Weighted average sale rates, proportionate interest disallowance, and prospective application of section 40(a)(ia) relief

Comparable flat-sale rates must reflect unit-specific differences in area, location and accessibility, so the highest rate cannot be mechanically applied without corroborative material; the weighted average rate, with exclusion of a non-comparable shop-cum-garage unit, was the proper basis. Expenditure incurred after the occupation certificate on maintenance, defect-liability, housekeeping and allied works was not disallowable where its genuineness was not doubted and no material showed it was fictitious or prohibited. Interest disallowance for advances to a sister concern must be confined proportionately to the actual diversion of borrowed funds. The proviso reducing disallowance under section 40(a)(ia) to 30% was held to operate prospectively and not for the year in question.

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Issues: (i) Whether the addition for alleged suppressed sales of flats could be sustained by adopting the highest sale rate, or whether the weighted average sale rate was the proper basis; (ii) Whether expenditure incurred after the occupation certificate on construction, maintenance, and allied works was disallowable; (iii) Whether interest disallowance for advances to a sister concern had to be restricted to the amount of the actual diversion of borrowed funds; (iv) Whether the proviso restricting disallowance under section 40(a)(ia) could be applied retrospectively.

Issue (i): Whether the addition for alleged suppressed sales of flats could be sustained by adopting the highest sale rate, or whether the weighted average sale rate was the proper basis.

Analysis: The rate of sale varied across units in the same project, but the variation could not be resolved by mechanically applying the highest rate to all sales. The Court noted that unit-wise differences in area, location, accessibility, and other features affected pricing, yet the Assessing Officer's approach of taking the maximum rate was also not justified. On the material produced, the weighted average rate reflected the actual sale pattern more reliably, subject to exclusion of a distinct shop-cum-garage unit that could not be compared with ordinary residential units.

Conclusion: The addition was not sustained on the basis adopted by the Assessing Officer, and the weighted average rate was directed to be applied. The issue was decided in favour of the assessee to that extent.

Issue (ii): Whether expenditure incurred after the occupation certificate on construction, maintenance, and allied works was disallowable.

Analysis: The occupation certificate did not mean that no work could remain pending or that all later expenditure was inherently non-deductible. The expenses were found to be connected with maintenance, defect-liability obligations, housekeeping, cleaning, and related works, and the genuineness of the expenditure was not doubted. The objections based on the occupation certificate and the general allegation of excessive cost were not supported by material showing that the expenditure was prohibited or fictitious.

Conclusion: The disallowance was not justified and the deletion was upheld. The issue was decided in favour of the assessee.

Issue (iii): Whether interest disallowance for advances to a sister concern had to be restricted to the amount of the actual diversion of borrowed funds.

Analysis: The advances to the sister concern were much smaller than the aggregate borrowings on which interest had been paid. The disallowance could not extend to the entire borrowing cost merely because a smaller amount had been advanced at a lower rate. The proper course was to confine the disallowance, if any, to the amount relatable to the actual advance, applying a proportionate approach rather than a blanket disallowance.

Conclusion: The restriction of disallowance to the amount of the actual advance was upheld. The issue was decided in favour of the assessee.

Issue (iv): Whether the proviso restricting disallowance under section 40(a)(ia) could be applied retrospectively.

Analysis: The amendment reducing the disallowance to 30% was held to operate prospectively. Since the relevant amendment came into force later, it could not be applied to the year under consideration.

Conclusion: The restriction to 30% was unsustainable and the Revenue succeeded on this issue.

Final Conclusion: The appeals were disposed of by granting relief on the sale-rate, construction-expense, and interest-disallowance issues, while allowing the Revenue's challenge on the section 40(a)(ia) issue.

Ratio Decidendi: Where sale-price variation in comparable units is explained by unit-specific factors, the revenue authorities cannot substitute the highest rate for all sales without corroborative material; proportionate disallowance is the proper approach for interest diversion to a sister concern; and a later beneficial amendment reducing disallowance under section 40(a)(ia) applies prospectively unless the statute provides otherwise.

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