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Facts
The Revenue appealed the deletion of additions made for land development income. The assessee treated land as a capital asset and entered into a Joint Development Agreement (JDA). The Assessing Officer (AO) treated it as business income, while the CIT(A) deleted the addition, finding it to be a capital asset and advances received. In another appeal, the assessee challenged the confirmation of addition for non-capitalization of interest.
Held
The Tribunal held that the land was a capital asset and advances received under JDA were not taxable. For the interest expenditure, it was found to be genuine, used for business purposes, and a timing difference, thus not warranting disallowance.
Key Issues
Whether income from a Joint Development Agreement (JDA) related to land development is business income or capital gains, and whether interest expenditure on borrowed funds for business purposes should be capitalized or treated as a revenue expense.
Sections Cited
147, 143(3), 2(47)(v), 2(47)(vi), 132(4), 153C, 36(1)(iii)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, ‘B’ BENCH, BANGALORE
Before: SHRI WASEEM AHMED & SHRI RAHUL CHAUDHARY
This is a bunch of five appeals filed by the Revenue and the assessee against the order dated 25-02-2025 for the assessment years 2013-14,2017-18,2020-21 & 2021-22.
The issue raised by the Revenue is that the ld. CIT-A erred in deleting the addition made by the AO for Rs. 4,074,07,85,005 under the head business for land development. 2.1 In the reassessment order framed under section 147 read with section 143(3) of the Act, the Assessing Officer held that the assessee had entered into a Joint Development Agreement (JDA) with M/s G Corp Homes Pvt. Ltd. under which the assessee was to receive 37% of the revenue arising from the sale of the developed flats. The Assessing Officer treated this arrangement as a business activity and concluded that the assessee was engaged in the business of property development. The Assessing Officer further held that the land in question was being exploited commercially and should, therefore, be treated as stock-in- trade rather than as a capital asset.
On this basis, the Assessing Officer held that the amounts received during the year under the joint development agreement, amounting to ₹13,87,39,209, represented business receipts liable to tax in the year of receipt. After allowing what he considered to be project- .
-1028-1296-1297-1286/Bang/2025 Page 3 of 14 related expenses of ₹9,79,54,204, he computed the taxable income at ₹4,07,85,005 and added the same to the returned income.
The learned CIT(A), however, after examining the materials on record and considering the assessee’s detailed submissions, reached a completely different conclusion. He observed that the assessee had consistently disclosed the land as a fixed asset in his balance sheet and had never treated it as stock-in-trade. He held that merely entering into a Joint Development Agreement does not convert a capital asset into stock-in-trade, nor does the sharing of revenue make the assessee a real estate developer. According to the ld. CIT(A), the assessee’s participation was limited to contributing land, while the actual development activity was entirely undertaken by the developer. Therefore, the Assessing Officer’s conclusion that the assessee was engaged in business was factually incorrect and unsupported by the record. The ld. CIT(A) also found that the amounts received by the assessee during the year were only advances and did not represent income accruing or arising during the year. He held that no transfer of property, as contemplated under section 2(47)(v) or 2(47)(vi), had taken place in the relevant assessment year.
An important finding recorded by the ld. CIT(A) was that the present issue was already covered in favour of the assessee in his own case by virtue of the order of the ITAT in to 544/Bang/2021 for the AYs. 2014-15 to 2016-17. The ld. CIT(A) observed that since the facts were identical, consistency required that the matter be decided in favour of the assessee in the present year as well. In light of these conclusions, the ld. CIT(A) deleted the entire .
-1028-1296-1297-1286/Bang/2025 Page 4 of 14 addition of ₹4,07,85,005.00 only. Hence, the ground of appeal of the assessee was allowed.
Being aggrieved by the order of learned CIT-A, the revenue is in appeal before us.
The learned DR before us reiterated the findings contained in the assessment order whereas the learned AR before us filed a paper book running from pages 1 to 432 and contended that the issue on hand is covered in favour of the assessee by virtue of the order of the ITAT in its own case which has been elaborated by the learned CIT-A in his order.
We have heard the rival contentions of both the parties and perused the materials available on record. At the outset, we note that the issue on hand is covered in favour of the assessee in its own case in to 544/Bang/2021 for the AYs. 2014-15 to 2016-17. The relevant extract of the order is reproduced as under:
“8.28 We have carefully considered the submission of the ld. DR. In our opinion, the question that needs to be addressed is whether the addition could be made merely on the basis of admission made by the assessee in the statement recorded u/s 132(4) of the Act? In our opinion, the statement recorded u/s 132(4) of the Act is not conclusive and it is rebuttable. For this proposition, we place reliance on the decision rendered by Hon'ble Supreme Courtin the case of Pullangode Rubber Product Co. Vs. State of Kerala (91 ITR to 544/Bang/2021 & CO Nos.17 to 19/Bang/2021 Sri Mathikere Ramaiah Seetharam, Bangalore Page 80 of 96 18) (SC), wherein it was held that the admission may be an important piece of evidence, but the same is not conclusive. It is open to the person who made the admission to show that it was incorrect. We may also refer to the decision rendered by Hon'ble Supreme Court in the case of CIT vs. V. MR.P Firm (1965) 56 ITR 67, wherein it was held that the principle of estoppels will not against the Income tax Act. The relevant observations are extracted below: "The .
-1028-1296-1297-1286/Bang/2025 Page 5 of 14 contention is that the assessees having opted to accept the scheme, derived benefit there-under, and agreed to have their discharged debts excluded from the assets side in the balance-sheet subject to the condition that subsequent recoveries by them would be taxable income, they are now precluded, on the principle of "approbate and reprobate", from pleading that the income they derived subsequently by realization of the revived debts is not taxable income. The doctrine of "approbate and reprobate" is only a species of estoppel; it applies only to the conduct of parties. As in the case of estoppel, it cannot operate against the provisions of a statute. If a particular income is not taxable under the Income-tax Act, it cannot be taxed on the basis of estoppel or any other equitable doctrine. Equity is out of place in tax law; a particular income is either eligible to tax to 712 /Bang/2018 to 1148 /Bang/2018 CO Nos.88 to 89 /Bang/2018 under the taxing statute or it is not. If it is not, the Income- tax Officer has no power to impose tax on the said income." Hence, mere admission of additional income would not automatically entitle the assessing officer to assess the same, if the assessee disputes the same subsequently with corroborative evidences. 8.29 The Hon'ble Bombay High Court has dealt with this issue in case of Balmukund Acharya (310 ITR 310), wherein it was held as under:- "31. Having said so, we must observe that the Apex Court and the various High Courts have ruled that the authorities under the Act are under an obligation to act in accordance with law. Tax can be collected only as provided under the Act. If any assessee, under a mistake, misconceptions or on not being properly instructed is over assessed, the authorities under the Act are required to assist him and ensure that only legitimate taxes due are collected (see S.R. Kosti v. CIT [2005] 276 ITR 165 (Guj.), CPA Yoosuf v. ITO[1970] 77 ITR 237 (Ker.), CIT v. Bharat General Reinsurance Co. Ltd. [1971] 81 ITR 303 (Delhi), CIT v. Archana R. Dhanwatey [1982] 136 ITR 355 (Bom.). 32.If particular levy is not permitted under the Act, tax cannot be levied applying the doctrine of estoppel. (See Dy. CST v. Sreeni Printers [1987] 67 SCC 279. This Court in the case of Nirmala L. Mehta v. A. Balasubramaniam, CIT [2004] 269 ITR 1 has held that there cannot be any estoppel against the statute. Article 265 of the Constitution of India in unmistakable terms provides that no tax shall be levied or collected except by authority of law. Acquiescence cannot take away from a party the relief that he is entitled to where the tax is levied or collected without authority of law. In the case on hand, it was obligatory on the part of the Assessing Officer to apply his mind to the facts disclosed in the return and assess the assessee keeping in mind the law holding the field." 8.30. The Hon'ble Calcutta High court in case of CIT V. Bhaskar Mitter (73 Taxmann 437) has held as under:
-1028-1296-1297-1286/Bang/2025 Page 6 of 14
"8. The controversy raised in the second question is as to whether the annual letting value of the property determined by the Tribunal could be a figure lower than that returned by the assessee. The principles for determining the annual letting value under section 23 are now well- settled and if the value returned is not in accordance with such principles, it is open to the assessee to contend that the value as may be determined upon correct application of the law should form the basis of assessment. The revenue authorities, in our view, cannot be heard to say that merely because the assessee has returned a figure which is higher than the annual value determined in accordance with the correct legal principles, such higher amount and not the correct amount should be lawfully assessed. An assessee is liable to pay tax only upon such income as can be in law included in his total income and which can be lawfully assessed under the Act. The law empowers the ITO to assess the income of an assessee to 712 /Bang/2018 to 1148 /Bang/2018 CO Nos.88 to 89 /Bang/2018 according to law and determine the tax payable thereon. In doing so he cannot assess an assessee on an amount, which is not taxable in law, even if the same is shown by an assessee. There is no estoppel by conduct against law nor is there any waiver of the legal right as much as the legal liability to be assessed otherwise than according to the mandate of the law (sic). It is always open to an assessee to take the plea that the figure, though shown in his return of total income, is not taxable in law. The Tribunal, therefore, in our view did not commit any error in directing to fix the correct annual letting value of the premises in question, in accordance with the provisions of section 23 of the said Act with reference to the municipal valuation, although such sum was lower than the figure shown by the assessee in his returns of total income." 8.31. In the instant cases, the Shri M.R. Seetharam, has stated that an amount of Rs.102 Crores be offered as income from the construction revenue as discussed above. The reason cited for his Sri Mathikere Ramaiah Seetharam, Bangalore Page 82 of 96 admission is that till date the revenue is not recognized for the advance received as the assessee was of the opinion that the percentage completion method is not applicable to assessee company as their revenue share was derived from transfer of right, title and interest in land. The contention of ld AR is that this admission cannot be base for issue of notice u/s 153C of the Act as the seized material does not throw any light on the undisclosed income of the assessee in this assessment year under consideration as the assessment for AY 2014-15 vide order dated 19.5.2016 u/s 143(3) of the Act, wherein department accepted the returned income of the assessee at Rs.1,85,34,040/- under head Business Income and Rs.1 lakh from agricultural income. The date of search in the case of M/s. Ramaiah Developers & Builders Pvt. Ltd. was on 23.8.2016 and the assessment .
-1028-1296-1297-1286/Bang/2025 Page 7 of 14 has already been concluded. Thus, for the assessment year 2014-15 which is a concluded assessment, to frame assessment u/s 153C of the Act the seized material is must. In the present case, the assessing officer relying only on the basis of sworn statement recorded u/s 132(4) as well as 131 of the Act without valid seized material. In our opinion, 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. 8.32 For the assessment year 2015-16 and 2016-17, these assessments were framed u/s 143(3) r.w.s. 153D of the Act and there was no valid seized material found during the course of search to frame the assessment. The ld. 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. 8.33 The learned 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. Since we have confirmed the deletion of additions by ld. CIT(A) made by ld. AO, at this stage, we refrain from commenting on the head of income under which the income to be taxed as there is no accrual of income in these assessment years.
9. In the result, the appeals of the revenue.”
8. The facts of the case on hand are identical to the facts of the own case of the assessee discussed above. Even at the time of hearing, the learned DR has not brought anything on record contrary to the finding of the ITAT elaborated above. It was also not brought to the notice that the finding of the ITAT given hereinabove has either been stayed or overruled by the higher judicial forum. Accordingly, we do not find any reason to interfere in the finding of the learned CIT-A. Hence the ground of appeal of the revenue is hereby dismissed.
-1028-1296-1297-1286/Bang/2025 Page 8 of 14
In the result, the appeal filed by the revenue is hereby dismissed.
Coming to 1028, 1296 and 1297/Bang/2025 for the assessment years 2017-18, 2020-21 and 2021-22, appeals by the Revenue
As the facts of the case on hand are identical to the facts of the case discussed above. The only difference is that the AO computed the income under capital gain instead of business income for the asst. years 2020-21 and 2021-22. It is admitted position that income has already been offered to tax in the subsequent years. therefore, respectfully following the order of the ITAT discussed above, we do not find any reason to interfere in the finding of the learned CIT-A. Hence the ground of appeal of the revenue is hereby dismissed.
In the result, the appeals filed by the revenue are hereby dismissed. an appeal by the assessee for assessment year 2020-21
12. The issue raised by the assessee is that the ld. CIT-A erred in confirming the addition made by the AO for Rs. 3.08 crores on account non-capitalization of interest.
The assessee declared a business loss of about ₹2.87 crore for AY in dispute. The Assessing Officer examined the financial statements and noticed that the assessee’s income from sale of sites and hostel receipts .
-1028-1296-1297-1286/Bang/2025 Page 9 of 14 was almost similar to the previous year, where the assessee had shown a profit. The AO observed that the major reason for the loss in the current year was a very steep increase in interest expenditure from about ₹39 lakh in the previous year to more than ₹3.10 crore in this year. Since there was no significant change in the business activities that could justify such a large rise in interest cost, the AO sought an explanation.
The assessee explained that the overdraft account was fully used in AY 2020-21, unlike the earlier year, and therefore the interest burden increased. However, the AO found that the assessee had also used borrowed funds for increasing inventory and giving advances for land acquisition. Because these assets/ projects were not yet completed or ready for sale, the AO held that the interest should not have been claimed as an expense but should have been capitalized into Work-in- Progress (WIP) and advances as per accounting standards. The AO further noted that the assessee’s claim of loss on sale of sites was not supported by any evidence that the sites were sold below cost for genuine business reasons. After re-working the profit and loss account, the AO rejected the loss and determined positive income of ₹22,99,306, leading to an addition of ₹3.08 crore to the total income of the assessee.
When the matter went before the ld. CIT(A), the assessee repeated that the loss mainly arose due to interest cost and that the overdraft was fully utilised. The ld. CIT(A) examined the submissions but found contradictions. On one hand, the assessee argued that the projects were not complete, and therefore interest and development expenses were added to WIP. On the other hand, the assessee claimed .
-1028-1296-1297-1286/Bang/2025 Page 10 of 14 that the sites were already ready for sale which were part of the opening stock. This inconsistency raised doubt about the real status of the projects. The ld. CIT(A) also noted that the assessee had not explained why the sites were sold at prices much lower than their cost, which is unusual and not supported by any evidence.
14.1 Accordingly, the ld. CIT(A) agreed with the AO that the borrowed funds were clearly used for WIP and for giving advances, and therefore the related interest should have been capitalised until the assets were ready for sale or use. Since the assets/ projects were not yet completed, the claim of interest as a revenue expense could not be accepted. The ld. CIT(A) also agreed that the assessee had failed to justify the large loss of ₹2.87 crores and the way the interest was claimed. Considering the contradictions and lack of clarity in the assessee’s submissions, the ld. CIT(A) upheld the AO’s addition and dismissed the assessee’s appeal.
Being aggrieved by the order of learned CIT-A, the assessee is in appeal before us.
The learned AR before us filed a paper book running from pages 54 to 211 and clarified that the assessee had already capitalized a major portion of the interest. He stated that out of the total interest of ₹8,30,17,382, an amount of ₹3,52,52,720 was capitalized to the project as WIP and ₹1,66,90,239 was debited to the capital account of the proprietor. He explained that the remaining interest of ₹3,10,10,034 related to inventory and business advances and was allowable under section 36(1)(iii) of the Act. The AR emphasized that the borrowed funds were used for business purposes and that the genuineness of the loans .
-1028-1296-1297-1286/Bang/2025 Page 11 of 14 and interest payment was not doubted by the lower authorities. He also argued that even if any interest was required to be capitalized, it would be tax-neutral because the WIP would be recognized as income in later years. The ld. AR argued that no part of the interest was used for non- business purposes and requested that the claim be allowed.
On the other hand, the DR supported the orders of the AO and CIT(A). He stated that the assessee had not completed the projects and therefore interest must be capitalised. He submitted that the assessee’s explanations were contradictory and that the assessee had not proved the loss on sale of sites. The ld. DR argued that the AO’s disallowance was justified and the appeal should be dismissed.
We have carefully considered the submissions and examined the records placed before us. The assessee has provided a clear break-up of the interest amounts and has demonstrated that out of the total interest incurred, a substantial part has already been capitalised to the project under development and a further portion has been transferred to the proprietor’s capital account. Only the balance interest of ₹3.10 crore has been claimed as revenue expenditure, and this interest relates entirely to inventory and business advances. These items form part of the regular operating cycle of the assessee’s business. There is nothing on record to show that the funds were used for any non-business purpose.
18.1 The most important fact, in our view, is that the genuineness of the interest expenditure has not been questioned at any stage. The AO has accepted that the borrowings are genuine. The AO has accepted that the funds were used in the business. The AO has not doubted the .
-1028-1296-1297-1286/Bang/2025 Page 12 of 14 interest rate, the lender, the payment, or the accounting entries. In such a situation, the question before us is only whether the interest should be treated as a charge to the Profit & Loss Account or as part of the cost of the project in WIP.
18.2 We notice that this issue is entirely tax-neutral. If the interest is capitalised and added to WIP, the WIP will go up. When the project is completed and sold, the higher WIP will result in a correspondingly lower profit. If the interest is treated as revenue expenditure, it reduces the profit in the current year. In both situations, the tax impact over the entire life of the project remains the same. It is merely a timing difference. What is also relevant here is that the Revenue has not added this interest to the WIP in the next year, nor has it adjusted the closing stock or project cost anywhere else. Because of this, the Revenue has only disallowed the expenditure in this year without making the corresponding increase in WIP in the following year. This creates a distorted picture of the assessee’s real income, which cannot be the intention of the law. The AO’s approach results in a mismatch: • The interest is removed from the Profit & Loss Account in this year, but • The Revenue does not add the same amount to the closing WIP, nor does it increase the cost of the project in the subsequent year.
18.3 This leads to a situation 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 .
-1028-1296-1297-1286/Bang/2025 Page 13 of 14 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.
18.4 Further, the 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. Taking all these factors together, we are of the clear view that the interest of ₹3.10 crore 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. The 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.
In the result, the appeal of the assessee is allowed.