ITAT rules Section 43CA cannot apply to property deals initiated before April 2014.

May 13, 2026 : The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has ruled in favour of Lodha Developers Limited in a major dispute involving the applicability of Section 43CA of the Income Tax Act and the treatment of interest expenditure and foreign exchange losses in real estate projects. The tribunal held that Section 43CA could not be retrospectively applied to property transactions initiated before the provision came into force, while also reaffirming important principles governing deduction of business interest and treatment of forex losses in the real estate sector.

The dispute arose from Assessment Year 2014-15, where the tax department had challenged multiple claims made by the real estate developer, formerly known as Shreeniwas Cotton Mills Limited. The tribunal heard cross appeals filed both by the assessee and the Revenue against the order of the Commissioner of Income Tax (Appeals).

One of the central issues before the tribunal concerned the addition of Rs. 2.05 crore under Section 43CA of the Income Tax Act. The provision empowers tax authorities to substitute the stamp duty valuation of an immovable property as the sale consideration if the declared sale value is lower than the stamp valuation. The Assessing Officer had alleged that two flats in the “World View” project at Lower Parel, Mumbai, were sold at undervalued prices and that the difference between the agreement value and the stamp duty value should be taxed.

According to the Revenue, the flats were registered during the assessment year in question and therefore Section 43CA, which became effective from April 1, 2014, would apply. However, Lodha Developers argued that the booking transactions had actually taken place in financial year 2011-12, well before the provision was introduced into the statute book. The company produced allotment letters, booking documents, cheques, and bank statements showing that booking amounts had been received from purchasers on August 24, 2011.

Accepting the company’s argument, the tribunal observed that the flats had already been allotted and agreements executed prior to the introduction of Section 43CA. Relying on earlier decisions including M/s Zain Construction v. ITO and Spenta Enterprises v. ACIT, the bench held that the provision could not be applied retrospectively merely because the formal registration took place later. The tribunal stated that “the flats were allotted and the agreements were duly executed during A.Y. 2012-13 itself” and therefore “the rigours of section 43CA of the Act would not be applicable to the impugned transactions.”

The ruling is likely to provide significant relief to real estate developers and property sellers facing tax disputes involving delayed registration of property agreements. The judgment clarifies that the substance and timing of the original transaction, including allotment and receipt of booking amounts, are critical in determining tax liability under Section 43CA.

The tribunal also dealt extensively with the issue of interest expenditure amounting to Rs. 35.07 crore claimed by the company under Section 36(1)(iii) of the Income Tax Act. The tax department had argued that the interest cost relating to ongoing construction projects should have been capitalized into work-in-progress (WIP) and allowed only when corresponding revenue from the projects was recognized. The Revenue relied on accounting standards, matching principles, and earlier tribunal rulings to support its stand.

Lodha Developers, on the other hand, contended that the borrowed funds were used entirely for business purposes and that the interest constituted a “period cost” allowable in the year of incurrence. The company relied heavily on the Bombay High Court ruling in CIT v. Lokhandwala Construction Industries Ltd., where interest on borrowed capital used for stock-in-trade was held deductible under Section 36(1)(iii).

The tribunal agreed substantially with the assessee and reiterated that interest expenditure incurred for business purposes is allowable as a deduction even in real estate projects. It observed that coordinate benches had consistently followed the Bombay High Court’s decision in Lokhandwala Construction Industries Ltd. in similar cases involving the Lodha group. The bench clarified that “the assessee had borrowed funds for the purposes of its business and the interest expenditure was incurred wholly and exclusively for business purposes.”

However, while granting relief, the tribunal sent the matter back to the Assessing Officer for a limited verification to ensure that the company had not claimed a “double benefit” by simultaneously treating the same amount as part of work-in-progress. As a result, the Revenue’s appeal on this issue was treated as partly allowed for statistical purposes.

Another important issue related to foreign exchange loss of Rs. 1.17 crore arising from consultancy charges payable to foreign entities connected with the construction business. The tax department had argued that since the consultancy expenditure related to project development, the exchange fluctuation loss should also be capitalized into the project cost.

The tribunal rejected the Revenue’s contention and upheld the appellate authority’s finding that the forex loss was revenue expenditure allowable in the year of occurrence. Referring to Accounting Standard-11 and the Supreme Court judgment in Woodward Governor India Pvt. Ltd., the bench held that exchange fluctuation losses on monetary items are allowable business expenditures. The tribunal further noted that similar claims had already been accepted in cases involving Lodha group companies.

The order reinforces the principle that foreign exchange fluctuations connected with operational liabilities and consultancy expenses cannot automatically be treated as capital expenditure merely because the business relates to real estate development. The ruling may influence ongoing tax litigation involving developers, infrastructure companies, and entities following project completion or percentage completion accounting methods.

Ultimately, the tribunal allowed Lodha Developers’ appeal challenging the Section 43CA addition and partly allowed the Revenue’s appeal only for verification purposes relating to interest deduction. The foreign exchange loss disallowance was fully deleted in favour of the company. The order was pronounced on May 13, 2026, by Judicial Member Anikesh Banerjee and Accountant Member Om Prakash Kant.

Case Reference : Lodha Developers Limited v. Deputy Commissioner of Income Tax, Case No. 7695/Mum/2025 and ITA No. 7875/Mum/2025, decided on May 13, 2026, by the Mumbai Bench “A” of the Income Tax Appellate Tribunal.