Section 40(a)(ia) Disallowance Cannot Apply to Expenditure Capitalised as Work-in-Progress — ITAT Mumbai

Overview of the Dispute

The Mumbai Bench of the Income Tax Appellate Tribunal recently delivered a significant ruling in the case of ACIT Vs Orbit Ventures Developers, addressing a critical question that frequently arises in real estate taxation — whether Section 40(a)(ia) of the Income Tax Act, 1961 can be invoked to disallow expenditure that has been capitalised as work-in-progress (WIP) rather than debited to the profit and loss account.

The Revenue challenged the order passed by the Commissioner of Income Tax (Appeals) [CIT(A)] operating under the National Faceless Appeal Centre, Delhi, which had partially set aside the disallowances made by the Assessing Officer under Section 40(a)(ia) concerning TDS default. The original assessment was framed under Section 143(3) read with Section 144B for Assessment Year 2018–19, and the CIT(A)'s order dated 06.11.2025 was the subject of this appeal.

Background and Assessment Proceedings

The assessee, a partnership firm engaged in real estate redevelopment activities, filed its return of income on 31.10.2018 declaring a total loss of Rs. 19,13,36,376/-. The case was selected for complete scrutiny under the E-Assessment Scheme, 2019, covering issues such as income from real estate business, TDS defaults, and loans and advances.

Notices under Section 143(2) dated 23.09.2019 and under Section 142(1) dated 16.12.2020, 03.01.2021, and 31.03.2021 were duly issued and served upon the assessee.

Key Observations by the Assessing Officer

During assessment proceedings, the Assessing Officer identified several irregularities:

  • The assessee's balance sheet disclosed TDS payable of Rs. 6,08,51,784/-, but challans evidencing timely deposit were not furnished.
  • The tax audit report reflected non-deduction of TDS on certain expenditures amounting to Rs. 47,72,650/-, whereas the assessee had voluntarily disallowed only Rs. 34,80,352/- under Section 40(a)(ia), resulting in a discrepancy.
  • Sale deed copies in respect of properties sold during the year were sought but not provided.

The Assessing Officer recorded non-cooperation by the assessee and issued a show cause notice along with a draft assessment order dated 08.04.2021 proposing disallowances under Section 43B and Section 40(a)(ia).

Assessee's Response and Final Assessment

The assessee contended that Section 43B has no application to non-payment of TDS liability, and that such defaults are governed exclusively by Section 40(a)(ia). It further submitted that having already disallowed Rs. 10,44,106/- under Section 40(a)(ia) in the return itself, any further disallowance would amount to double disallowance.

The Assessing Officer rejected these submissions. Holding that the assessee had deducted but not deposited TDS of Rs. 6,08,51,784/- before the due date for filing the return under Section 139(1), the Assessing Officer computed a disallowance of Rs. 1,82,85,535/- representing 30% of the unpaid TDS liability. An additional disallowance of Rs. 3,52,949/- was also made on account of non-deduction of TDS on payments aggregating Rs. 46,56,850/-. The total assessed income was thus revised to a loss of Rs. 17,26,97,892/- as against the returned loss of Rs. 19,13,36,376/-. Penalty proceedings under Section 270A were also initiated.

Proceedings Before the CIT(A)

The assessee preferred an appeal before the CIT(A), advancing two principal contentions: