ASSISTANT COMMISSIONER OF INCOME TAX,CIRCLE-2(2)(1), BANGALORE vs. EMBASSY RR PROJECTS PRIVATE LIMITED, BANGALORE
Income Tax Appellate Tribunal, ‘A’ BENCH, BANGALORE
Before: SHRI WASEEM AHMED & SHRI SOUNDARARAJAN KAssessment Year: 2022-23
PER WASEEM AHMED, ACCOUNTANT MEMBER:
This is an appeal filed by the assessee against the order passed by the NFAC, New Delhi vide order dated 29-01-2025 in DIN No. ITBA/
NFAC/S/250/2024-25/1072680262(1) for the assessment year 2022-23. 2. The revenue has raised the following grounds of appeal:
“1. Whether the Ld. CIT(A) was right in fact in not appreciating the fact that the assessee has advanced loans to the sister company M/s
RR Platina infra for building and evading taxes.
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2. Whether the Ld. CIT(A) was right in fact in not remitting the file to the AO to add the interest income to the income from 'other sources rather than disallowing the same as Business Income.”
The only issue raised by the revenue is that the ld. CIT-A erred in deleting the addition made by the AO for ₹25.02 crores representing the interest accrued on the diversion of fund.
The brief facts are that the assessee, a subsidiary company of M/s Embassy Property Development Pvt Ltd, was incorporated on 07.06.2020 and engaged in the business of real estate development. The company, during the year under consideration (A.Y. 2022-23) reported no sales or purchases in the financial statement and in the return of income declared a loss of ₹10,52,430/- only. The case of the assessee was selected for complete scrutiny due to low income in comparison to high loans, advances, and investments reported in the balance sheet, particularly inter-corporate deposits and real estate assets.
Originally M/s Embassy Property Development Pvt Ltd (M/s EPDPL) entered into loan agreements dated 6th June 2020 with M/s RR Plantina Infra (the borrower) which subsequently renamed to M/s Sai Shrusti Infrastructure Innovation Projects and later on converted into M/s Sai Shrusti Infrastructure Innovation Projects Pvt Ltd. As per the impugned agreement, M/s EPDPL agreed to extend loan of Rs. 150 crores in tranches for the purpose of development of a Software Technology Park on a land allotted by Karnataka Industrial Areas Development Board to the borrower and subsequently an amount of Rs. 70 crore was disbursed. Later, M/s EPDPL transferred the original loan agreement to the assessee company through a novation agreement Page 3 of 10
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dated 2nd November 2020. The assessee company further disbursed an amount of Rs. 69 crores during the year under consideration to the borrower company, accordingly total amount of loan and advances standing in the books of the assessee as on 31st March 2022 at Rs. 139
crores only.
The AO during the assessment proceedings enquired the assessee to furnish certain details with respect to the impugned loans which were duly provided. Further, the AO to verify the genuineness of loan transactions issued notices under section 133(6) of the Act to M/s RR Platina Infra (borrower). Despite multiple notices, no response was received from the third-party namely M/s RR Platina Infra under section 133(6) of the Act. The AO alleged that the PAN provided by the assessee for RR Platina Infra was mismatched and that no reliable evidence or confirmation was furnished. The AO thus proposed to treat the sum of ₹69 crores as an unexplained investment under section 69 of the Act through show cause notice dated 6th March 2024. 7. In response, the assessee clarified that the PAN provided did, in fact, belong to RR Platina Infra, which had subsequently changed its name to M/s. Sai Shrusti Infrastructure Innovation Projects on 25.08.2022. The assessee submitted documentary evidence including a copy of the PAN card, Form II for name change, the original loan agreement (ICD), and a novation agreement showing the transfer of the ICD from Embassy Property Development Pvt. Ltd. to the assessee. Additionally, the assessee submitted a communication from RR Platina Infra confirming its response to the notice issued under section 133(6) Page 4 of 10
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of the Act and requested a personal hearing through VC, which was granted.
The AO upon examining the loan and novation agreements, observed that loan was extended to the sister concern to get equity shares for the value equal to the loan amount plus interest at 18% on such loan. The AO observed that as per the agreement the assessee agreed to advance an amount of Rs. 150 crores in return the assessee was to get equity of Rs. 175 crores and the excess value of Rs. 25 crore was nothing but the interest @ 18% on such loan. The AO noted that the conversion clause and valuation metrics indicated the creation of capital assets worth ₹175 crores for a total investment of ₹150 crores, clearly implying capitalization of interest income of ₹25 crores. The AO accordingly held that such income had accrued during the year and should be taxed as business income. Therefore, the AO added an amount ₹25.02 crores to the assessee's income.
The aggrieved assessee preferred an appeal before the learned CIT(A).
Before the learned CIT(A), the assessee submitted that the addition made by the AO on account of interest income was incorrect and unjustified. It was explained that as per the terms of the loan agreement, specifically clause 4.8 of agreement, interest was not payable on a yearly basis, but only upon the occurrence of a "Conversion Event". This Conversion Event referred to the formal conversion of the partnership firm into a private limited company through the filing of Form URC-1 with the