CHANCHAL BUILDCON,AHMEDABAD vs. ITO.WD-6(1)(1), AHMEDABAD, AHMEDABAD

ITA 1038/AHD/2026Status: DisposedITAT Chandigarh24 September 2026AY 2018-198 pages
AI SummaryPartly Allowed

What did the Tribunal hold?

The Tribunal held that the assessee had member collections of Rs. 38.10 crores, which were business receipts. The assessee had no surplus funds of its own to cover partner withdrawals. The borrowed funds were used for land purchase, and there was no nexus between borrowed funds and partner withdrawals. This was a diversion of business collections for partner capital without interest. The assessee failed to establish any genuine business purpose or commercial expediency for advancing business funds to the partner. The diversion of member's collection towards partner's capital withdrawal violated RERA guidelines, which mandate utilization of such funds for the project. The Tribunal upheld the disallowance of proportionate interest under Section 36(1)(iii) in principle. However, regarding the quantum, the AO disallowed interest on the total debit balance of Rs. 8,40,95,200. The Tribunal noted an opening debit balance of Rs. 5,13,83,000 and an incremental debit of Rs. 3,27,12,200. Following the Karnataka High Court's decision in CIT vs. Sridev Enterprises, the matter was set aside to the AO to verify disallowance in earlier years. If no disallowance was made in earlier years, the current year's disallowance should be restricted to the incremental debit balance of Rs. 3,27,12,200.

What were the facts?

The assessee, Chanchal Buildcon, engaged in real estate development, filed its return for AY 2018-19 declaring Rs. 18,53,600. The Assessing Officer (AO) noted interest expenses of Rs. 1,02,64,424 on unsecured loans used for land purchase. The assessee received Rs. 38.10 crores from prospective buyers. The AO observed that a portion of these collections, Rs. 8,40,94,520, was withdrawn by partners without interest being charged. The AO disallowed Rs. 1,00,91,424, representing 12% of the partner's capital withdrawal. The assessee's appeal to the NFAC (CIT(A)) was dismissed. The assessee is now in appeal before the ITAT.

What were the issues?

1. Whether the CIT(A) erred in upholding the disallowance of interest expenses of Rs. 1,00,91,424 under Section 36(1)(iii) read with Section 37 of the Income Tax Act, 1961, when the AO failed to prove the nexus between interest-bearing borrowings and partner withdrawals? Assessee's Contention: The AO was incorrect in disallowing interest as borrowed funds were not used for partner withdrawals. Withdrawals were from member collections, not borrowed funds. There was no direct nexus between interest-bearing borrowings and non-business utilization. The partnership deed did not require charging interest on partner capital. The AO cannot dictate business operations. The AO's calculation of disallowance on the full debit balance was erroneous; it should only be on the incremental debit balance of Rs. 3,27,12,200, relying on CIT vs. Sridev Enterprises (Karnataka). Revenue's Contention: Funds borrowed for land purchase should have been capitalized, not debited to P&L. Business funds (member collections) were neither used for business nor loan repayment but withdrawn by partners. No commercial expediency was explained for capital withdrawal. The assessee had no surplus funds to cover partner withdrawals.

Which sections of the Income-tax Act were involved?

Section 36(1)(iii),Section 37

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, “A” BENCH, AHMEDABAD

Before: SHRI SANJAY GARG & SHRI NARENDRA PRASAD SINHA

For Appellant: Shri S. N. Divatia, AR & Shri Samir Vora, AR
For Respondent: Shri Amit Pratap Singh, SR-DR
Hearing: 15.07.2026Pronounced: 24.09.2026

PER NARENDRA PRASAD SINHA, ACCOUNTANT MEMBER:

This appeal is filed by the Assessee against the order of National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as “CIT(A)”] dated 06.02.2026 for the Assessment Year (A.Y.) 2018-19 in the proceeding u/s. 143(3) of the Income Tax Act [hereinafter referred as “The Act”].

2.

The brief facts of the case are that the assessee had filed its return of income for A.Y 2018-19 on 30.10.2018 declaring total income of Rs.18,53,600/-. The case was selected for scrutiny under CASS. The assessee is engaged in the business of real estate development and Chanchal Buildcon Vs ITO, AY- 2018-19 2 constructio

The order continues below.

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