2025 (12) TMI 594 - AT - Income Tax

Search assessments under Sections 143(3)/153D: advances not taxable, interest disallowance deleted as timing difference only

ITAT Bangalore dismissed Revenue's appeals and allowed assessee's appeal. It upheld CIT(A)'s deletion of additions treating amounts received under a joint ... Addition under the head business for land development - AO held that the amounts received during the year under the joint development agreement represented business receipts liable to tax in the year of receipt - HELD THAT:- We note that the issue on hand is covered in favour of the assessee in its own case [2022 (12) TMI 347 - ITAT BANGALORE] held that should be a valid seized material found during the course of search and the sworn statement of the Directors cannot substitute this seized material found during the course of search, though sworn statement is a piece of evidence to frame the assessment but it is not conclusive evidence to frame the assessment or sustain the addition. For the assessment year 2015-16 and 2016-17, these assessments were framed u/s 143(3) r.w.s. 153D and there was no valid seized material found during the course of search to frame the assessment. AO cannot rely only on the sworn statement recorded from Shri M.R. Seetharam to frame the assessment. In our opinion, as discussed in earlier para, sworn statement is not conclusive evidence to frame the assessment or to sustain the addition. The addition shall be based on the evidence found during the course of search action or during the course of assessment. CIT(A) after verifying the detailed submissions, had allowed the appeals filed by the Respondent holding that the sale of flats (received under Development Agreement) are to be taxed in the year of execution of sale deed and not in the year of advances received. In view of this, we confirm the order of the CIT(A) in all these years in deleting the addition made by AO. Addition on account non-capitalization of interest - Where the assessee is taxed on a higher figure this year without any adjustment in future years, even though the expenditure is genuine and directly related to business. This method does not reflect the true income of the assessee. It artificially inflates taxable income in one year and does not correct it in the project completion year. We consider this to be a fundamental flaw in the assessment. Revenue has not brought on record any evidence that the interest is excessive, inflated, bogus, or diverted. No enquiries were made with the lenders. No defects were pointed out in the books. No part of the interest has been shown as relating to personal use, non-business activity, or any other unrelated purpose. When the expenditure is genuine and the borrowings are for business, disallowance merely because the AO prefers a different method of accounting is not justified. Interest is wholly for the purpose of business, its genuineness is unquestioned, and the disallowance results only in a timing distortion without any actual revenue impact. Revenue has not corrected this distortion in subsequent years by increasing WIP. Therefore, the disallowance is not sustainable. We accordingly delete the addition of ₹3.08 crores. Hence, the ground of appeal of the assessee is allowed. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether, in respect of the Joint Development Agreement, the receipts/advances arising from sale of developed flats are taxable in the relevant years as business income or capital gains, and whether the underlying land is to be treated as stock-in-trade or as a capital asset. 1.2 Whether, in the relevant assessment years, any 'transfer' within the meaning of section 2(47)(v) or 2(47)(vi) of the Act occurred so as to trigger taxability of receipts/advances arising under the Joint Development Agreement. 1.3 Whether, for the years where similar additions were made, the Revenue was justified in disturbing the findings of the first appellate authority despite an earlier binding order of the Tribunal in the assessee's own case on identical facts. 1.4 Whether interest expenditure of approximately Rs.3.10 crores, incurred on borrowed funds used for inventory and business advances in AY 2020-21, was required to be capitalised to work-in-progress and advances or allowable as a revenue deduction under section 36(1)(iii) of the Act. 1.5 Whether disallowance of such interest expenditure without corresponding capitalization or adjustment of work-in-progress in subsequent years, resulting in a timing distortion, is sustainable in law. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 & 2: Taxability and character of receipts under the Joint Development Agreement; existence of 'transfer' u/s 2(47) Interpretation and reasoning 2.1 The Tribunal noted that the Assessing Officer had treated the Joint Development Agreement as a business venture, characterising the land as stock-in-trade and taxing the receipts during the year as business income after allowing estimated project expenses. The first appellate authority, however, had found that the assessee had consistently shown the land as a fixed asset and not as stock-in-trade, and that mere execution of a Joint Development Agreement and sharing of revenue does not, by itself, convert a capital asset into stock-in-trade or make the assessee a real estate developer. 2.2 The first appellate authority had also recorded a categorical finding that the assessee's role was limited to contribution of land and that all development activities were undertaken by the developer, thus negating the conclusion that the assessee was engaged in business of property development. It further held that the receipts in the years under appeal were only advances and did not constitute income accruing or arising in those years, as no 'transfer' as contemplated in section 2(47)(v) or 2(47)(vi) had occurred in such years. 2.3 The Tribunal observed that these conclusions were fully supported by an earlier order of the Tribunal in the assessee's own case for earlier assessment years, where on identical facts it had been held that the sale of flats received under a development agreement was to be taxed in the year of execution of sale deeds and not in the year of receipt of advances, and that there was no accrual of income in the years of receipt of advances. 2.4 The Tribunal noted that the Revenue did not bring on record any new facts or distinguishing features from those earlier years, nor any material to show that the earlier order of the Tribunal had been reversed, stayed, or otherwise rendered inapplicable. In such circumstances, the Tribunal applied the principle of consistency and followed its earlier decision. Conclusions 2.5 The receipts under the Joint Development Agreement, being in the nature of advances in the relevant assessment years, were not taxable as business income or capital gains in those years. 2.6 No 'transfer' as contemplated under section 2(47)(v) or (vi) took place in the relevant assessment years so as to give rise to taxable income in those years. 2.7 The Tribunal upheld the deletion of additions made on this basis by the first appellate authority and dismissed the Revenue's appeals for all such assessment years, including those where the Assessing Officer had alternatively computed income under the head 'capital gains.' Issue 3: Binding effect and application of earlier Tribunal order in assessee's own case Interpretation and reasoning 3.1 The Tribunal noted that the first appellate authority had relied on an earlier order of the Tribunal in the assessee's own case for preceding years, involving the same Joint Development Agreement and materially identical facts. 3.2 The Tribunal reproduced and relied upon the detailed reasoning adopted in the earlier order, including the findings that mere admission or statements by the assessee cannot override statutory provisions; that there is no estoppel against the statute; and that income not chargeable under the Act cannot be made taxable on the basis of admissions, doctrines of estoppel, or equitable considerations. 3.3 The Tribunal emphasised that the Revenue failed to show any contrary judicial precedent, any factual dissimilarities, or any modification of the earlier decision by a higher forum. Consequently, the earlier order remained binding and directly applicable. Conclusions 3.4 The Tribunal affirmed that, on principles of consistency and judicial discipline, the earlier decision in the assessee's own case governed the present years, warranting deletion of the additions. 3.5 The Revenue's grounds challenging the relief granted by the first appellate authority on this issue were rejected for all years under appeal. Issue 4 & 5: Capitalisation vs revenue deduction of interest expenditure; sustainability of disallowance causing timing distortion (AY 2020-21) Legal framework (as discussed) 4.1 The Tribunal considered the allowability of interest expenditure under section 36(1)(iii) where borrowed funds are used for business purposes, and examined the treatment of such interest as either a revenue charge or an element of project cost/work-in-progress, with reference to accepted accounting practices. Interpretation and reasoning 4.2 The Assessing Officer had disallowed interest of about Rs.3.10 crores claimed as revenue expenditure, holding that the funds were used for increasing inventory and for advances towards land acquisition and ongoing projects which were not completed; therefore, the interest should have been capitalised to work-in-progress and advances, instead of being charged to the Profit & Loss Account. 4.3 The first appellate authority upheld the disallowance, primarily on the basis of perceived contradictions in the assessee's submissions regarding the stage of completion of projects and lack of substantiation for the claimed loss on sale of sites. 4.4 Before the Tribunal, the assessee furnished a detailed break-up of interest, showing that out of total interest incurred, a substantial portion had already been capitalised to work-in-progress and another portion debited to the proprietor's capital account, leaving only Rs.3.10 crores claimed as revenue expenditure. It was explained that this remaining interest related solely to inventory and business advances forming part of the normal operating cycle, and that the genuineness of borrowings and of the interest had not been questioned at any stage. 4.5 The Tribunal recorded that the Assessing Officer had accepted: (i) that the borrowings were genuine, (ii) that the funds were used for business, and (iii) the interest rate, lenders, payments and accounting entries. The only dispute was the mode and timing of recognition-capitalisation versus revenue charge. 4.6 The Tribunal observed that the dispute was tax-neutral. If the interest were capitalised, work-in-progress would increase and taxable profit would correspondingly reduce in the year of sale; if treated as revenue expenditure, current year profit would be reduced. Over the life of the project, there would be no change in the total tax base. 4.7 The Tribunal found a fundamental defect in the Revenue's approach: while disallowing the interest as a revenue expense, the Revenue had not correspondingly increased work-in-progress in the current or subsequent years, nor adjusted closing stock or project cost, thereby artificially inflating taxable income in the disallowance year without rectification in later years. This created a distorted picture of the assessee's real income, contrary to the true income principle. 4.8 The Tribunal further noted that the Revenue had not produced any evidence to show that the interest was excessive, bogus, diverted, or related to non-business purposes; nor had any defects in the books been pointed out. The disallowance was found to be solely a consequence of the Assessing Officer's preference for a different method of accounting, without statutory or factual support. Conclusions 4.9 The interest expenditure of Rs.3.10 crores, having been incurred wholly for business purposes and being genuine and undisputed, was held to be allowable as a revenue deduction, and its disallowance on the ground of non-capitalisation was found unsustainable. 4.10 The Tribunal held that the disallowance, in the absence of corresponding adjustment to work-in-progress or project cost in subsequent years, resulted in an impermissible timing distortion and did not represent the true income of the assessee. 4.11 The addition of Rs.3.08 crores (on account of the disallowed interest) was deleted and the assessee's appeal for AY 2020-21 was allowed. 4.12 Consequently, for all years under appeal, the Tribunal dismissed the Revenue's appeals and allowed the assessee's appeal, thereby affirming the first appellate authority's relief on JDA-related issues and granting relief on the interest capitalisation dispute.