TaxTMI 
TaxTMI 
2026 (7) TMI 1085
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....d ("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 Rs.150,13,26,289 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 wa....
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.... 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 ld. 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 Rs.404,08,90,647 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 reproduc....
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....alid 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. viii. 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'....
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....e 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....
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....ax, New Delhi [2018] 91 taxmann.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 taxmann.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. ....
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....ourable 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 Rs.4,08,90,647 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 merelyproceeded todisallow 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....
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....rofit is Rs.1,00,00,000. However, if construction costs subsequently rise and the revised estimated cost becomes Rs.6,00,00,000, the contract will result in an expected loss of Rs.1,00,00,000. 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 est....
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.... 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 Rs.119,56,53,057 was not allowed under sections 40A (13) and 36(1)(....
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....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 Q....
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....articularly 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 Rs.119,56,53,057. 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 re....
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....re submitted that, across all five projects, the assessee was required to incur further cost of Rs.248,98,49,648, 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 Rs.53,79,93,234 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 a....
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....eyance 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 ....
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....ome 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. TheFinance Act 2018 introduced section 36(1) (xviii) and section 40A (13) with retrospective effect from 1-4-2017 in terms of the above decision. 43. 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 ....
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....spective 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. 48. 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 ....
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....ponents, methodology of working and supporting evidences. 53. 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. 54. Before us, the learned authorised representative furnished a project-wise statement showingrevenue, 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 Rs.929,79,83,832 was required to be recognised, while only Rs.680,81,34,184 had been recognised in the books. The balance cost of Rs.248,98,49,648, according to the assessee, was required to be matched against revenue already recognised. Against this amount, the assessee had made a provision of only Rs.119,56,53,057, though described in the books as provision for expected loss. 55. 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 recogn....
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....and expenses respectively by reference to the stage of completion of the contract activity at the reporting date. 58. 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. 59. Thuss, 'provisions' for expenses are allowed by ICDS X and thus not hit by ICDS I off prohibition of allowability of losses. 60. 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....
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....e, 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 year-end, 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. 64. 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 on....
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....essing Officer under section 14A of the Income-tax Act, 1961, (i) upheld the disallowance of Rs.36,20,60,000 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. 71. 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 Rs.154,69,68,638. 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 ld. CIT (A) confirmed the assessment order subject to some relief. 72. 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 73. 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 ....
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....t 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 taxmann.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 demonstr....
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....pt income or that the assessee's disallowance of 5% of exempt income was inadequate. 79. 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. 80. Grounds 4 and 5 relate to the disallowance of Rs.36,20,60,000 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, th....
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....assessment year 2017-18, we allowgrounds 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? 85. Ground No. 6 relates to the addition made by the learned Assessing Officer on account of deemed dividend, amounting to Rs.337.47 crore. The facts relevant to this addition show that the assessee had borrowed Rs.249 crore from Manyata Promoters Limited, Rs.14 crore from Embassy VTV Infrastructure Management Private Limited, and Rs.74.47 crore from Embassy Services Private Limited, aggregating to Rs.337.47 crore. 86. The learned AO noted that the assessee had obtained a loan of Rs.14 crore from Embassy VTV Infrastructure Management Private Limited, the said company had reserves and surplus of Rs.61.46 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....
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....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. 91. Regarding the loan of Rs.74.47 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. 92. 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. 93. 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 advan....
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....s 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. 97. 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 (De....
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....emed 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. 101. 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. 102. The charge under section 2(22)(e) arises at t....
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....or 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 Rs.14 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 Rs.670 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 patt....