ACIT Vs Giraffe Developers Pvt Ltd (ITAT Mumbai)
Summary: The Revenue challenged the order dated 15/12/2025 passed by the Commissioner of Income-tax (Appeals)-49, Mumbai for Assessment Year 2014-15, which deleted an addition of ₹13.88 crore relating to interest expenditure attributable to unsold real estate units. The assessee was engaged in real estate construction and development. The project had been completed during Financial Year 2010-11 and the Occupation Certificate (OC) was obtained on 23.12.2010. During the relevant period, the assessee claimed interest expenditure on borrowed funds used in its real estate project. Certain interest expenditure had earlier been disallowed under Section 40(a)(ia) of the Income-tax Act, 1961 due to non-compliance with TDS requirements. After the prescribed TDS conditions were subsequently fulfilled, the assessee claimed deduction of ₹13.88 crore in the year under consideration.
The Assessing Officer accepted that the statutory requirement regarding deduction and payment of TDS had been fulfilled but held that the interest attributable to unsold flats constituted part of the cost of inventory and could be allowed only when the respective flats were sold. The CIT(A), however, deleted the addition. It held that the project had already been completed and the unsold units constituted finished goods or stock-in-trade. Consequently, borrowing costs incurred after completion were to be charged to the Profit & Loss account as revenue expenditure. The CIT(A) further noted that the interest expenditure pertained to FY 2012-13, substantially after completion of the project, and that the assessee had fulfilled the statutory TDS requirement for claiming deduction under the proviso to Section 40(a)(ia).
Before the Tribunal, the Revenue contended that interest relatable to unsold units formed part of inventory cost and was allowable only upon sale of those units. The Tribunal identified the short question as whether interest incurred after completion of the real estate project, in respect of borrowed capital relatable to unsold flats held as stock-in-trade, was required to be capitalised and deferred until sale, or constituted allowable business expenditure in the year in which the conditions under Section 40(a)(ia) were fulfilled.
The Tribunal noted that there was no dispute that the project had been completed in FY 2010-11 and that the OC had been obtained on 23.12.2010. It held that the Assessing Officer’s approach proceeded on the erroneous assumption that borrowing costs continued to be capitalisable after completion of the project. According to the Tribunal, borrowing costs incurred during the construction phase are liable to be capitalised, but once the project is completed and the units are ready for sale, unsold units cease to be work-in-progress and assume the character of finished stock-in-trade. At that stage, capitalisation of borrowing costs comes to an end.
The Tribunal further held that interest incurred thereafter represented the cost of financing the business and constituted recurring revenue expenditure incurred wholly and exclusively for carrying on the business. The fact that certain flats remained unsold for commercial reasons did not convert the continuing interest liability into part of their acquisition or construction cost. The Tribunal also observed that postponing the deduction until the eventual sale of the flats had no support in Section 36(1)(iii) or Section 40(a)(ia). Once the statutory embargo under Section 40(a)(ia) was removed through subsequent deduction and payment of TDS, no independent legal basis remained for deferring the deduction merely because some finished inventory remained unsold.
In considering the assessee’s reliance on Taparia Tools Ltd. v. Joint Commissioner of Income Tax, Nasik, reported in [2015] 55 taxmann.com 361 (SC), the Tribunal noted the principle that revenue expenditure incurred in a particular year is to be allowed in that year, subject to the circumstances concerning spreading of expenditure where the assessee itself seeks such treatment.
The Tribunal distinguished the Revenue’s reliance on Wall Street Construction Ltd. v. Joint Commissioner of Income Tax, Mumbai, 101 ITD 156 (Mum)(SB), observing that the Special Bench decision concerned borrowing costs incurred during execution of a project where the assessee followed the project completion method. The present case, according to the Tribunal, concerned borrowing costs admittedly incurred after completion of the project, when the units had become finished stock-in-trade, and therefore the ratio of that decision did not apply.
The Tribunal agreed with the CIT(A) that once the project was completed and the OC obtained, capitalisation of borrowing costs necessarily came to an end. The interest expenditure incurred thereafter constituted revenue expenditure allowable in accordance with law. Since the assessee had complied with the conditions prescribed under the proviso to Section 40(a)(ia), the deduction became admissible during the year under consideration. Finding no factual or legal infirmity in the CIT(A)’s order, the Tribunal affirmed it and dismissed the Revenue’s appeal. The order was pronounced in the open Court on 20/07/2026.
Cases Discussed
- Taparia Tools Ltd. v. Joint Commissioner of Income Tax, Nasik, [2015] 55 taxmann.com 361 (SC) — relied upon by the assessee and considered by the Tribunal in relation to allowability of revenue expenditure in the year in which it is incurred.
- Wall Street Construction Ltd. v. Joint Commissioner of Income Tax, Mumbai, 101 ITD 156 (Mum)(SB) — relied upon by the Revenue but distinguished by the Tribunal as relating to borrowing costs incurred during project execution before completion.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
This appeal by the Revenue is directed against order dated 15/12/2025 passed by the Ld. Commissioner of Income-tax (Appeals)- 49 Mumbai [in short the Ld. CIT(A)] for Assessment Year 2014-15 raising following grounds:
i. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of ₹ 13.80 crores on account of interest expenditure pertaining to unsold units, ignoring the fact that such interest forms part of the cost of inventory and is allowable only at the time of sale of the respective units?”
ii. The appellant craves leave to add, delete, alter, modify, rectify, substitute or otherwise any or all of the grounds of appeal at or before the time of hearing of the appeal.
iii. The appellant, therefore, prays that on the ground(s) stated above, the order of the Ld. CIT (A), Mumbai, may be set aside and that of the Assessing Officer to be restored.
iv. The order of the Ld. CIT (A) was received by the Pr. CIT, Central-1, Mumbai, having jurisdiction over the case on 07.01.2026. However, the CIT(A)’s order is dated 15.12.2025 and the limitation for filing appeal starts from 01.01.2026 and last date for filing appeal is 28.02.2026.
2. During the year under consideration, t he assessee was engaged in the business of real estate construction and development. The assessee filed its original return of income on 30th November, 2014 declaring total income at Rs. 67,044/-, which was subsequently revised on 31st March, 2016 retaining the same total income. The return filed by the assessee was selected for scrutiny assessment and statutory notices under the Income-Tax Act, 1961 (in short ‘the Act’) were issued and complied with.
2.1 During the assessment proceedings, the Assessing Officer observed substantial interest expenditure disallowed by the assessee claimed interest expenses of Rs. 19.41 Crores incurred on borrowed funds deployed for its real estate project. Out of the said amount, the assessee had voluntarily disallowed Rs. 18.54 Crores under Section 40(a)(ia) in the computation of the income on account of TDS non- compliance. The AO, however, was of the view that the said interest amounting to Rs. 19.41 Crores was related to the stock of finished flats and, therefore, same was only allowed to be directed against cost of those flats at the time of the sale of those flats and not to be allowed to the assessee as a revenue expenditure in the year under consideration. The Ld. AO computed the proportionate interest out of Rs. 19.41 Crores to the unsold inventory of the flats and, accordingly, computed amounting to Rs. 15.96 crore and held the same as not allowable being pertaining to the unsold units and could only be claimed at the time of their sale. But since the assessee has already made suo-motu disallowance in the computation of the income, so no further separate addition was made by the Assessing Officer.
2.2 The AO further observed that during the relevant previous year, it claimed deduction of interest expenditure amounting to ₹ 13.88 crores, being interest which had been disallowed in the immediately preceding assessment year under section 40(a)(ia) of the Income-tax Act, 1961 (“the Act”) owing to non- deduction of tax at source. Since the tax was deducted and deposited during the terms of the proviso to section 40(a)(ia). The Assessing Officer, however, declined the claim. According to him, the borrowed funds related to the real estate project and the corresponding interest attributable to the unsold flats constituted part of the cost of such inventory. Consequently, the deduction, in his view, could be allowed only in the year in which the respective flats were sold and not in the year in which the conditions prescribed under section 40(a)(ia) stood satisfied. Although the Assessing Officer accepted that the statutory requirement regarding deduction and payment of tax at source had been fulfilled, he nevertheless held that the deduction remained deferred until the sale of the unsold units.
3. On further appeal before the Ld. CIT(A), the assessee submitted that the real estate projects had been completed and the occupation certificate (OC) was received on 23rd December, 2010, evidencing that construction was fully concluded and the project was ready for its intended use. Upon issuance of the OC, all unsold units stand classified as finished goods inventory rather than work in progress or qualifying assets within the meaning of ICDS IX (Borrowing Costs), in terms of ICDX IX capitalization of borrowing cost must discontinue once the asset is ready for use or sale. It was submitted that accordingly any interest incurred subsequent to the OC date constituted ‘period interest’ chargeable to the profit and loss account and cannot lawfully be capitalized project cost. After considering the sub mission of the assessee, the Ld. CIT(A) deleted the additions in dispute, observing as under;-
“I have considered the facts of the case, discussion in the assessment order and submission of the appellant. Sole issue in appeal is disallowance of Rs 13,88,00,000/- made on account of interest payment. As discussed in the assessment order, the appellant had shown interest payment of Rs 19.41 Crores in the profit and loss account. In the computation of income, it has disallowed the amount of Rs 20.40 Cr u/s 40( a)(ia), as TDS was not deducted on the said amount. The amount of Rs 20.40 Crores included the interest expenses of Rs 19.1 Cr pertaining to current year. During the year under consideration, appellant had sold 9 units, whose total cost was Rs 38.89 Crores. To arrive at the exact profits on the sale of 9 units, the AO has calculated the proportionate interest on the 9 units, which comes to Rs 3.45 Crores. The balance amount of Rs 15.96 Crores was treated as not allowable, as it was incurred as a cost of uns old units and can be claimed only on the sale of the unsold units. Since, the appellant had already disallowed the interest expenses u/s 40(a)(ia), no addition was made to the income of the year. However, the AO has referred to the claim of the interest de duction of Rs 13.88 crores which was disallowed by the appellant in the earlier years u/s 40(a)(ia), but claimed in the present year on payment of TDS. The said claim has not been allowed on the ground that payment was related to the part of commercial Project which was unsold during that year. Accordingly, the amount of Rs 13.88 Cr was added to the income of the current year.
7.1. In the present proceedings, the addition is contested primarily on the ground that
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- The interest payment of Rs 13.88 Crores was disallowed claimed in this year, on actual payment of the TDS amount.
- Hon’ble Income Tax Appellate Tribunal, Mumbai, in the Appellant’s own case for this very assessment year (ITA No. 2663/Mum/2019, order dated 25.07.2022) has conclusively established the Appellant’s interest expenses are directly connected with its business activities and that the funds were utilized wholly and exclusively for business purposes
- the project was completed and the Occupation Certificate (OC) was received on 23-12- 2010, evidencing that construction is fully concluded and the project is ready for its intended use.
- Upon issuance of the OC, all unsold units stand classified as finished goods inventory rather than work -in- progress or qualifying assets within the meaning of ICDS IX (Borrowing Costs), in terms of ICDS IX, capitalization of borrowing costs must discontinue once the asset is ready for use or sale.
- Appellant has relied upon the case laws in its support.
7.2. The submission of the appellant and the case laws relied upon are considered.
There is no dispute regarding the actual payment of TDS amount on the interest payment of Rs 13.88 Crores. The sole ground for disallowance of interest payment of Rs 13.8 8 Crores is that the interest payment pertains to unsold units. As is seen from the facts on record, the said project was completed in the FY 2010- 11 and therefore any expenditure including the interest expenditure incurred for the period till FY 2010-11 would have been capitalized. However, once the project is completed, the unsold units would constitute the finished goods or stock in trade and borrowing costs incurred after the asset is read y for its intended use are to be charged to the Profit & Loss account as revenue expenditure. In the present case, the interest expenditure pertains to FY 2012-13 (AY 2013- 14), which is significantly after the project’s completion. Having fulfilled the statutory requirement of TDS payment, the Appellant is entitled to the deduction under the proviso to Section 40(a)(ia). Considering the overall facts of the case the addition of Rs 13.88 Crores cannot be upheld. AO is directed to delete the same.”
4. Aggrieved, the Revenue is in appeal by way of grounds reproduced as above.
5. We have heard the rival submission of the parties and perused the material on record. The short question requiring adjudication is whether the interest expenditure incurred after completion of the real estate project, in respect of borrowed capital relatable to unsold flats held as stock-in- trade, is liable to be capitalised and allowed only upon sale of such flats, or whether it constitutes allowable business expenditure in the year in which the statutory conditions under section 40(a)(ia) stand fulfilled.
5.1 At the outset, it is necessary to notice that there is no dispute on the foundational facts. The project had already been completed during Financial Year 2010-11 and the Occupation Certificate had been obtained on 23.12.2010. There is equally no dispute that the flats remaining unsold thereafter formed part of the assessee’s assessee satisfied the conditions prescribed under the proviso to section 40(a)(ia) by deducting and depositing the tax during the year under consideration. The controversy, therefore, is confined solely to the year in which such expenditure becomes allowable.
5.2 The assessee debited the interest cost incurred on the borrowed funds to the profit and loss account, but on account of non-compliance of the TDS provisions, the assessee disallowed suo -motu and added to the computation of the income in AY 2013-14. Similar treatment was given to the interest expenditure incurred during the year under consideration. The assessee claimed deduction under the year under consideration on the basis of the payment of the said interest under Section 40(a)(ia) of the Act. The AO, however, is of t he view that such interest should be deducted only against the cost of the unsold flats at the time of their sale.
5.3 In our considered opinion, the approach adopted by the Assessing Officer proceeds on an erroneous assumption that borrowing costs continue to be capitalisable even after the project has reached completion. Such an assumption overlooks the settled distinction between borrowing costs incurred during the construction phase and interest incurred after the asset has become commercially complete. Borrowing costs incurred till completion of a real estate project are undoubtedly liable to be once the project is completed and the units are ready for sale, the unsold units cease to be work-in- progress and assume the character of finished stock-in- trade. At that stage, capitalization of borrowing cost comes to an end. Interest thereafter is no longer incurred for bringing the inventory into existence or for making it saleable. It represents the cost of financing the business and assumes the character of a recurring revenue expenditure incurred wholly and exclusively for the purposes of carrying on the business. Merely because certain flats remain unsold for commercial reasons does not con vert the continuing interest liability into part of their acquisition or construction cost. The borrowing continues to finance the business as a whole, and not any specific asset under construction. The commercial identity of the loan remains unchanged merely because the project has been completed. As long as the borrowed capital continues to remain deployed in the business, the interest thereon retains its character as business expenditure allowable under the Act.
5.4 The Assessing Officer’s reasoning that such expenditure should await the eventual sale of the flats effectively seeks to postpone a deduction which has otherwise accrued under the statute. Such deferment finds no support either in section 36(1)(iii) or in section 40(a)(ia). The proviso to section 40(a)(ia) itself contemplates that where tax has subsequently been deducted and year. Once the statutory embargo created by section 40(a)(ia) stands removed, no independent legal basis survives for postponing the deduction merely because some portion of the finished inventory remains unsold.
5.5 Before us, Ld. Counsel for the assessee relied upon the decision of the Hon’ble Supreme Court in the case of Taparia Tools Ltd. v. Joint Commissioner of Income Tax, Nasik reported in [2015] 55 taxmann. Com 361 (SC), wherein it is held that revenue expenditure incurred in a particular year is to be allowed in that year, but in cases where the assessee himself wants the separate expenditure over the period of ensuing years, it can be allowed only if the principle on matching concept is satisfied.
5.6 The reliance placed by the Revenue upon the decision of the Special Bench of the Tribunal in Wall Street Construction Ltd. (101 ITD 156) is equally misplaced. In that case, the controversy related to the treatment of borrowing costs incurred during the execution of the project where the assessee followed the project completion met hod. The issue before the Special Bench concerned the allowability of interest prior to completion of the project. The present case stands on an entirely different footing since the borrowing costs in question have admittedly been incurred after completion finished stock-in- trade. The ratio of the said decision, therefore, has no application to the facts before us.
5.7 We are, therefore, in complete agreement with the conclusion reached by the Ld. CIT(A) th at once the project stood completed and the Occupation Certificate had been obtained, capitalization of borrowing costs necessarily came to an end. The interest expenditure incurred thereafter constituted revenue expenditure allowable in accordance with la w. Since the assessee had complied with the conditions prescribed under the proviso to section 40(a)(ia), the deduction became admissible during the year under consideration itself.
5.8 We, accordingly, find no infirmity, either factual or legal, in the well- reasoned order of the Ld. CIT(A) warranting interference. The same is, therefore, affirmed and the grounds raised by the Revenue stand dismissed.
6. In the result, the appeal of the Revenue is dismissed.
Order pronounced in the open Court on 20/07/2026.
