ASSISTANT COMMISSIONER OF INCOME TAX,CIRCLE-2(2)(1), BANGALORE V. EMBASSY RR PROJECTS PRIVATE LIMITED, BANGALORE

ITA 931/BANG/2025

AI Insights

The case involves the Assistant Commissioner of Income Tax, Bengaluru, as the appellant, and Embassy RR Projects Pvt. Ltd., as the respondent. The core issue was the addition of \\u20b925.02 crores as interest income by the Assessing Officer (AO), which was treated as business income. The AO argued that the interest was accrued on loans advanced to a sister company for real estate development, which the Revenue suspected was a means to evade taxes. The CIT(A) deleted this addition, agreeing with the assessee that no interest had actually accrued or been received during the relevant year as the conditions for such accrual were not met. The Tribunal upheld the CIT(A)'s decision, emphasizing that income tax should be levied on real income, not hypothetical or notional income.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 781433 (ITAT-BANGALORE)
• Duration Of Justice: 5 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-09-2025
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2022-2023
• Appeal Filed On: 22-04-2025
• Other Referred Cases: Poona Electric Supply Company Ltd. vs. CIT, CIT vs. Shoorji Vallabhdas & Co., CIT vs. VXL India Ltd, CIT vs. Vijay Singh, Highways Construction Company Pvt Ltd vs. CIT
• Laws Referred To: Income Tax Act
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SHIVANAND KALAKERI
• Assessee Lawyers: DEEPESH WAGLE
• Keywords: Business income; Capital asset; Unexplained investment; Principle of natural justice; Notional interest
• Section: 69; 133(6)

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL ‘A’ BENCH, BANGALORE BEFORE SHRI WASEEM AHMED, ACCOUNTANT MEMBER AND SHRI SOUNDARARAJAN K, JUDICIAL MEMBER ITA No. 931/Bang/2025 Assessment Year: 2022-23 The Asst. Commissioner of Income Tax, Circle – 2(2)(1), Bengaluru. Vs. Embassy RR Projects Pvt. Ltd., 1st Floor, Embassy Point, 150, Infantry Road, Bangalore North, Vasanthnagar, Bengaluru – 560 001. PAN – AAFCE 9175 Q APPELLANT RESPONDENT Assessee by : Shri Deepesh Wagle, CA Revenue by : Shri Shivanand Kalakeri, CIT (DR) Date of hearing : 01.07.2025 Date of Pronouncement : 29.09.2025 O R D E R 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. Printed from counselvise.com ITA No.931/Bang/2025 Page 2 of 10 . 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.” 3. 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. 4. 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. 5. 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 Printed from counselvise.com ITA No.931/Bang/2025 Page 3 of 10 . 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. 6. 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) Printed from counselvise.com ITA No.931/Bang/2025 Page 4 of 10 . of the Act and requested a personal hearing through VC, which was granted. 8. 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. 9. The aggrieved assessee preferred an appeal before the learned CIT(A). 10. 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 Registrar of Companies. Since no such Conversion Printed from counselvise.com ITA No.931/Bang/2025 Page 5 of 10 . Event took place during the relevant Assessment Year 2022-23, the condition for interest to become payable or accrued was not met. Hence, no interest was charged, paid, or receivable during that year. 11. The assessee further pointed out that even the borrower, M/s RR Platina, had not made any provision for interest payment in its books of accounts, which clearly shows that there was no mutual understanding or expectation of interest payment in that year. The assessee also argued that the addition was made without issuing a written show cause notice and based only on oral discussions, which goes against the principles of natural justice and principles laid down in several judicial precedents. 12. It was also contended that the attempt by the AO to tax notional income was contrary to law, as income tax can only be levied on real basis and not hypothetical income unless specifically provided under the Act. The assessee emphasized that no interest was ever recorded or charged in the subsequent years either which shows consistency and clarity in the accounting treatment. Furthermore, since the assessee was not in the business of money lending, any interest, if received, could not be classified as business income. 13. In view of these facts, the assessee requested the learned CIT(A) to delete the addition of interest income as it was not supported by the terms of the agreement or the provisions of the Act. Printed from counselvise.com ITA No.931/Bang/2025 Page 6 of 10 . 14. The learned CIT(A) after considering the facts in totality concurred with the argument advanced by the assessee and deleted the addition made by the AO by observing as under: The detailed discussion made above revealed a fact that, the AO computed the notional interest income without accrual of any such interest to the appellant in the relevant assessment year. The appellant referred the terms and conditions of the loan and relied upon the same terms that 18% of interest per annum compounded annually payable only in the event that the conversion of outstanding amount into equity or partnership interest in the case borrower is not completed under clause 4.2 or clause 4.8 of the said agreement. In the present case, the ICD given by the appellant to M/s RR Platina had not been converted in any such manner and the ICD did not result in any such accrual of interest to the appellant. There is no provision in the Act to charge the interest on notional basis. The appellant relied upon the decision of Hon’ble Supreme Court in the case of Poona Electric Supply Company Ltd. vs. CIT (1965) 3 SCR 818, decision of Hon’ble High Court of Delhi in the case of CIT vs. Shoorji Vallabhdas & Co. [1962] 46 ITR 144, CIT vs. VXL India Ltd vs. CIT [1993] 199 ITR 702, Island Hotels Ltd. [2010] 323 ITR 490 and CIT vs. Vijay Singh [2010] 323 ITR 466 of Hon’ble High Court of Guwahati in the case of Highways Construction Company Pvt Ltd vs. CIT [1993] 199 ITR 702. In all these decisions, Hon’ble High Courts held that notional interest cannot be charged on the interest free loan given by the assessee. In the present case, the condition for the conversion of the outstanding amount into equity or partnership interest was not met out in the relevant assessment year or subsequently. Hence there is no scope for charging notional interest on the ICD. 12. Further, as rightly contended by the appellant that such interest income cannot be computed under the head “Business Income”. The appellant in-spite of clarifying the terms and conditions during the course of VC, the AO proceeded to compute the notional interest of Rs. 25,02,00,000/- on the advances made. Such notional interest added as income from business is not maintainable. The judicial decisions relied upon by the appellant in their written submission is squarely applicable to the facts and circumstances of the present appeal. Hence the AO is directed to delete the addition of notional interest as income from business. 15. Being aggrieved by the order of the learned CIT(A), the Revenue is in appeal before us. 16. The learned DR before us submitted that loan was diverted for tax evasion and diverting profits. The ld. DR vehemently supported the order of the authorities below. Printed from counselvise.com ITA No.931/Bang/2025 Page 7 of 10 . 17. On the other hand, the learned AR for the assessee before us submitted that the loan in question was advanced purely for commercial purposes. It was given with the intent of forming a joint venture for a real estate development project, for which land had already been allotted by KIADB to the borrower. The ld. AR clarified that the lender (the assessee) and the borrower were two separate and independent legal entities, and that the entire transaction was routed through normal banking channels with proper agreements and documentation in place. 18. The learned AR strongly denied the Revenue’s allegation that the loan was meant for tax evasion or for building and diverting profits. It was pointed out that neither the Assessing Officer nor the ld. CIT-A had raised any such allegation during the assessment or appellate proceedings. Hence, this new claim introduced by the Revenue at this stage was merely an afterthought and not backed by any evidence or factual records. 19. The learned AR also highlighted that under the terms of the Loan Agreement, interest at 18% was payable only if the investment was not converted into equity or partnership interest. Since, the borrower was expecting to convert its legal status into a private limited company, and optionally convertible debentures were already issued, the interest clause was not triggered. Thus, no interest income accrued or became receivable during the relevant year, and the addition made by the AO on notional basis was completely unjustified. Printed from counselvise.com ITA No.931/Bang/2025 Page 8 of 10 . 19.1 Both the ld. DR and the AR before us relied on the order of authorities below as favouable to them. 20. We have heard the rival contentions of both the parties and perused the materials available on record. The core issue in the present appeal pertains to the addition of ₹25.02 crores on account of alleged interest income, which the AO treated as business income accrued to the assessee during the relevant assessment year. 20.1 The facts of the case on record are not in dispute. The assessee is a subsidiary of M/s Embassy Property Development Pvt. Ltd. and is engaged in the business of real estate development. The loan in question, initially granted by the holding company, was transferred to the assessee through a novation agreement. The total disbursed amount stood at ₹139 crores as on 31st March 2022. The AO has not disputed the genuineness of the loan transaction itself or the documentary evidence furnished by the assessee, including the original and novation agreements, ledger extracts, and confirmation from the borrower. 20.2 The AO proceeded to compute interest at 18% on the total amount disbursed, relying on the conversion clause in the agreement and inferred that the assessee was entitled to capital appreciation to the extent of ₹25 crores. The AO treated this appreciation as interest income accrued to the assessee and added it under the head \"business income.\" However, on a plain reading of the loan agreement, particularly the clause 4.8, it is evident that interest becomes payable only upon the failure to convert the outstanding loan into equity or partnership interest. The agreement thus does not provide for yearly accrual of Printed from counselvise.com ITA No.931/Bang/2025 Page 9 of 10 . interest. It is also not in dispute that no such Conversion Event occurred during the relevant assessment year. 20.3 We find merit in the assessee’s argument that there was neither accrual nor receipt of any interest income during the year. The borrower too had not recorded any interest liability in its books, affirming the absence of any enforceable or accrued interest obligation. The assessee has consistently maintained this position in subsequent years as well. Therefore, the AO’s action in computing notional interest is not in line with the terms of the agreement or the factual matrix of the case. 20.4 We further note that taxation in India is based on real income and not hypothetical or notional income unless specifically mandated by the Act. This position has been upheld by the Hon’ble Supreme Court in Poona Electric Supply Co. Ltd. v. CIT (1965) 3 SCR 818 and reaffirmed by various Hon’ble High Courts including in CIT v. Shoorji Vallabhdas & Co. (1962) 46 ITR 144, CIT v. VXL India Ltd. (1993) 199 ITR 702, and CIT v. Vijay Singh (2010) 323 ITR 466 (Gauhati). In all these cases, the Courts have ruled that unless income has truly accrued or become receivable, it cannot be taxed merely on a presumptive basis. The learned CIT(A) has rightly relied on these decisions while deleting the addition. 20.5 The Revenue has also raised a ground suggesting that the assessee advanced the loan to a sister concern for the purpose of diverting profits and evading tax. However, we find this allegation to be devoid of merit. The assessee and the borrower are legally distinct entities. The transaction was executed through proper banking channels Printed from counselvise.com ITA No.931/Bang/2025 Page 10 of 10 . which was supported by agreements. No such allegation was raised by the AO during the assessment proceedings, and this plea appears to be an afterthought, unsupported by any evidence. 20.6 In view of the above discussion, we find no error in the order passed by the learned CIT(A). The addition made by the AO is based on notional income without any accrual or enforceability as per the agreement. The assessee cannot be fastened with tax liability merely because of a potential future benefit which had not been crystallized during the year. Accordingly, we uphold the order of the learned CIT(A). Hence, the ground of appeal raised by the Revenue is hereby dismissed. 21. In the result, the appeal filed by the Revenue is dismissed. Order pronounced in court on 29th day of September, 2025 Sd/- Sd/- (SOUNDARARAJAN K) (WASEEM AHMED) Judicial Member Accountant Member Bangalore Dated, 29th September, 2025 / vms / Copy to: 1. The Applicant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR, ITAT, Bangalore. 6. Guard file By order Asst. Registrar, ITAT, Bangalore Printed from counselvise.com "