Tax Treatment of Borrowing Costs on Unsold Real Estate Inventory Post-Completion: An Analysis of ITAT Mumbai Ruling
The intersection of real estate accounting and income tax provisions frequently generates complex litigation, particularly concerning the treatment of borrowing costs. A central point of contention is whether interest expenses incurred on borrowed capital should be capitalized as part of the inventory cost or claimed as a deductible revenue expenditure, especially after a project has been completed but units remain unsold.
The Income Tax Appellate Tribunal (ITAT), Mumbai Bench, recently provided significant clarity on this issue in the case of ACIT Vs Giraffe Developers Pvt Ltd. (ITA No. 1842/MUM/2026). In its order dated 20/07/2026, the Tribunal adjudicated on the deductibility of interest expenditure amounting to ₹13.88 crore for Assessment Year 2014-15. The ruling firmly establishes that once a real estate project is completed and the Occupation Certificate (OC) is received, the capitalization of borrowing costs ceases, and subsequent interest expenses must be treated as allowable revenue expenditure.
Factual Matrix of the Dispute
The assessee in this matter is a corporate entity engaged in the business of real estate development and construction. The dispute traces back to the financial dynamics of a real estate project that was successfully completed in FY 2010-11, with the official Occupation Certificate (OC) being issued on 23.12.2010.
For the Assessment Year 2014-15, the assessee filed its original return of income on 30th November 2014, declaring a total income of Rs. 67,044/-. This return was later revised on 31st March 2016, though the total income figure remained unchanged. The case was subsequently selected for scrutiny assessment.
The Assessing Officer's Observations and Calculations
During the scrutiny proceedings, the Assessing Officer (AO) scrutinized the assessee's profit and loss account, noting a total interest payment of Rs. 19.41 Crores. In its tax computation, the assessee had voluntarily disallowed a sum of Rs. 20.40 Crores under Section 40(a)(ia) of the Income-tax Act, 1961 due to non-deduction of Tax Deducted at Source (TDS). This disallowed amount included current-year interest expenses of Rs. 19.1 Crores.
The AO observed that during the year under consideration, the assessee had successfully sold 9 units, the total cost of which was Rs 38.89 Crores. To determine the precise profit derived from these specific sales, the AO calculated the proportionate interest attributable to these 9 units, arriving at a figure of Rs 3.45 Crores. Consequently, the AO determined that the remaining balance of Rs. 15.96 crore pertained to the unsold units. The AO took the stance that this Rs. 15.96 crore could not be allowed as a current-year expense; rather, it had to be treated as a cost of the unsold inventory, claimable only in the future when those specific units were sold. Because the assessee had already made a suo-motu disallowance under Section 40(a)(ia), the AO did not make a separate addition for this specific amount in the current year's computation.