

16. In view of the above, we hold that the disallowance made by the learned Assessing Officer is unsustainable, as the satisfaction required under section 14A (2) of the Act regarding the correctness of the assessee’s voluntary disallowance of 5% of exempt income was not recorded.

17. However, we do not agree with ground no. 3 of the appeal to the extent it contends that no disallowance under section 14A of the Act was warranted on the facts of the case and that the disallowance is unsustainable. Since the assessee itself had offered a disallowance of 214,16,211, its contention that no disallowance under section 14A was called for cannot be accepted. Accordingly, ground no. 3 is dismissed to that extent.

18. Accordingly, grounds nos. 2 and 3 of the appeal are partly allowed, and the learned Assessing Officer is directed to restrict the disallowance to the suo motu disallowance amount offered by the assessee.

Issue No 2: –

(a) Whether assessee engagedin real estate development business can be allowed any Marked to Market loss or other expected loss as computed in accordance with the Income Computation and Disclosure Standards[ICDS] notified u/s 145(2) of The Act.

(b) Whether the provision of section 36(1) (xviii) applies in case of any real estate Development Business.

(c) Whether provision of expenses based on matching concept is also covered by the provision of section 36(1) (xviiii) read with section 40A (13) of the Act

19. Grounds nos. 4 and 5 concern the disallowance of 2119,56,53,057. The assessee had claimed a provision for expected losses in its profit and loss account and was asked to explain why the claim should not be disallowed.

20. In response, the assessee explained that a real estate developer may enter into agreements to sell commercial or residential units during construction. Accordingly, ongoing projects may include units for which sale agreements have been executed, as well as work-in-progress for which no agreement has yet been entered; the latter forms part of the developer’s inventory. The assessee submitted that, during its business, some sale contracts may become onerous where performance of the contract is likely to result in a loss because the estimated total cost exceeds the expected revenue. By way of illustration, if an apartment is agreed to be sold for 25,00,00,000 and the estimated contract cost is 24,00,00,000, the expected profit is 21,00,00,000. However, if construction costs subsequently rise and the revised estimated cost becomes 26,00,00,000, the contract will result in an expected loss of 21,00,00,000. Under the percentage-of-completion method, revenue and cost are recognized with reference to the stage of completion. Even if no revenue is recognized in the first year because the project has not reached 25% completion, the expected loss is recognized immediately as a provision and is reversed over the contract period as actual costs are incurred. The assessee further submitted that financial statements must present a true and fair view of the entity’s position and performance, and that accounting principles require provisions for known liabilities and losses, including future obligations that can be reasonably estimated. It was stated that the provision for losses on such contracts was made in accordance with AS 29 and Ind AS 37, which require recognition of provisions for such losses. Reliance was also placed on the decision of the Hon’ble Supreme Court in Rotork Controls India Pvt. Ltd. v. CIT, 314 ITR 62, wherein a provision was explained as a liability measurable only by substantial estimation and recognizable when there is a present obligation from a past event, a probable outflow of resources, and a reliable estimate of the obligation. The assessee submitted that section 145 of the Act requires business income to be computed in accordance with regularly employed commercial accounting principles, and that notified accounting standards recognize prudence as a guiding principle requiring provision for all known liabilities and losses, even where the amount can only be estimated. It was therefore contended that losses arising from onerous contracts, being known and capable of estimation based on current cost estimates, are allowable in accordance with accounting principles and tax law. The assessee also relied on the decisions of the coordinate benches in ACIT v. Ashoka Buildcon Ltd., 61 taxmann.com 330, and ACIT v. ITD Cementation India Ltd. [2014] 146 ITD 59, where foreseeable losses on fixed-price infrastructure contracts recognized under Accounting Standard 7 were held to be allowable. Accordingly, the assessee submitted that the provision for expected losses was allowable under the applicable accounting standards, the Act, and the judicial precedents relied upon. Assessee neither explains how the provision is worked out, what its components are and what are the future events based on which this loss is claimed.

21. The learned Assessing Officer held that the computation of business income under the Income-tax Act must be based on recognised and regularly followed accounting practices and principles. He observed that business income for tax purposes is to be computed in accordance with ordinary principles of commercial accounting regularly employed by the assessee. He further held that the Income Computation and Disclosure Standards are required to be followed by the prescribed class of taxpayers for the prescribed class of income, and that compliance with section 145(2) is mandatory. He noted that the ICDS notified by the Central Board of Direct Taxes in September 2016 became applicable from assessment year 2017-18 onwards. He also referred to the decision of the Hon’ble Delhi High Court in Chamber of Tax Consultants v. Union of India, 87 taxmann.com 92, and to CBDT Circular No. 10/2017 dated 23 March 2017. The learned Assessing Officer further observed that the Finance Act, 2018 introduced specific provisions under sections 43AA and 43CB and substituted section 145A with retrospective effect from 1 April 2017. He also noted that the Act permits deduction of expenses incurred for earning business income and that the Finance Act, 2018 inserted clause (xviii) in section 36(1), dealing with mark-to-market losses and prescribing conditions for claiming such deduction. This provision covers mark-to-market losses or other expected losses computed in accordance with the ICDS notified under section 145(2). Referring to section 40A (13), which disallows mark-to-market losses except as allowable under section 36(1)(xviii), and to section 145(2), which prescribes ICDS for computing taxable income under the head “Profits and gains of business or profession,” the learned Assessing Officer held that the principle of prudence had been expressly overridden by the Finance Act, 2018. According to him, mark-to-market losses or other expected losses are allowable only to the extent specifically permitted under the ICDS; where the ICDS do not provide such allowance or specifically deny it, the claim cannot be allowed. He therefore held that the assessee’s claim of 2119,56,53,057 was not allowed under sections 40A (13) and 36(1)(xviii).

22. Aggrieved, the assessee preferred an appeal before the learned CIT(A), reiterated its explanation on the allowability of the provision, and relied on judicial precedents. The learned CIT(A) noted that ICDS III, dealing with construction contracts, does not permit adjustment of incidental income such as interest, dividend, or capital gains against contract cost, nor does it allow recognition of foreseeable or expected losses as contract cost until such losses are actually incurred. He also referred to ICDS X, dealing with provisions, contingent liabilities, and contingent assets, and held that it does not permit creation of a provision for onerous contracts. Accordingly, he confirmed the disallowance.

23. 0n appeal before us, the learned authorised representative submitted that the provision for expected losses created by the assessee was neither ad hoc nor notional but represented a project-wise estimated and proportionate based on reliable data and reasonable assumptions. This factual position, according to him, has not been disputed by the Revenue authorities. The loss reflects a present obligation arising from ongoing projects or contracts and, therefore, constitutes an ascertained liability. It is neither contingent nor a provision made without basis. He further submitted that the Income Computation and Disclosure Standards applied by the learned Assessing Officer for computing income under the head “Profits and gains of business or profession” do not override or replace the accounting standards prescribed for maintaining books of account, nor do they determine the chargeability of income, which must be governed by the provisions of the Act. In this regard, reliance was placed on the decision of the Hon’ble Delhi High Court in Chamber of Tax Consultants v. Union of India, 400 ITR 178. It was argued that the ICDS framework cannot override judicial precedents, the provisions of the Act, the applicable accounting standards, or the method of accounting regularly employed by the assessee. The learned authorized representative further submitted that the ICDS framework creates an impermissible circularity which renders section 36(1)(xviii) ineffective. According to him, a blanket prohibition on expected losses, particularly where no ICDS specifically governs real estate developers, exceeds the rule-making authority conferred under section 145(2) of the Act and results in taxation of income that has not accrued. He also referred to sections 36(1)(xviii), 40A (13), and 145(2) of the Act, as well as ICDS I, to demonstrate how such circularity arises. Relying on the settled principle that a construction of law which renders a statutory provision redundant, meaningless, or otiose must be rejected, he submitted that the legislative intent behind section 36(1)(xviii), as evident from the Memorandum explaining the Finance Act, 2018, was to restore the deductibility of mark-to-market and expected losses that had been affected by the introduction of ICDS with effect from 1 April 2017. Therefore, an interpretation of ICDS that converts this allowance provision into a permanent prohibition would be contrary to the express legislative intent. He further submitted that, where subordinate legislation such as ICDS makes the parent legislation under the Income-tax Act ineffective, the subordinate legislation must yield to the Act. It was also pointed out that no specific ICDS has been notified for real estate developers, a position expressly recognized by the Central Board of Direct Taxes in Circular No. 10/2017, wherein the answer to Question No. 12 clarifies that the existing ICDS framework does not govern real estate developers. Accordingly, the reliance placed by the learned CIT(A) and the learned Assessing Officer on ICDS was stated to be misconceived and legally untenable. The assessee’s contention was that section 36(1)(xviii) grants deduction for expected losses, while ICDS merely provides the computational mechanism governing the method and timing of such computation. Similarly, section 40A (13) disallows expected losses only where they are not computed in accordance with ICDS, thereby preventing arbitrary or unsubstantiated provisions. The prohibition under ICDS is intended to prevent purely speculative or unsupported anticipated losses from being recognised; it cannot apply to a loss that has genuinely crystallized, is capable of reliable quantification, and is maintained in accordance with applicable accounting standards. Such a loss falls within the ambit of section 36(1)(xviii), and ICDS cannot extinguish the statutory deduction. It was therefore submitted that the assessee’s claim ought not to have been disallowed by the learned Assessing Officer or confirmed by the learned CIT(A).

24. The learned CIT-DR vehemently submitted that, with effect from 1 April 2017, clause (xviii) was inserted in section 36(1) of the Act to provide that any mark-to-market loss or other expected loss shall be allowed as a deduction, while computing income referred to in section 28, only if such loss is computed in accordance with the Income Computation and Disclosure Standards notified under section 145(2) of the Act. He submitted that the deduction is available under section 36(1) only where the loss is so computed. He further referred to section 40A (13), also inserted by the Finance Act, 2018 with retrospective effect from 1 April 2017, which provides that no deduction or allowance shall be made in respect of any mark-to-market loss or other expected loss except as provided under section 36(1)(xviii). Since the present appeal concerns assessment year 2017-18, he submitted that full effect must be given to these provisions. According to him, the assessee’s claim is hit by sections 36(1)(xviii) and 40A (13) and was therefore rightly disallowed by the lower authorities. He also relied on the decision of the Hon’ble Delhi High Court in Chamber of Tax Consultants v. Union of India, 400 ITR 178, particularly paragraph 102, and submitted that, after the retrospective amendments, the said decision does not assist the assessee.

25. During the hearing, the Bench asked the assessee to explain how it had computed the onerous contract loss of 2119,56,53,057. The assessee was also asked to clarify whether the quantum and method of computation of such loss had been examined by the lower authorities, to establish the nature of the mark-to-market loss or expected loss provided in the books of account and now claimed as an allowable deduction.

26. In response, the assessee furnished a detailed charts identifying five projects— “Embassy Groove”, ‘Embassy Lake Terrace’, ‘Embassy Christine’, ‘Embassy Boulevard ‘, and ‘Embassy Oasis’—and submitted that the loss for the year had been computed with reference to these projects. The assessee was then asked to explain how the above amount was derived.

27. The assessee submitted that it maintains its books of account on the percentage completion method and, therefore, revenue recognition must be matched with the percentage of work completed in accordance with the applicable guidance on accounting for construction contracts. It also referred to the relevant ICDS provisions, under which the required provision is to be recognised in the books of account.

28. In response, it submitted that, in the; ‘Embassy Groove’ project, revenue of 282.14 crore had been recognised against total revenue to be recognised as 83.01 crore, leaving further revenue of 20.87 crore to be recognised. It was further stated that construction cost of 251.92 crore was required to be recognised up to 31 March 2017, whereas only 242.63 crore had been recognised in the books by that date, leaving additional construction cost of 29.29 crore to be recognised. Similarly, land cost of 25.02 crore had been recognised against total land cost to be recognised of 25.97 crore, leaving 20.94 crore yet to be recognised. Thus, for this project, the remaining revenue was 20.87 crore, while the remaining land cost and construction cost were 20.94 crore and 29.29 crore respectively, resulting in a further expected provision to be recognised.

29. With respect to the Embassy Lake Terrace project, the learned authorised representative submitted that further cost of 233,76,36,027 was required to be recognised. According to him, total cost required to be recognised amounted to 2297,91,85,682, whereas only 2264,15,49,655 had been recognised in the books. Since project revenue of 2269,82,38,189 had already been offered to the profit and loss account, the corresponding expenditure, computed with reference to the project-completion ratio, was also required to be provided. The provision therefore arose from the need to match the recognised revenue with the related project cost.

30. With respect to the Embassy Pristine project, he submitted that, on the same basis, further cost was required to be recognised in proportion to the revenue already offered under the percentage-completion method. Accordingly, an additional provision of 2168,04,28,054 was required for expenses yet to be incurred.

31. For the Embassy Boulevard project, he submitted that additional cost of 231,53,48,064 was required to be incurred against project revenue of 2178,67,87,805 already offered by the assessee.

32. For the Embassy Oasis project, he submitted that further cost of 26,34,47,708 was required to be incurred, while project revenue of 214,97,55,981 had already been recorded in the books of account.

33. He therefore submitted that, across all five projects, the assessee was required to incur further cost of 2248,98,49,648, computed with reference to the percentage of completion of each project. This amount represented the provision for expenditure required up to the relevant stage of completion under the percentage-completion method. He further stated that onerous contract losses of 253,79,93,234 booked in earlier years were reversed during the year and adjusted against the provision for expenditure yet to be incurred.

34. He further submitted that the draft Income Computation and Disclosure Standard on real estate transactions, first placed in the public domain in May 2016, has not yet been notified. The draft standard covers the development and sale of residential and commercial units, row houses, and independent houses. He referred to paragraph 3(1) of the draft standard, which recognizes the percentage-completion method of accounting, and to paragraph 4, which prescribes the criterion that 25% or more of the construction and development cost should have been incurred. Accordingly, he contended that the Revenue authorities were incorrect in stating that the 25% criterion did not apply merely because it was not specifically mentioned. He also referred to the ICAI Guidance Note on Accounting for Real Estate Transactions and submitted that reconciliation is required between the draft ICDS on real estate transactions and the ICAI Guidance Note for computing the assessee’s income.

35. He finally submitted that the amount provided in the assessee’s books was not a mark-to-market loss or any other expected loss covered by section 36(1)(xviii), but it is in fact provision for expenses, and therefore section 40A (13) could not be invoked He relied up on decision of Mumbai coordinate bench in case of Tata Consultancy Limited V DCIT 182 taxmann.com 570(2026) para 40 to 42 where in it is held that to provision of expenses, section 40A (13) does not apply, and thus provision is allowable. He submits that this covers issue in favour of the assessee. According to him, the lower authorities ought not to have proceeded merely with the nomenclature used in the financial statements but should have examined the substance of the provision. The amount he submitted represented a provision for expenses required to be incurred under the percentage-completion method. The assessee had consistently followed this method year after year, and the Revenue had accepted it; even in the year under appeal, the Assessing Officer did not dispute its correctness. At most, the amount was inaccurately described as an expected loss instead of a provision for expenses.

36. He submits that reading sections 40A (13) and 36(1)(xviii) together, he submitted that mark-to-market or other expected losses are deductible where computed in accordance with ICDS. Under ICDS X, a provision is a liability measurable only by substantial estimation. A liability is a present obligation arising from past events, settlement of which is expected to result in an outflow of economic resources; such obligation exists where, on the evidence available at year-end, its existence is reasonably certain. ICDS X permits recognition of a provision where a present obligation arises from a past event, an outflow of resources to settle it is reasonably certain, and the amount can be reasonably estimated.

37. He further submitted that, under section 11(4) of the RERA Act, a promoter remains responsible for all obligations under the Act, the rules, regulations, and agreements with allottees until conveyance of the apartments, plots, buildings, or common areas, and continues to be liable for structural and other defects for the prescribed period even after conveyance. Since revenue is recognised based on sale agreements executed with buyers, the promoter must also recognize the corresponding contractual and statutory obligations. Expenses yet to be incurred for fulfilling those obligations therefore qualify as provisions under ICDS X.

38. In the assessee’s case, the provision represents expenses corresponding to income already recognised, consistent with the matching and accrual principles under AS 1 and ICDS I. Costs required to complete the work relate to the year in which the corresponding income is recognised. Accordingly, he submitted that the assessee’s claim could not have been disallowed.

39. The learned CIT-DR vehemently submitted that these details were not produced before the learned Assessing Officer. He further contended that the assessee’s argument that the amount represented a provision for expenses was neither raised before the lower authorities nor was capable of being considered at this stage. In any event, he submitted that sections 36(1)(xviii) and 40A (13) of the Act clearly prohibit allowance of such expenditure in the guise of expected losses. He also argued that, if the assessee maintained its books on the percentage-completion method, there was no justification for debiting the amount as a loss provision. He submits that it is nomenclature explained by the assessee which will decide the taxability of sum involved. The assessee’s claim that the amount represented cost to be recognised under the project-completion method requires verification and cannot be allowed as a deduction without such examination. He therefore maintained his original contention that sections 36(1)(xviii) and 40A (13) clearly disallow the loss claimed by the assessee.

40. We have carefully considered the rival contentions and perused the orders of the lower authorities. Heere the claim of the assessee is that either the provision of future losses to be allowed or otherwise provision for expenses. Dilemma is because neither the assessee nor the Id. Revenue authorities have examined the nature of claim, its components, methods, supporting evidence etc. Everybody went on the description of one line item given by assessee in its annual accounts ” provision for future losses”

41. According to para 4 of ICDS -I which provides that

Considerations in the Selection and Change of Accounting Policies

4. Accounting policies adopted by a person shall be such so as to represent a true and fair view of the state of affairs and income of the business, profession or vocation. For this purpose,

(i)	the treatment and presentation of transactions and events shall be governed by their substance and not merely by the legal form; and
(ii)	marked to market loss or an expected loss shall not be recognised unless the recognition of such loss is in accordance with the provisions of any other Income Computation and Disclosure Standard.

5. An accounting policy shall not be changed without reasonable cause.

42.

43. Presuming that it is a provision for future losses, we do not find any infirmity in the orders of the Id. Lower authorities for the reason that Section 145 empowers the Central Government to notify Income Computation and Disclosure Standards for computing income of assesses who follow the mercantile system of accounting and offer income under the heads “Profits and gains of business or profession” or “Income from other sources.” As income as reflected in the books of account does not automatically determine the amount chargeable to tax. Taxability must be examined in accordance with the Act, including the way the notified ICDS operate. It is also relevant that the ICDS were challenged before the Hon’ble Delhi High Court in Chamber of Tax Consultants v. Union of India, 400 ITR 178. In paragraph 102 of that decision, the Hon’ble High Court held that an ICDS which dispenses with the concept of prudence is contrary to the Act and binding judicial precedents and is, therefore, unsustainable in law. The Finance Act 2018 introduced section 36(1) (xviii) and section 40A (13) with retrospective effect from 1-4-2017 in terms of the above decision.

44. The impugned disallowance is based on three connected provisions applicable from assessment year 2017-18: first, section 36(1)(xviii) of the Act, which permits deduction of any mark-to-market loss or other expected loss only if computed in accordance with the Income Computation and Disclosure Standards notified under section 145(2); secondly, section 40A(13), which disallows any mark-to-market loss or other expected loss except to the extent allowable under section 36(1)(xviii); and thirdly, paragraph 4(ii) of ICDS I, which provides that expected losses shall not be recognised unless their recognition is permitted by another ICDS.

45. Significantly, section 40A (1) gives the entire section overriding effect by providing that it applies notwithstanding anything contrary contained in any other provision of the Act relating to computation of income under the head “Profits and gains of business or profession.” This non-obstante clause forms the foundation of the Revenue’s case.

46. 0n careful consideration of the learned authorized representative’s contention that the provision represents an ascertained and crystallized liability, as contemplated in the line of authorities beginning with Bharat Earth Movers v. CIT, 245 ITR 428 (SC), Rotork Controls India (P.) Ltd. v. CIT, 314 ITR 62 (SC), and CIT v. Woodward Governor India (P.) Ltd., 312 ITR 254 (SC), we find that the proposition was unexceptionable for years prior to assessment year 2017-18. After the statutory amendments, however, the assessee faces two hurdles supporting the disallowance. First, section 40A (13), read with the overriding clause in section 40A (1), applies notwithstanding sections 28, 37 and 145(1), and therefore prevails over the judge-made prudence principle on which those decisions rested. Secondly, Rotork dealt with warranty provisions[expenses] arising from completed sales, whereas the present provision, in the assessee’s own explanation, represents expected loss recognised immediately and reversed as actual costs are incurred over the contract period.

47. It is therefore claim of assessee is anticipatory in nature and relates to costs yet to be incurred under executory contracts. Further, the assessee’s own description of the item as a “provision for expected losses” does not support its contention that the amount falls outside the expression “other expected loss” in section 40A (13).

48. As regards the assessee’s reliance on Chamber of Tax Consultants v. Union of India, 400 ITR 178 (Del), the principle that ICDS, as delegated legislation, cannot override the Act or binding judicial precedent is well settled. However, that decision has been substantially overtaken by the Finance Act, 2018, which inserted sections 36(1)(xviii), 40A (13), 43AA and 43CB, substituted section 145A, and inserted section 145B with retrospective effect from assessment year 2017-18. These amendments supplied the primary statutory basis whose absence had weighed with the Hon’ble Delhi High Court. For the year under appeal, therefore, the disallowance rests on the Act itself and not merely on the ICDS operating independently. The assessee’s ultra vires contention based on Chamber of Tax Consultants consequently cannot prevail.

49. As regards circularity or otiose argument, the assessee’s contention that a blanket ICDS prohibition renders section 36(1)(xviii) ineffective is appealing at first sight but is overstated. The provision continues to have meaningful operation, including in respect of foreign exchange mark-to-market gains or losses recognised under ICDS VI read with section 43AA, inventory write-downs to net realizable value under ICDS II read with section 145A(i), and losses on construction contracts recognised with reference to the stage of completion under ICDS III. Section 36(1)(xviii) therefore operates as a gateway provision and cannot be treated as redundant. The rule against surplusage is accordingly satisfied without adopting the assessee’s interpretation. The assessee’s reading of the Memorandum to the Finance Bill, 2018 as reflecting an intent to restore deductibility of expected losses is also not correct. The stated object was to provide certainty and give legislative recognition to ICDS after Chamber of Tax Consultants decision, which supports the Revenue’s construction rather than the assesses.

50. As regards the argument based on Circular No. 10/2017, Question 12, the assessee’s submission is overstated. The Circular states that no specific ICDS has been notified for real estate developers and that the relevant provisions of the Act and the ICDS shall apply to such transactions, as may be applicable. It does not exempt real estate developers from the ICDS framework altogether. ICDS I, which applies to all assesses computing business income under the mercantile system, prohibits recognition of expected losses unless another ICDS permits such recognition; ICDS X does not recognize provisions for onerous executory contracts. It applies to all business without any exception.

51. The learned authorized representative relied on several decisions allowing provisions for expected losses, including ACIT v. ITD Cementation India Ltd., (2014) 146 ITD 59 (Mum-Trib), ACIT v. Ashoka Buildcon Ltd., 61 taxmann.com 330 (Trib), Jacobs Engineering India (P.) Ltd. v. ACIT, ITA Nos. 335-336/Mum/2007 (Mum-Trib), Mazagon Dock Ltd. v. JCIT, (2009) 29 SOT 356 (Mum-Trib), and Dredging International NV v. ADIT, (2011) 48 SOT 430 (Mum-Trib). However, all these decisions relate to assessment years prior to 2017-18. They were rendered under AS-7, which required immediate recognition of the entire foreseeable loss, and before the insertion of sections 36(1)(xviii) and 40A (13). In view of these statutory changes, reliance on those decisions is misplaced.

52. We therefore reject the assessee’s contentions that ICDS does not apply to real estate development business and that the impugned claim of `provision for expected losses falls outside section 40A (13) of the Act. On the facts of the present case, even if the provision is treated as an expected loss, it is not allowable under section 36(1)(xviii) of the Act.

53. To decide the claim of the assessee that claim of the assessee is for deduction of expenditure matching the revenue already offered and to such claim section 40A (13) does not apply, there should be necessary finding about the nature of claim, its components, methodology of working and supporting evidences.

54. The question, therefore, is whether, based on the details furnished before us, the provision for expenditure required to match revenue already recognised is allowable under section 28 of the Act, rather than under section 36(1)(xviii) and is not hit by section 40 A (13) of the Act.

55. Before us, the learned authorised representative furnished a project-wise statement showing revenue, land cost, construction cost, and the resulting profit or loss under the percentage-completion method for each project. On a cumulative basis, the assessee submitted that cost of 2929,79,83,832 was required to be recognised, while only 2680,81,34,184 had been recognised in the books. The balance cost of 2248,98,49,648, according to the assessee, was required to be matched against revenue already recognised. Against this amount, the assessee had made a provision of only 2119,56,53,057, though described in the books as provision for expected loss.

56. Where an assessee follows the mercantile system of accounting, income is computed on accrual basis, and the matching principle requires that the costs incurred to earn the recognised revenue be matched against that revenue in the same year. Revenue and the related cost are two sides of the same transaction; therefore, the cost of completing the work already sold cannot be deferred to a later year after recognizing the corresponding revenue. If revenue is recognised without providing for the related cost, the profit for that year is overstated and the matching principle is violated. In the case of a real estate developer, once an agreement to sell is entered into with a buyer before completion of construction, the identified unit is earmarked for that buyer, consideration is received in construction-linked instalments, and the developer becomes contractually and statutorily bound to complete and deliver the unit within the agreed time. In substance, therefore, the developer performs construction for and on behalf of the buyer. The Hon’ble Supreme Court in K. Raheja Development Corporation v. State of Karnataka [AIR 2005 SC 2350; (2005) 5 SCC 162; 141 STC 298] held that where an agreement with the purchaser is entered into before construction is complete, the developer executes a works contract for and on behalf of the purchaser; however, no works contract arises where the sale is of an already completed unit. Consequently, where the arrangement is in substance a construction contract, the cost required to complete the sold work is an inherent contract cost of earning the recognised revenue. Such a provision is therefore not discretionary and cannot be treated merely as a loss. On this characterization, the provision falls within the framework of ICDS III, and section 40A (13) would not apply to such expenditure.

57. Even under ICDS III, contract revenue and contract costs are recognised with reference to the stage of completion. Contract costs include costs required to complete the contract, and foreseeable losses are recognised in accordance with the standard. If the assessee is characterized as a contractor, ICDS III would govern the computation, and the matching of costs required to complete the contracted work would be inherent in that method. Thus, ICDS III itself supports recognition of the provision for such completion costs as a deductible expenditure.

58. Para 16 of ICDS III Construction contracts provide that Contract revenue and contract costs associated with the construction contract should be recognised as revenue and expenses respectively by reference to the stage of completion of the contract activity at the reporting date.

59. Income Computation and Disclosure Standard X relating to provisions, contingent liabilities and contingent assets provides that Provision” is a liability which can be measured only by using a substantial degree of estimation and further. A provision shall be recognised when:

(a)	a person has a present obligation as a result of a past event;
(b)	it is reasonably certain that an outflow of resources embodying economic benefits will be required to settle the obligation; and
(c)	a reliable estimate can be made of the amount of the obligation.

If these conditions are not met, no provision shall be recognised.

60. Thuss, ‘provisions’ for expenses are allowed by ICDS X and thus not hit by ICDS I off prohibition of allowability of losses.

61. In these circumstances, section 40A(13), which disallows mark-to-market losses or other expected losses except to the extent allowable under section 36(1)(xviii), does not apply to a provision for expenditure required to complete construction already sold. There is a clear distinction between a “loss” and an “expenditure.” The cost required to complete construction corresponding to revenue already recognised is an expenditure incurred to earn that revenue. Therefore, where revenue has accrued and the related cost is required to be incurred under the matching principle, such cost is deductible under section 28 itself. Section 40A (13) does not bar allowance of such provision. Accordingly, the cost required to complete the contract is deductible in the year in which the corresponding revenue is recognised, being an accrued and present liability.

62. The assessee stated that the project-wise charts were supported by adequate cost-to-cost documentation and the statement of profit and loss account for the year ended 31 March 2017 and attempted to demonstrate the same before us. However, the record shows that the lower authorities neither called for these details nor examined the basis of the provision. The assessee also did not voluntarily place the complete work before them. Consequently, the amount was neither properly characterized nor quantified by the lower authorities, and no verification of the claim was undertaken.

63. Unless the nature of claim of the assessee is examined, it is futile to refer to the decisions relied upon by the parties. Assessee did not furnish any details before Id. AO or CIT (A), assessee’s explanation is no body asked it. Really nobody asked it. It was asked for the first time by ITAT. The Assessee responded to by producing it. The Id. CIT DR submits that it is impossible to examine the same at this stage before the ITAT and to give any opinion thereon. He submits that it needs to be examined by the Id. AO only. When assessee was asked about the applicability of Rule 29 of ITAT rules, he submits that it is on asking by ITAT only, but it is better if same can be examined by Id. AO for completeness.

64. In sum, neither the learned Assessing Officer nor the learned CIT(A) examined the composition of the provision of 21,19,56,53,057. The expression “expected loss” ordinarily refers to a loss arising from future events; however, no such future event was identified before us. On the assessee’s explanation, the amount represents a provision for uncompleted work for which revenue has already been recognised. To the extent the project-wise computation represents (i) write-down of unsold work-in-progress to net realizable value, as contemplated by section 145A(i) read with ICDS II and outside the scope of section 40A (13), or (ii) loss attributable to costs already incurred on contracted units as at year­end, disallowance of the entire provision may not be sustainable. Further, the learned CIT(A)’s reliance on ICDS III is misplaced. The lower authorities also failed to address tax neutrality: if the provision is disallowed in the present year, the actual loss must be allowed in the year of incurrence, and any subsequent writeback of the same provision cannot be taxed again.

65. In view of the above, we allow these grounds for statistical purposes and restore the issue to the learned Assessing Officer for the limited purpose of verifying the project-wise computation. The learned Assessing Officer shall bifurcate the provision between (i) the write-down of inventory or work-in-progress to net realizable value, and any loss attributable to costs already incurred, which would be allowable under section 145A(i) read with ICDS II and would fall outside section 40A (13); and (ii) further provision of expenses would be allowed to the assessee in terms ICDS X (iii) any purely anticipatory element referable only to estimated future costs, which would be disallowable under section 40A (13). The learned Assessing Officer shall also ensure that, if any amount is disallowed in the present year, the corresponding actual loss is allowed in the year of incurrence and any subsequent writeback of the same provision is not taxed again.

66. The assessee is directed to produce before the learned Assessing Officer complete project-wise and contract-wise details, including the cost already incurred and recognised in the books and the cost required to be recognised for each unit. The learned Assessing Officer shall examine the assessee’s claim that further cost of U48,98,49,648 is required to be incurred in relation to the revenue already recognised. If, on verification, the claim is found to be correct, the disallowance of 2119,56,53,057 shall be deleted. If the learned Assessing Officer is not satisfied with the project-wise computation or the quantum of cost claimed, he shall determine the expenditure allowable to the assessee and identify whether any part of the claim represents an expected loss hit by section 40A (13) of the Act. The disallowance, if there is any, shall then be computed accordingly.

67. Accordingly ground no 4 &5 of the appeal are restored back to the file of the Id.A0 and allowed as indicated above.

68. No other grounds were pressed before us and therefore those are dismissed.

69. In the Result ITA no 2865/bang/2025 is partly allowed for statistical purposes.

[ITA No. 2866/Bang/2025]
[AY 2018-19]

70. ITA No. 2866/Bang/2025 is filed by Embassy Property Developments Private Limited [ the Assessee/ Appellant] against the appellate order dated 6 October 2025 passed by the Principal Commissioner of Income Tax (Appeals)-11, Bangalore [ the Id. CIT (A)]. By the said consolidated appellate order for assessment years 2016-17 to 2018-19, the appeal filed by the assessee against the assessment order dated 28 September 2021 passed by the Deputy Commissioner of Income Tax, Central Circle-1(3), Bangalore, [ the Ld. AAO] undersection 143(3) of the Income-tax Act, 1961, [ The ACT] for assessment year 2018-19—wherein the total income was assessed at a loss of Rs. 2,02,76,00,620 as against the returned income of Rs. Nil—was dismissed.

71. The assessee is aggrieved by the appellate order, which (i) confirmed the disallowance made by the learned Assessing Officer under section 14A of the Income-tax Act, 1961, (i) upheld the disallowance of 236,20,60,000 in respect of the provision created by the assessee, and further (iii) sustained the addition made towards deemed dividend under section 2(22)(e) of the Act.

72. Briefly stated, the facts of the case are that the assessee is a company, engaged in real estate development, filed its return of income on 13 October 2020 declaring total income at Nil after setting off the current year’s loss against income from other sources amounting to 2154,69,68,638. Notice under section 143(2) of the Act was issued on 23 September 2020. Thereafter, the assessment was completed on 28 September 2021. On Appeal, the Id. CIT (A) confirmed the assessment order subject to some relief.

73. Ground no1 is general in nature and no arguments were advanced, hence, dismissed.

Issue No 1

Whether disallowance u/s 14A of the act invoking computation  mechanism u/r 8D can be made without recording satisfaction as  envisaged u/s 14(2) of the Act

74. As per Ground no 2 & 3 of the Appeal, the first issue relates to the disallowance under section 14A of the Act. On examining the annual accounts, the learned Assessing Officer noted that the assessee had made substantial investments in equities and mutual funds for earning exempt income, had earned dividend income of 213,17,70,539 during the year, and had debited finance costs of 2617.01 crore to the profit and loss account. The assessee was therefore asked to furnish details of investments made to earn exempt income and the computation of disallowance under section 14A. The assessee furnished the details and stated that it had made a suo motu disallowance of 265,88,527. However, the learned Assessing Officer held that the computation was not in accordance with section 14A read with rule 8D of the Rules. Although the assessee contended that no finance cost was incurred for earning exempt income and that the investments were made from its own funds, the learned Assessing Officer recorded dissatisfaction with the correctness of the assessee’s claim regarding expenditure incurred, or not incurred, in relation to exempt income. He accordingly computed the disallowance under section 14A based on the monthly opening and closing balances of investments at 27,58,08,682. After reducing the suo motu disallowance of 265,88,527 already made by the assessee, a net disallowance of 26,92,20,155 was added.

75. The assessee challenged the disallowance before the learned CIT(A), contending that the learned Assessing Officer had wrongly considered investments from which no exempt income was earned during the year. According to the assessee, only investments that yielded exempt income could be considered for computing disallowance under section 14A read with rule 8D.The assessee also submitted that the learned Assessing Officer had not recorded proper satisfaction regarding the correctness of its claim that only 265,88,527, being 5% of the exempt income, was disallowable. In the absence of such satisfaction, no further disallowance could be made.

76. The learned CIT(A) upheld the disallowance made by the learned Assessing Officer under section 14A of the Act. However, he directed the learned Assessing Officer to restrict the addition only to investments that had yielded exempt dividend income. Accordingly, the assessee’s appeal on this issue was partly allowed.

77. The assessee, being aggrieved, is in appeal before us on grounds 2 and 3. The learned authorized representative submitted that the issue is identical to the disallowance under section 14A arising in assessment years 2016-17 and 2017-18. He contended that, during the assessment proceedings, the learned Assessing Officer invoked section 14A read with rule 8D of the Income-tax Rules, 1962, and made a further disallowance over and above the suo motu disallowance already offered by the assessee, without first recording the mandatory satisfaction required under section 14A (2) of the Act. According to him, in the absence of any objective examination of the books of account and any valid dissatisfaction with the correctness of the assessee’s claim, such invocation of rule 8D is invalid. Reliance was placed on the decision of the Hon’ble Supreme Court in Maxopp Investment Ltd. v. Commissioner of Income Tax, New Delhi [2018] 91 com 154 (SC), and on the decision of the Hon’ble Karnataka High Court in Hindustan Aeronautics Ltd. It was argued that the observations made by the learned Assessing Officer are merely general and mechanical and do not satisfy the statutory mandate of section 14A (2). The learned authorized representative further submitted that the Assessing Officer failed to establish any demonstrable nexus between borrowed funds and investments yielding exempt income and did not properly examine or rebut the assessee’s suo motu disallowance, computed at 5% of the exempt income. He therefore submitted that the impugned disallowance under section 14A read with rule 8D deserves to be deleted in its entirety.

78. The learned CIT-DR, Shri Shivanand Kalakeri, strongly supported the orders of the lower authorities. He submitted that the assessee had merely disallowed 5% of the exempt income, which was not in accordance with rule 8D of the Income-tax Rules, 1962, read with section 14A of the Act. Therefore, the learned Assessing Officer rightly rejected the suo motu disallowance offered by the assessee. He further submitted that the learned Assessing Officer had considered both the borrowing costs incurred by the assessee and the investments made and had called upon the assessee to furnish the computation of disallowance under section 14A read with rule 8D. According to him, the learned Assessing Officer had duly recorded dissatisfaction before applying rule 8D. He heavily relied on the order of the learned CIT(A), contending that the learned CIT(A) had considered all relevant aspects, accepted that proper dissatisfaction had been recorded by the Assessing Officer, and granted relief to the assessee only to a limited extent. Accordingly, he submitted that there was no infirmity in the orders of the lower authorities.

79. We have carefully considered the rival submissions and perused the orders of the lower authorities. The assessee earned exempt income of 213,17,70,539 and made a suo motu disallowance of M5,88,527 under section 14A of the Act. The assessee specifically denied incurring any finance cost for earning the exempt income and submitted that the investments were made from its own funds. However, without objectively rejecting this explanation or recording satisfaction from the books of account regarding the incorrectness of the assessee’s claim, the learned Assessing Officer merely referred to the finance cost debited to the profit and loss account and proceeded to compute disallowance under section 14A read with rule 8D. In our view, the learned Assessing Officer failed to record the satisfaction required under section 14A (2) before invoking rule 8D. He also did not demonstrate that any interest expenditure was incurred for earning exempt income or that the assessee’s disallowance of 5% of exempt income was inadequate.

80. An identical issue arose in the assessee’s own case for assessment years 2016-17 and 2017-18. While deciding the assessee’s appeal for assessment year 2017-18, we considered this issue in the preceding paragraphs and deleted the disallowance made by the learned Assessing Officer. Since there is no change in the facts or circumstances for the year under consideration, we direct the learned Assessing Officer to delete the disallowance made under section 14A of the Act by invoking rule 8D without recording the requisite satisfaction. However, the suo motu disallowance offered by the assessee shall remain undisturbed. Accordingly, grounds 2 and 3 are allowed.

Issue No 2

Whether the provision of section 40A (13 ) of the act bars deduction of any mark to market loss or any other loss which is not otherwise allowable u/s 36(1) (xviii) of the Act .

81. Grounds 4 and 5 relate to the disallowance of 236,20,60,000 made by the learned Assessing Officer in respect of the provision created by the assessee for expected losses on onerous contracts. During the assessment proceedings, the learned Assessing Officer noted that the assessee had debited 236,20,60,000 as provision for expected losses. On examining the computation of income, he observed that the assessee had not disallowed the said amount while computing its total income. The assessee was therefore called upon to show cause why the provision for expected losses should not be disallowed. The learned Assessing Officer further noted that an identical issue had arisen in the assessee’s case for assessment year 2017-18, where the matter had been examined in detail during scrutiny assessment. Following the same reasoning, he disallowed the provision of 236,20,60,000 by invoking section 36(1)(xviii) read with section 40A (13) of the Act and the applicable Income Computation and Disclosure Standards.

82. The assessee, being aggrieved, preferred an appeal before the learned CIT(A). The learned CIT(A) held that the disallowance was not made under section 36(1)(xviii) of the Income-tax Act, 1961, but was sustainable under section 40A (13) of the Act. He further noted that, for assessment year 2017-18, he had already confirmed an identical disallowance. Accordingly, he confirmed the disallowance of the provision for expected losses.

83. The assessee reiterated the same submissions as were advanced in its appeal for assessment year 2017-18 and submitted that the present grounds are identical to those raised for that year. The assessee also raised the similar grounds by submitt8ng the details that it is a provision for expenses so should be allowed as such provisions are not hit by section 40A 913) of the Act.

84. The learned CIT(A) also reiterated the same reasoning and supported the orders of the lower authorities. He held that section 40A (13) expressly bars allowance of losses that are not eligible for deduction in computing income under the Income Computation and Disclosure Standards notified by the Central Board of Direct Taxes.

85. Both parties confirmed that the issue is identical to the ground raised by the assessee for assessment year 2017-18 and that there is no change in the facts or circumstances. While deciding the assessee’s appeal for assessment year 2017-18, the Tribunal considered the issue and restored the issue back to the file of the Id. AO with direction to assessee for substantiation. Following the same reasoning and respectfully applying our decision for assessment year 2017-18, we allow grounds 4 and 5 of the assessee’s appeal for determination of nature of claim as indicated therein. Issue No 3

Whether addition u/s 2(22)(e) of the act can be made in the hands of the  borrower even if it is not the shareholder of the lending company?

86. Ground No. 6 relates to the addition made by the learned Assessing Officer on account of deemed dividend, amounting to 2337.47 crore. The facts relevant to this addition show that the assessee had borrowed 2249 crore from Manyata Promoters Limited, 214 crore from Embassy VTV Infrastructure Management Private Limited, and 274.47 crore from Embassy Services Private Limited, aggregating to 2337.47 crore.

87. The learned AO noted that the assessee had obtained a loan of Z14 crore from Embassy VTV Infrastructure Management Private Limited, the said company had reserves and surplus of 261.46 crore and was not a company in which the public were substantially interested. It is the 100 % subsidiary of one company Technic Control facility management Private Limited. Technic Control facility management private Limited is subsidiary of the assessee company. Further, lending money did not constitute a substantial part of its business. The learned Assessing Officer therefore held that the loan advanced by the lender to the assessee, being within the reserves and surplus available in the subsidiary’s books, was liable to be treated as deemed dividend in the hands of the assessee under section 2(22)(e) of the Act.

88. Similarly, the assessee obtained a loan of 2670 crore from Manyata Promoters Private Limited. Since the reserves and surplus in the books of that company were only 2249 crore, the learned Assessing Officer treated the loan to the extent of 2249 crore as deemed dividend taxable in the hands of the assessee under section 2(22)(e) of the Act as assessee is a group company exercising control over the group.

89. Further, the assessee received a loan of 274.47 crore from Embassy Services Private Limited. Since the reserves and surplus in the books of Embassy Services Private Limited stood at 2200 crore, the learned Assessing Officer treated the entire loan amount as deemed dividend taxable in the hands of the assessee under section 2(22)(e) of the Act.

90. The assessee submitted that Embassy VTV Infrastructure Management Private Limited had advanced an inter-corporate deposit of 214,00,00,000 during the year under consideration. It was explained that Technique Control Facility Management Private Limited held 100% of the equity share capital of Embassy VTV Infrastructure Management Private Limited. The assessee was not a shareholder of the lender company, nor was Technique Control Facility Management Private Limited a shareholder of the assessee. Therefore, section 2(22)(e) of the Act was not attracted, as the assessee did not hold the requisite shareholding of at least 10% in the lending company. Consequently, the inter-corporate deposit of 214,00,00,000 advanced by Embassy VTV Infrastructure Management Private Limited could not be treated as deemed dividend in the hands of the assessee.

91. With respect to the inter-corporate deposit of 2670 crore received from Manyata Promoters Private Limited, the assessee submitted that the shareholders of Manyata Promoters Private Limited were BRE Mauritius holding 37%, NBC Office Sparks Limited holding 36%, and Reddy Veeranna holding 27%. It was further submitted that Manyata Promoters Private Limited had not advanced any loan to its shareholders, nor had it advanced any loan to the assessee in which the said shareholders held substantial interest. These shareholders of Manyata Promoters Private Limited were not shareholders of the assessee company. The assessee also explained its shareholding pattern before the learned Assessing Officer.

92. Regarding the loan of 274.47 crore received from Embassy Services Private Limited, the assessee submitted that JV Holdings Private Limited held 99% of the lender’s shares, while JV Holdings Private Limited, jointly with Mr. Jitendra Virwani, held the remaining 1%. Since the assessee did not hold any shares in the lender company, it contended that no shareholder relationship existed between the borrower and the lender and, therefore, section 2(22)(e) of the Act was not attracted.

93. The assessee also furnished its own shareholding pattern, showing that JV Holdings Private Limited held 91.92% of its shares and the remaining 8% was held by other entities.

94. Thus, the assessee’s argument was that assessee was not a shareholder of any of the lender companies and, therefore, section 2(22)(e) of the Act could not be invoked in its hands. Secondly, the amounts received were business advances in the nature of inter-corporate deposits and were outside the scope of deemed dividend.

95. The learned Assessing Officer considered the assessee’s explanation but rejected it. He held that, although the assessee was not a direct shareholder of Manyata Promoters Private Limited, it exercised control over that company through its subsidiary, which held 36% of its shares. Similarly, in relation to Embassy VTV Infrastructure Management Private Limited, he observed that the assessee held 99.9% of the shares of Technique Control Facility Management Services Private Limited, which in turn held 100% of Embassy VTV Infrastructure Management Private Limited. He therefore concluded that, despite the absence of direct shareholding, the assessee exercised control over the lender company and that the provisions relating to deemed dividend were attracted. With respect to the loan from Embassy Services Private Limited, the learned Assessing Officer held that the company had advanced funds to the assessee, in which 92% of the shares were held by JV Holdings Private Limited, which also held 99% of the shares of Embassy Services Private Limited. On this basis, he held that section 2(22)(e) of the Act applied to the loans received from these companies and that the amounts were taxable as deemed dividend. He also rejected the assessee’s contention that the amounts were inter-corporate deposits outside the scope of deemed dividend. Accordingly, he made an addition of 2337.47 crore as deemed dividend.On appeal, the learned CIT(A) confirmed the addition.

96. The learned authorized representative submitted that the lower authorities had misconstrued section 2(22)(e) of the Act. According to the assessee, it was not a shareholder of any of the companies from which the loans were received. In any event, the advances were business transactions in the nature of inter-corporate deposits and therefore could not be taxed in the assessee’s hands by invoking section 2(22)(e). It was further submitted that the provision did not apply to the transactions; and even if it were applicable, deemed dividend could be taxed only in the hands of the shareholder. Since the assessee was not a shareholder of any of the lender companies, the invocation of section 2(22)(e) was legally unsustainable.

97. The learned authorized representative submitted that section 2(22)(e) of the Act creates a deeming fiction and, therefore, must be construed strictly. According to him, the lower authorities impermissibly expanded the scope of the provision merely because the lender companies and the assessee belonged to the same group. He argued that a loan from a group concern does not, by itself, become deemed dividend in the hands of the borrowing company. The learned authorized representative placed before us the shareholding pattern of each lender company as well as that of the assessee to demonstrate that the statutory conditions for invoking section 2(22)(e) were not satisfied. He also relied on several judicial precedents in support of the assessee’s case.

98. Thus, as it was not a shareholder of any of the lender companies and, therefore, section 2(22)(e) of the Act could not be invoked in its hands. Secondly, the amounts received were business advances in the nature of inter-corporate deposits and were outside the scope of deemed dividend. The assessee relied on Prasad Film Laboratories (P.) Ltd. v. Assistant Commissioner of Income-tax [2025] 176 taxmann.com 255 (Telangana) and Commissioner of Income-tax vs. Raj Kumar [2009] 181 Taxman 155 (Delhi)/[2009] 318 ITR 462 (Delhi)/[2010] 228 CTR 506 (Delhi)[14-05-2009], Commissioner of Income-tax vs. Ambassador Travels (P.) Ltd. [2008] 173 Taxman 407 (Delhi)/[2009] 318 ITR 376 (Delhi)/[2008] 220 CTR 475 (Delhi)[23-04-2008], Commissioner of Income-tax vs. Creative Dyeing & Printing (P.) Ltd. [2009] 184 Taxman 483 (Delhi)/[2009] 318 ITR 476 (Delhi)/[2010] 229 CTR 250 (Delhi)[22-09-2009], [2012] 18 taxmann.com 132 (Delhi)/[2012] 205 Taxman 44 (Delhi) (Mag.)[30-09-2011], circular dated Central Board of Direct Taxes,. Circular No.19 of 2017 dated 12.06.2017 and submitted that, in the absence of any shareholding in the lender companies, there was no basis for applying section 2(22)(e). It was further contended that deemed dividend, if any, could be taxed only in the hands of the shareholder. The assessee also relied on several judicial precedents, including CIT v. Madhur Housing and Development Co., (2018) 401 ITR 152 (SC), and CIT v. Ankitech Pvt. Ltd., (2012) 340 ITR 14 (Del).

99. The learned CIT-DR, Shri Shivanand Kalakeri, vehemently supported the orders of the lower authorities. He submitted that the assessee had received substantial borrowings from group concerns which had sufficient reserves and surplus, and therefore the amounts were chargeable as deemed dividend in the assessee’s hands. He further submitted that the assessee had borrowed funds from group entities and used them for their own purposes. According to him, the assessee failed to produce any evidence before the lower authorities establish that the amounts represented inter-corporate deposits or business transactions outside the deeming fiction of section 2(22)(e) of the Act. He therefore contended that the lower authorities rightly taxed the loans, to the extent of the reserves and surplus available in the lender companies, as the assessee’s income by invoking section 2(22)(e) of the Act.

100. We have carefully considered the rival contentions and the orders of the lower authorities. We have also examined the shareholding between the lender companies and the assessee, as well as the assessee’s contention that the amounts advanced by the lender companies were inter-corporate deposits and, therefore, could not be treated as deemed dividend in the assessee’s hands under section 2(22)(e) of the Act.

101. Under section 2(22)(e) of the Act, any payment by way of loan or advance made by a closely held company is deemed to be dividend, to the extent of the company’s accumulated profits, where it is made to a shareholder, who is the beneficial owner of shares carrying not less than 10% of the voting power, or to a concern in which such shareholder has substantial interest, or for the individual benefit of such shareholder. For this purpose, a person is regarded as having substantial interest if he is beneficially entitled to not less than 20% of the income of the concern at any time during the previous year. The term “concern” includes a Hindu undivided family, firm, association of persons, body of individuals, or company. Thus, the applicability of section 2(22)(e) depends on the nature of the recipient, the shareholding relationship, and whether the payment is made to, or for the benefit of, a specified shareholder.

102. Thus, payments by way of loan or advance are deemed to be dividend only to the extent of the accumulated profits of the lending company and only where they are made to, or for the benefit of, a shareholder holding not less than 10% of the voting power, or to a concern in which such shareholder has substantial interest.

103. The charge under section 2(22)(e) arises at the time the loan or advance is made; subsequent repayment does not affect its taxability. Accordingly, only loans, advances, or other payments covered by section 2(22)(e) can be treated as deemed dividend, and then only to the extent of the accumulated profits available on the date of payment, after making the statutory adjustments.

104. It is settled law that deemed dividend is a legal fiction and must be construed strictly. Once section 2(22)(e) of the Act is attracted, taxability is determined when the loan or advance is made; subsequent repayment, later changes in shareholding, or other subsequent events do not affect chargeability.

105. Courts have also held that regular business transactions between concerns cannot be treated as loans or advances for the purpose of deemed dividend.

106. Further, for section 2(22)(e) to apply, the shareholder must be both the registered shareholder and the beneficial owner of the shares. The Hon’ble Delhi High Court in CIT v. Ankitech Pvt. Ltd., 340 ITR 14, held accordingly, and this principle was affirmed by the Hon’ble Supreme Court in CIT v. Madhur Housing and Development Co., 401 ITR 152, dated 5 October 2017. Although the Hon’ble Supreme Court in National Travel Services, 401 ITR 154, expressed reservations on whether the concepts of registered and beneficial ownership are mutually compatible and referred the issue to a larger Bench, that appeal was later withdrawn under the Vivad se Vishwas Scheme, 2020. Consequently, the decision in Madhur Housing and Development Co.[401 ITR 152] continues to hold the field.

107. It is therefore necessary to examine whether the assessee had any shareholder relationship with any of the lender companies.

a. Embassy VTV Infrastructure Management Private Limited advanced an inter-corporate deposit of Z14 crore to the assessee. The lender is a wholly owned subsidiary of Technique Control Facility Management Private Limited. The assessee is not a shareholder of the lender company, and Technique Control Facility Management Private Limited is not a shareholder of the assessee. Rather, the assessee holds 100% of Technique Control Facility Management Private Limited, which in turn holds 100% of the lender company. Thus, the loan was advanced by the wholly owned subsidiary of a company to the shareholder of its holding company. The assessee is neither the registered nor the beneficial shareholder of the lender company. Accordingly, section 2(22)(e) of the Act is not attracted, as the assessee does not hold the requisite shareholding of at least 10% in the lender company. Consequently, the inter-corporate deposit of Z14 crore advanced by Embassy VTV Infrastructure Management Private Limited cannot be treated as deemed dividend in the assessee’s hands. The statutory fiction under section 2(22)(e) cannot be extended up the corporate chain to tax a company that holds no direct equity interest in the lender. This position is supported by the Hon’ble Supreme Court in CIT v. Madhur Housing and Development Co., (2018) 401 ITR 152 (SC), affirming the principle laid down by the Special Bench in ACIT v. Bhaumik Colour Pvt. Ltd., (2009) 313 ITR (AT) 146 (Mum-Trib) (SB).

b. It is undisputed that Manyata Promoters Private Limited advanced a loan of 2670 crore to the assessee. The shareholders of Manyata Promoters Private Limited were BRE Mauritius,  holding 37%; NBC Office Sparks Limited, holding 36%; and Reddy Veeranna, holding 27%. None of these shareholders held shares in the assessee company. The assessee also placed its own shareholding pattern before the learned Assessing Officer. In these facts, section 2(22)(e) of the Act is not attracted, as the loan was neither advanced to a shareholder of the lender company nor to a concern in which any such shareholder had substantial interest.

c. It is also undisputed that the assessee received a loan of 274.47 crore from Embassy Services Private Limited. JV Holdings Private Limited held 99% of the shares of Embassy Services Private Limited, while the remaining 1% was held jointly by JV Holdings Private Limited and Mr. Jitendra Virwani. Since the assessee did not hold any shares in the lender company, there was no shareholder relationship between the borrower and the lender. Accordingly, section 2(22)(e) of the Act was not attracted. Even otherwise, if section 2(22)(e) were attracted on the facts—namely, if the lender was a closely held company with accumulated profits and the loan was not made in the ordinary course of money­lending business—the deemed dividend, if any, would be assessable only in the hands of the registered and beneficial shareholders of Embassy Services Private Limited, and not in the hands of the assessee.

108. We therefore find no basis for invoking section 2(22)(e) of the Income-tax Act in the hands of the assessee in respect of borrowings from the three entities referred to above, as the assessee does not hold any shares in any of those lender companies.

109. Deemed dividend can be taxed only in the hands of a registered and beneficial shareholder. Since the assessee is neither the registered nor the beneficial shareholder of any of the lender companies, the addition made by the lower authorities under section 2(22)(e) is not sustainable in law.

110. The learned Assessing Officer is accordingly directed to delete the addition, and ground No. 6 of the assessee’s appeal is allowed.

111 In the result, the appeal filed by the assessee for AY 2018-19 is partly allowed.

112. Both appeals are partly allowed as indicated on each of the grounds.

Order pronounced in the open court on 14^th July, 2026.