DCIT Vs Sunteck Realty Limited (ITAT Mumbai)
Summary: The Mumbai Bench of the Income Tax Appellate Tribunal dismissed the Revenue’s appeals against Sunteck Realty Limited for AYs 2019-20 and 2020-21. The consolidated order upheld relief concerning Section 14A disallowance, adjustments to MAT book profits, deduction for qualifying CSR donations under Section 80G, recognition of project finance costs and proportionate deduction under Section 80-IBA. The directions for verification and proportionate denial in respect of the non-compliant housing unit remained intact.
On Section 14A read with Rule 8D, the Assessing Officer had considered the entire investment portfolio instead of investments actually yielding exempt dividend income. For AY 2019-20, exempt dividend income was Rs. 21,20,22,218 and the AO computed disallowance of Rs. 7,19,96,135, resulting in an additional Rs. 6,68,75,623 over the amount voluntarily disallowed. For AY 2020-21, exempt dividend income was Rs. 21,95,17,291 and the additional disallowance was Rs. 8,49,16,468. Following the Special Bench ruling in ACIT v. Vireet Investment (P.) Ltd. and coordinate-bench decisions, the Tribunal upheld recomputation confined to investments that actually yielded exempt income.
The Tribunal also rejected the Revenue’s attempt to carry the Section 14A/Rule 8D disallowance into book profits under Section 115JB. Following the Bombay High Court decision in CIT v. Bengal Finance & Investment Pvt. Ltd. and the Special Bench decision in Vireet Investment, it held that the Rule 8D computation could not be mechanically imported into clause (f) of Explanation 1 to Section 115JB(2). On the facts recorded, there was no direct expenditure debited to the profit and loss account relatable to exempt income warranting the disputed adjustment.
For CSR donations, the assessee had added back the relevant expenditure while computing business income and separately claimed deduction under Section 80G. The claims were Rs. 82,17,596 for AY 2019-20, involving donations to eligible institutions including Bai Jerbai Wadia Hospital for Children and Isha Foundation, and Rs. 50,00,000 for AY 2020-21 for a donation to Reimaging Higher Education Foundation through banking channels. The AO objected that compulsory CSR spending lacked voluntariness. The Tribunal held that Explanation 2 to Section 37(1) bars a business expenditure deduction but does not create a general prohibition under Chapter VI-A. Subject to Section 80G conditions, eligible donations remained deductible; the specific statutory exclusions concerning CSR contributions to Swachh Bharat Kosh and Clean Ganga Fund did not extend to all qualifying institutions. The genuineness of the donations and approvals of the recipient trusts were undisputed.
For AY 2020-21, the AO had also disallowed finance costs stated at Rs. 11,68,66,821, treating them as an accounting adjustment rather than expenditure incurred during that year. The CIT(A) found that these were genuine borrowing costs capitalised in capital work-in-progress in earlier years and accepted in scrutiny assessments. In the circumstances of the assessee’s transition in accounting treatment under Ind AS 115 read with Ind AS 23, the costs were de-capitalised and charged to the profit and loss account. The Tribunal upheld the deduction because the actual borrowing, interest payment and business nexus were undisputed, and a change in recognition did not make genuine expenditure fictitious.
The remaining dispute concerned deduction of Rs. 57,83,81,990 under Section 80-IBA for “Sunteck West World 1”. The AO alleged multiple allotments to individuals or family members based primarily on brokers’ invoices. The assessee explained that six alleged instances concerned adjoining projects for which no deduction was claimed; certain paired flat numbers represented single units of 52.92 square metres; and another pair involved sales to independent purchasers. The Tribunal recorded that the allegation ultimately stood restricted to Flat Nos. 1901/1902 allotted to Shri Kirit Kumar and his spouse, out of 1,205 flats in the eligible project.
Applying the Bombay High Court’s proportionality approach under analogous Section 80-IB(10) provisions, including Kamat Constructions, Devashri Nirman and Kumar Builders Consortium, the Tribunal upheld the direction to examine registered agreements and restrict denial to the non-compliant flat. An isolated unit-level violation did not justify rejection of the entire project’s deduction. Both Revenue appeals were dismissed, with the order pronounced on 15 September 2026.
Cases Discussed
- Alubound Dacs India (P.) Ltd. Vs DCIT — [2024] 207 ITD 393; ITA No. 3663/Mum/2023, 27 May 2024 (ITAT Mumbai). Followed on the availability of Section 80G deduction for eligible CSR donations.
- Societe Generale Securities India (P.) Ltd. Vs PCIT — [2024] 204 ITD 796 (ITAT Mumbai). Relied upon for the distinction between the business expenditure restriction and Chapter VI-A deduction.
- ACIT Vs Rustomjee Realty Pvt. Ltd. — ITA No. 1585/Mum/2023, 28 November 2023 (ITAT Mumbai). Followed on deduction under Section 80G for qualifying CSR contributions.
- PCIT Vs Kumar Builders Consortium — Income Tax Appeal No. 82 of 2018, 18 July 2022 (Bombay High Court). Applied by analogy to support proportionate relief for compliant housing units.
- Kamat Constructions Pvt. Ltd. Vs ACIT — [2020] 429 ITR 609; Tax Appeal No. 47 of 2016, 1 December 2020 (Bombay High Court). Applied for restricting the effect of unit-specific violations instead of denying the entire project deduction.
- Devashri Nirman LLP Vs ACIT — [2020] 429 ITR 597 (Bombay High Court). Cited in support of proportionate housing project deduction.
- ACIT Vs Vireet Investment (P.) Ltd. — [2017] 165 ITD 27 (ITAT Delhi, Special Bench). Followed on exempt-income-yielding investments and the independent computation of MAT book profits.
- CIT Vs Bengal Finance & Investment Pvt. Ltd. — Income Tax Appeal No. 337 of 2013 (Bombay High Court). Followed against mechanically adding the Section 14A disallowance to MAT book profits.
- Raoul Thackersey Vs DCIT — 165 taxmann.com 692 (ITAT Mumbai). Cited for restricting Rule 8D computation to investments that yielded exempt income.
- Reliance Power Ltd. Vs DCIT — 159 taxmann.com 1626 (ITAT Mumbai). Cited on the investment base for Rule 8D computation.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
The above two captioned appeals preferred by the Revenue emanate from separate orders passed by the learned Commissioner of Income Tax (Appeals)- 51, Mumbai [hereinafter referred to as “CIT(A)”] under Section 250 of the Income-tax Act, 1961 [the “Act”], per taining to Assessment Years (AYs) 2019-20 and 2020- A.Ys. 2019-20 & 2020-21 M/s Sunteck Realty Limited and interconnected issues are involved, these appeals were heard together and are being disposed of by this consolidated order for the sake of brevity and convenience.
ITA No. 7882/Mum/2025 (AY 2019-20)
2. The grounds of appeal raised by the Revenue for AY 2019-20 read as follows:
1. “On the facts and circumstances of the case, the Ld. CIT(A) erred in directing the AO to recompute the addition of Rs. 6,68,75,623/- under Section 14A r.w. Rule 8D of the Income-tax Act by taking the value of only such investments that have yielded exempt income during the year and disallow the same which is in excess of the suomotu disallowance of Rs. 51,20,511/- done by the appellant in the normal income of the assessee.”
2. “On the facts and circumstances of the case, the Ld. CIT(A) erred in deleting the addition of Rs. 6,68,75,623/- under Section 14A r.w. Rule 8D of the Income-tax Act, as the adjustment made in the book profit under Section 115JB of the Income-tax Act.”
3. “On the facts and circumstances of the case, the Ld. CIT(A) erred in deleting the addition of Rs. 82,17,596/- made by the AO on account of disallowance of deduction under Section 80G claimed in respect of CSR expenditure and failed to appreciate that CSR expenditure being a statutory obligation under the Companies Act, 2013, lacks voluntariness and, therefore, cannot qualify as ‘donation’ within the meaning of Section 80G of the Income-tax Act. The Ld. CIT(A) erred in not appreciating the legislative intent as clarified in the Explanatory Memorandum to the Finance (No. 2) Act, 2014 and CBDT Circular No. 01/2015, that CSR expenditure is application of income and hence not eligible for tax benefit.”
3. Ground no.1 pertains to the disallowance u/s 14A of the Act r.w. Rule 8D.In both the assessment years under consideration, the Assessing Officer computed disallowance under section 14A read with Rule 8D by taking into account the entire investments appearing in the Balance Sheet of the assessee, rather than considering only those investments which actually yielded exempt dividend income during the respective previous years. For AY 2019-20, against the exempt dividend income of Rs. 21,20,22,218/- and suo motu disallowance of Rs. 51,20,512/-, the AO worked out the disallowance at Rs. 7,19,96,135/-, making a further addition of Rs. 6,68,75,623/-. For AY 2020-21, against exempt dividend income of Rs. 21,95,17,291/- and suo motu disallowance of Rs. 50,39,502/-, the AO computed the Rule 8D disallowance at Rs. 8,99,55,970/-, resulting in an incremental addition of Rs. 8,49,16,468/-.
4. The ld. CIT(A) directed the AO to recompute the disallowance under Rule 8D by considering only those investments that yielded exempt income during the year, following the decision of the Special Bench of this Tribunal in Asstt. CIT v. Vireet Investment (P.) Ltd. [2017] 82 165 ITD 27 (Delhi – Trib.) (SB). The Revenue is in appeal, urging that the average investments as per the accounts must be adopted without segregation.
5. We have heard both sides and perused the material on record. The issue as to whether all investments or only exempt income yielding investments are to be factored into the computation under Rule 8D is no longer res integra. The Special Bench of the Tribunal in Vireet Investments (P.) Ltd. (supra) has held that only those investments which have actually yielded exempt income during the relevant financial year should enter the computation of the average value of investments for the purpose of Rule 8D(2). This principle has been consistently followed by the Jurisdictional Coordinate Benches in Raoul Thackersey v. Dy. CIT (Mumbai – Trib.) andReliance Power Ltd. v. Dy. CIT (Mumbai – Trib.). We find no infirmity in the direction of the ld. CIT(A) directing the AO to restrict the Rule 8D computation to dividend-yielding investments. Ground No. 1 of the Revenue’s appeals for both AYs 2019-20 and 2020-21,are accordingly dismissed.
6. Ground no.2 pertains to the additions to the book profit computed under Section 115JB of the Act on account of the disallowance worked out under Section 14A read with Rule 8D. The ld. CIT(A) deleted these adjustments.
7. We find that the issue is squarely covered in favour of the assessee by the judgment of the Hon’ble Jurisdictional Bombay High Court in CIT v. Bengal Finance & Investment Pvt. Ltd. [IT Appeal No. 337 of 2013], affirming that an amount disallowed under Section 14A cannot be imported into clause (f) of Explanation 1 to Section 115JB(2). The Special Bench in Vireet Investments (P.) Ltd. (supra) has also held that the computations contemplated under Section 14A read with Rule 8D cannot be mechanically imported into the computation under Section 115JB of the Act which is an independent and self-contained code. In the absence of direct expenditure debited to the profit and loss account relatable to exempt income, artificial disallowance under Rule 8D cannot form an item of upward adjustment under Explanation 1 to Section 115JB(2). The findings of the ld. CIT(A) are in consonance with the binding jurisdictional precedents. Consequently, Ground no. 2 of the Revenue’s appeals for both years stands dismissed.
8. Ground no.3 relates to the deduction allowed by the lower authorities in respect of expenditure incurred under Corporate Social Responsibility(CSR) and claimed deductible u/s 80G of the Act as donation. In AY 2019-20, the assessee incurred total CSR expenses of Rs. 3,55,86,000/- (total donations of Rs. 3,56,46,000/-) and added back the entire amount in its computation of business income pursuant to Explanation 2 to Section 37(1) of the Act. Out of the same, donations made to eligible institutions registered under Section 80G, such as Bai Jerbai Wadia Hospital for Children and Isha Foundation, were claimed as deduction under Chapter VI-A under Section 80G, restricted to the statutory ceiling of Rs. 82,17,596/-. Similarly, in AY 2020-21, out of total CSR spending of Rs. 87,19,940/-was added back under Section 37(1), the assessee claimed deduction under Section 80G of Rs. 50,00,000/- in respect of a donation made to “Reimaging Higher Education Foundation” through proper banking channels, supported by valid 80G receipts.
9. The AO disallowed these claims on the premise that CSR expenditure is a mandatory statutory obligation under Section 135 of the Companies Act, 2013, lacking the attribute of “voluntariness”, and that allowing deduction under Section 80G would defeat the legislative intent expressed in Explanation 2 to Section 37(1). The ld. CIT(A) reversed the AO’s findings and allowed the deduction.
10. Having considered the rival submissions, we are of the considered opinion that the disallowance made by the AO cannot be sustained. While Explanation 2 to Section 37(1) creates a statutory bar against claiming CSR expenses as deductible business expenditure under the head “Profits and Gains of Business or Profession”, it does not place an embargo on claiming deduction under Chapter VI-A under Section 80G, provided the essential statutory conditions thereof are fulfilled. Section 80G comes into play only after the Gross Total Income is computed. The legislature, wherever it intended to deny Section 80G benefit to CSR donations, specifically amended Section 80G(2)(a) by inserting sub-clauses (iiihk) and (iiihl), denying deductions in respect of donations made to the Swachh Bharat Kosh and the Clean Ganga Fund. No such blanket restriction has been placed on donations to other qualifying institutions.
11. This Bench has consistently upheld this proposition in several decisions, notably Alubound Dacs India (P.) Ltd. v. Dy. CIT [2024] 163 207 ITD 393 (Mumbai – Trib.), Societe Generale Securities India (P.) Ltd. v. Pr. CIT [2024] 204 ITD 796 (Mumbai – Trib.), and ACIT v. Rustomjee Realty Pvt. Ltd. [IT Appeal No. 1585 (Mum) of 2023, dated 28-11-2023]. Denying deduction under Section 80G of the Act merely because an eligible donation was made to fulfil a statutory CSR mandate would lead to an unintended double disallowance. The genuineness of the donations and the 80G approvals of the recipient trusts have not been doubted by the Revenue. The order of the ld. CIT(A) on this issue is, therefore, upheld and ground no. 3 of the Revenue’s appeals for both AYs 2019-20 and 2020-21 stands dismissed.
12. In the result, ITA No. 7882/Mum/2025 for AY 2019-20 filed by the Revenue stands dismissed.
ITA No. 7883/Mum/2025 (AY 2020-21)
13. The grounds raised by the Revenue for AY 2020-21 are as follows:
1. Restricting disallowance under Section 14A r.w. Rule 8D to exemptincome-yielding investments
2. Deleting the addition of Section 14A disallowance to book profits under Section 115JB.
3. Deleting the addition of Rs. 50,00,000/- claimed under Section 80G out of CSR expenses.
4. “On the facts and circumstances of the case, the Ld. CIT(A) erred in deleting the addition of Rs. 11,68,66,821/- made by the AO on account of interest expenses without appreciating that the same represented a mere accounting adjustment to incurred during the relevant year. The Ld. CIT(A) also failed to appreciate that mere compliance with Ind AS does not automatically render an expense deductible under Section 37(1) of the Income-tax Act, 1961.”
5. “On the facts and circumstances of the case, the Ld. CIT(A) erred in deleting the disallowance under Section 80IBA of the Income-tax Act made by the AO of Rs. 57,83,81,990/- as the assessee company has not satisfied all the conditions to become eligible for deduction under Section 80IBA of the Act.”
14. Ground Nos. 1 to 3 have already been adjudicated while dealing with the corresponding grounds for AY 2019-20 and are dismissed for the reasons stated above.
15. Ground no.4 pertains to the deletion of Rs 11.68 cr. on account of interest expenses. During the assessment proceedings, the AO observed that the assessee had debited an amount of Rs. 11,68,66,821/-comprising of Rs. 4,68,15,953/- pertaining to AY 2018-19 and Rs. 7,00,50,867/- pertaining to AY 2019-20 as Finance costs to the Profit & Loss account. The AO disallowed the entire amount under Section 37(1) on the ground that it represented a mere accounting adjustment arising from a change in the revenue recognition method under Ind AS 115 and was not an actual expenditure incurred during the relevant year for business purposes.
16. In the subsequent appeal, the ld. CIT(A) deleted the disallowance upon observing that the expenditure was genuine project finance cost capitalised in Capital Work-in-Progress (CWIP) in preceding years and accepted in scrutiny assessments. Following the mandatory adoption of Ind AS 115 and IndAS 23, the assessee transitioned from the Percentage of Completion Method (POCM) to the Completed Contract Method for certain projects, thereby de-capitalising the finance cost from CWIP and debiting it to the Profit & Loss account. The ld.CIT(A) held that this represented a recognised timing difference, and deduction could not be denied for genuine business borrowing costs.
17. We have heard both parties and examined the audited accounts. It is undisputed that the borrowing costs were actually incurred for project development and formed part of the CWIP accepted by the Department in scrutiny assessments for AY 2018-19 and AY 201920. Under the mandatory statutory requirements of Ind AS 115 read with Ind AS 23, borrowing costs relating to post-launch activities where control had not transferred were required to be expensed in the Profit & Loss account instead of being carried forward in inventory/CWIP. The Revenue has not disputed the genuineness of the loans, the payment of interest, or the commercial nexus of the borrowings with the real estate operations of the assessee. Once an expenditure is found to have been laid out wholly and exclusively for business purposes, the change in the point of chargeability or recognition brought about by the mandatory adoption of the applicable accounting standards does not render a real expenditure fictitious. The expenditure represents a revenue deduction claimed in accordance with the applicable financial accounting standards notified by the Ministry of Corporate Affairs. We find no error in the findings of the ld CIT(A). Ground No. 4 of the Revenue is accordingly, dismissed.
18. In ground no.5, the Revenue has contested the deletion of disallowance of deduction 80IB of the Act. The assessee claimed deduction under Section 80IBA of the Act amounting to Rs. 57,83,81,990/- in respect of its affordable housing project named “Sunteck West World 1”. The AO denied the deduction in its entirety on the ground that the assessee had violated the conditions prescribed under Section 80IBA(2) by allegedly selling more than one residential unit to the same individual or family members in nine instances. The AO relied primarily on invoices raised by property brokers.
19. In the subsequent appeal before the ld.CIT(A), it was contended that the assessee established that it had claimed deduction under Section 80IBA exclusively for the project “Sunteck West World 1” and had made no claim for its other adjoining projects, viz., “West World 2” and “Maxx World”. In six out of the nine alleged instances, the flats cited by the AO pertained to non-80IBA projects, namely, “West World 2” or “Maxx World” and in two instances, namely Flat Nos. 1003/1004 and 2C-203/204, each represented a single standalone flat measuring 52.92 square metres, well within the statutory limit, and not two units. Further, in one instance, namely Flat Nos. 5B 1303 and 1304, Flat No. 1304 were sold to Ms. Minakshi Ojha, whereas Flat No. 1303 was sold to an independent third party in the subsequent financial year; and only in a single instance, namely Flat Nos. 1901 and 1902 sold to Shri Kirit Kumar and his spouse, had two flats been inadvertently allotted to members of the same family within the eligible project.
20. We find that the ld. CIT(A) held that the AO fell into error by relying on broker invoices rather than verified registered sale deeds. Applying the decisions of the Hon’ble Jurisdictional Bombay High Court in Kamat Constructions (P.) Ltd. v. Asstt. CIT [2021] 124 [2020] 429 ITR 609 (Bombay),Devashri Nirman LLP. v. Asstt. CIT [2020] 429 ITR 597 (Bombay), and CIT v. Kumar Builders Consortium [IT Appeal No. 82 of 2018, dated 18.07.2022], he held that an infringement in respect of an individual unit could not result in forfeiture of deduction for the entire affordable housing project, and directed proportionate disallowance restricted strictly to the default unit(s).
21. We have carefully considered the rival submissions and perused the statutory provisions alongside the judicial authorities on the subject. Section 80IBA of the Act was introduced to incentivise the development of affordable housing. The condition that an individual or his family members shall not be allotted more than one residential unit is unitspecific. The Hon’ble jurisdictional Bombay High Court in Kumat Builders Consortium (supra) and Kamat Construction Pvt. Ltd. (supra), while construing analogous provisions under Section 80IB(10) of the Act, has laid down the principle of proportionality. Their Lordships have held that if an isolated flat or unit infringes the prescribed conditions, the deduction cannot be denied to the entire housing project in its entirety; rather, the AO is required to work out a pro-rata deduction in respect of the compliant residential units.
22. On facts, the assessee placed registered agreements on record demonstrating that, out of 1,205 flats constructed and sold in the eligible project “Sunteck West World 1”, the allegation of allotment to family members stood restricted to one solitary instance, namely Flat Nos. 1901/1902. The ld. CIT(A) correctly directed the AO to verify the primary registered agreements and limit the proportionate denial of deduction strictly to the non-compliant flat. The approach of the first appellate authority is fully supported by the jurisprudence of the jurisdictional High Court. We find no reason to interfere with the well-reasoned directions by him Ground raised by the Revenue in this regard is accordingly, dismissed.
23. In the result, ITA No. 7883/Mum/2025 for AY 2020-21 filed by the Revenue stands dismissed.
24. To sum up, both appeals filed by the Revenue for AYs 2019-20 and 2020-21 are dismissed.
Order pronounced in the open court on 15/09/2026.
