ESSAE SUHAGRAJA PRIVATE LIMITED,BANGALORE V. DEPUTY COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE 2(1), BANGALORE

ITA 592/BANG/2025

AI Insights

Essae Suhagraja Private Limited appealed against the orders of the Deputy Commissioner of Income Tax and the Commissioner of Income Tax (Appeals) regarding the reassessment of income and the disallowance of certain deductions. The primary issues revolved around the reopening of the assessment for the year 2018-19, the denial of deduction for the cost of TDR, and the imposition of penalties related to the misreporting of income. The Tribunal found inconsistencies in the application of tax treatment for TDR costs across different assessment years and acknowledged the debatable nature of the keyman insurance premium expenditure, leading to the decision to allow the appeals.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 790691 (ITAT-BANGALORE)
• Duration Of Justice: 8 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-12-2025
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2022-2023
• Appeal Filed On: 20-03-2025
• Other Referred Cases: Shri Nidhi Corporation v. Addl. CIT, GE Capital US Holdings Inc. v. DCIT(International taxation)
• Laws Referred To: Income Tax Act
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SUMAN LUNKAR
• Keywords: Capital asset; Proportionate interest; Reassessment proceedings; Business expenditure; Tax effect; Reopening of assessment; Capital expenditure; Capital Gains; Capital asset converted into stock in trade
• Section: 147; 148; 143(3); 139; 37

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH: BANGALORE BEFORE SHRI PRASHANT MAHARISHI VICE PRESIDENT AND SHRI KESHAV DUBEY, JUDICIAL MEMBER ITA Nos.590 to 592/Bang/2025 Assessment years: 2018-19, 2021-22 & 2022-23 Essae Suhagraja Private Limited, No.915, Essae Pride, 80 Feet Road, 6th Block, Koramangala Layout, Bangalore South, Koramangala, Bangalore – 560 095. PAN: AABCE 4594K Vs. The Deputy Commissioner of Income Tax, Central Circle 2(1), Bangalore. APPELLANT RESPONDENT Revenue by : Smt. Suman Lunkar, CA Respondent by : Shri Balusamy N., Jt. CIT(DR)(ITAT), Bengaluru. Date of hearing : 08.09.2025 Date of Pronouncement : 04.12.2025 O R D E R Per Prashant Maharishi, Vice President 1. ITA No. 590/Bangalore/2025 is filed by Essae Suhagraja Private Limited [assessee/appellant] for assessment year 2018 – 19 against the appellate order passed by the Commissioner of Income Tax (A) – 15, Bangalore (the learned CIT – A) dated 31 January 2025 wherein the appeal filed by the assessee against the assessment order passed u/s. 143 (3) read with section 147 of the Income Tax Act (the Act) on 3 Printed from counselvise.com ITA Nos.590 to 592/Bang/2025 Page 2 of 19 March 2023 assessing the total income of the assessee at ₹ 69,843,018/– against the return filed by the assessee on 30 September 2018 at Rs. Nil, was dismissed. 2. The assessee has raised the following grounds of appeal:- “ 1. The learned Commissioner of Income-tax (Appeals) 45, Bengaluru has erred in confirming the impugned order passed by the Assessing officer. The orders passed being bad in law and are liable to be quashed. Without prejudice: 2. The condition precedent for issue of notice u/s 148 of the Act being absent, mandatory procedures under law not having been followed and the requisite approvals from the specified authority not having been taken, reopening of assessment in the appellant's case is bad in law. Consequently, the reassessment order as passed being also bad in law is required to be quashed. Without further prejudice: 3.1. The learned C1T(A) has erred in confirming the denial of deduction of Rs. 5.54 crores with respect to cost of TDR without appreciating that the tax treatment of cost of TDR having attained finality in the assessment order for AY 20-21, the learned assessing officer, for the assessment of income for AY 18-19 ought to have followed the same tax treatment. The action of the learned assessing officer in the reassessment order being inconsistent with the concluded position on the same matter is bad law hence the denial of deduction as made/confirmed is to be allowed. 3.2. The learned CIT(A) has erred in not appreciating the fact that the assessing officer himself having concluded, in the assessment order for AY 20-21, that the cost of TDR is allowable as deduction in the income computation for AY 18-19 and has erred in disallowing the claim of TDR. On proper appreciation of facts of the case and the law applicable, the cost of TDR is ought to have been allowed as deduction in the hands of the appellant. Printed from counselvise.com ITA Nos.590 to 592/Bang/2025 Page 3 of 19 The disallowance being in violation of principles of consistency and fairness in tax proceedings is erroneous, bad in law and liable to be deleted. The learned CIT(A) has failed to appreciate this ground and has erred in confirming the disallowance made by the AO. 3.3 In any case, the appellant's claim for deduction of TDR costs is also allowable on merits of the appellant's case. (Tax Effect of above ground: 2,12,70,100/-) 4. The appellant also denies liability to pay interests. The interests having been levied erroneously have to be deleted. 5. In view of the above and on other grounds to be adduced at the time of hearing, it is requested that the impugned assessment order be quashed or at least a. Entire cost of TDR be allowed as deduction and b. Interest levied be deleted. (Tax Effect of above ground: 2,12,70,100/)” 3. The brief fact of the case shows that assessee is a company engaged in the business of real estate, filed its return of income u/s. 139 of the Act on 30 September 2018 at a total income of ₹ 693,860/–. In response to a notice u/s. 148 of the Act the assessee filed its return of income declaring a total income of Rs.1,53,04,240. The assessee has claimed the cost of Transferable Development Rights (TDER) allowable in assessment year 2018 – 19 of ₹ 54,538,780/– as expense under the head business and profession. The case of the assessee was reopened by issue of notice u/s. 148 of the Act stating that assessee failed to declare proportionate capital gain on the transfer of capital gains during the financial year 2017 – 18. Based on this, after taking the approval of the Printed from counselvise.com ITA Nos.590 to 592/Bang/2025 Page 4 of 19 Principal Commissioner of Income Tax, Bangalore on 22 March 2022, a show cause notice u/s. 148A (b) of the Act was issued on 23 March 2022. The same was replied on 29th of March 2022 and accordingly notice u/s. 148A (b) was issued to the assessee on 31st of March 2022 disposing off the objections. Notice u/s. 148 was issued on 31st of March 2022 which was responded to by filing the return in response to that on 11 May 2022. 4. The issue in the appeal is that assessee has purchased the land to the extent of ₹ 1,96,020 sq.ft. and building to the extent of 21,350 sq.ft. in the financial year 2005 – 06. This asset was rented out by the assessee and income from house property was declared in the return of income. The capital asset was converted into stock in trade in the financial year 2011 – 12 upon conversion of land it was held as a capital asset converted into stock in trade and the capital gain of ₹ 191,622,660/– was computed u/s. 45 (2) of the Act which was liable to be subjected to tax in the year of sale or otherwise transfer of the stock in trade. Assessee entered into a joint development agreement with a builder in financial year 2013 – 14 as per agreement dated 2 August 2013 registered as document with Sub- Registrar Bangalore. As per the joint development agreement the assessee was entitled to receive super built up area of constructed area of 1,49,640 sq.ft. for giving up 1,40,670 sq.ft. of land. Thus, the assessee was entitled to receive 34% of total built up area with proportionate common amenities, car parking slots, and garden area by way of consideration in view of giving up 66% of land. The assessee received the constructed area in two tranches (1) Printed from counselvise.com ITA Nos.590 to 592/Bang/2025 Page 5 of 19 super built up area of 76,865 sq.ft. in financial year 2017 – 18, (2) super built up area of 72,775 sq.ft. in financial year 2019 – 20. As the assessee has transferred the stock in trade in view of the receipt of the constructed area, to the extent of land transferred, assessee is liable for offering capital gains computed earlier in the year of conversion to tax in the current year as the concerned stock was otherwise transferred in lieu of the constructed area. In this case the assessment was completed on 25th of March 2022 wherein the stand taken by the revenue was that the capital gain u/s. 45 (2) of the Act is to be offered to tax is not in the proportion to the built up area of flat sold but in the proportion to the undivided interest in land sold and transferred by the assessee. Thus, it was concluded in the original assessment that the event of handing over possession of flat to the assessee by the builder parallelly results in transfer of undivided interest in land from the assessee to the builder resulting in tax u/s. 45 (2) of the Act. 5. Thus, as per the assessee the income u/s. 45 (2) is chargeable to tax only in the years when the flats are sold to the ultimate buyers whereas as per the opinion of the learned AO income is also chargeable to tax in the year of receipt of possession of constructed flats from the builder in view of the stock of land. 6. Thus, in the reassessment proceedings, the assessee updated the income tax return as per the approach of the revenue, but assessee has claimed cost of transferable development right allowable to the assessee of ₹ 54,538,780 as expense. Printed from counselvise.com ITA Nos.590 to 592/Bang/2025 Page 6 of 19 7. The assessee has claimed the cost of transferable development right allowable to it in assessment year 2018-19 to the extent of ₹ 54,538,780/– as expense under the head business. This is the assessee's share of cost of TDR incurred by the developer. The learned assessing officer has disallowed the above cost. The claim of the learned assessing officer is that the entire cost of transferable development right was purchased over the period 14 January 2011 to 2 January 2017 before transfer of super built up area to the assessee in financial year 2017 – 18. As per the joint development agreement the assessee was required to pay the amount within 90 days to the developer. The fact of purchase of transferable development right is intimated to the assessee in the supplementary joint development agreement dated 2 May 2018 hence the assessee was required to pay the amount within the financial year 2018 – 19. Further this expenditure should be appropriated as cost in respect of all the sales of specified super built up area made by the assessee. During the current year the assessee has not sold any super built up area, hence the cost incurred towards the super built up area will have to be added to the closing work in progress. Thus, as per ld. AO as no super built up area was sold in the current year, no deduction will be allowed under the head income from business payment of transferable development right. Hence the same should have been included in the closing stock of super built up area in financial year 2018 – 19. Thus, the claim of the assessing officer is that that during the assessment year 2018 – 19 the assessee was handed over the possession of 76,865 ft²/sq.ft. of built up area of 449 flats by Printed from counselvise.com ITA Nos.590 to 592/Bang/2025 Page 7 of 19 the builder which has resulted in transfer of ₹ 72,154 .68 sq.ft. of undivided area to the builder. The assessee has offered capital gain of ₹ 70,536,027 to tax in the return of income for assessment year 2018 – 19. This amount is determined based on total land area proportionate to the area of the land handed over to the builder during this year. 8. However, the learned assessing officer noted that during financial year 2017 – 18 relevant to this assessment year, the assessee has entered into seven agreements to sell seven flats to different prospective buyers however the occupancy certificate was received by the assessee on 6 June 2018 therefore during the financial year 2017 – 18 the sale of flats were not finalized. It was further held that as assessee is following mercantile system of accounting, the corresponding expenditure will have to be accounted in the year in which the liability arises. On joint reading of the joint development agreement and the dates of purchase of the transferable development right provides that the same is expenditure pertaining to financial year 2018 – 19 and subsequent years provided the fact that the corresponding sale of the flats also happens in the relevant year. According to him, allowing the accounting expenditure in the year of payment will lead to accounting the same as per cash system of accounting and therefore it will result in a mixed system of accounting which is not permitted. Accordingly, as no sales have been made during the relevant financial year in assessment year 2018 – 19 no cost of transferable development right expenses of ₹ 54,538,780/– is allowable hence same was disallowed. Printed from counselvise.com ITA Nos.590 to 592/Bang/2025 Page 8 of 19 9. Correspondingly assessment order was passed u/s. 143(3) r.w.s. 147 of the Act on 3 March 2023 determining the total income of the assessee at ₹ 69,843,018/–. 10. The assessee aggrieved with the same preferred an appeal before the learned CIT – A challenging the reopening of the assessment as well as the addition on the merits of the case of disallowing the cost of transferable development right. The learned CIT – A dismissed the appeal of the assessee on reopening of the assessment. Further with respect to the allowability of the cost of TDR expenditure wherein it was held that that the cost of TDR as deduction for the assessment year 2020 – 21 is disallowable and same is to be claimed in assessment year 2018 – 19. The learned CIT – A dismissed the appeal of the assessee holding as under: - \" 6.4 the grounds, submission of the appellant and material available on record have been carefully considered. There is no dispute on the fact that the cost of transferable development right has to be appropriated as cost in respect of all the flats sold. It is also a fact that there was no sale of flats during the year 2018 – 19. This being the case there is no scope for allowance of the entire TDR expenses in this year. The cost paid for the TDR is to be treated as part of the cost of land or development cost and this cost is to be capitalised into the overall development costs, which means it becomes the cost of the capital expenditure of the project, similar to the cost of land acquisition, construction and labour. The cost of TDR has to be located across the various units in the project. When TDR is acquired, it is to be recorded in the books as and as at the cost of TDR is capitalised over the life of the project, thereby contributing to the cost of each unit sold. The appellant also agrees to the above accounting treatment of transferable development right. The only contention of the appellant, that the Department has taken different stand in assessment year 2020 – 21 though is acceptable does not help the appellant's case in this year (assessment year 2018 – 19) Printed from counselvise.com ITA Nos.590 to 592/Bang/2025 Page 9 of 19 that is being adjudicated. The appellant has to seek remedy for the appropriate year only. Therefore, having stated thus it is held that the Act of the AO in disallowing the entire TDR cost during this year and including it in the cost of the projects is hereby upheld. The appellant is at liberty to seek redress for assessment year 2020 – 21 inappropriate for a. Therefore, this ground of appeal No. 3 is dismissed.\" 11. Against this appellate order the assessee is in appeal before us. The learned authorised representative referred to us the assessment order passed for assessment year 2020 – 21 wherein in paragraph No. 16 it was stated that that the above expenditure of ₹ 54,538,780/– is pertaining to assessment year 2018 – 19. On this ground, the deduction was denied to the assessee. Thus, the facts now stand is that the assessee has been denied the deduction of ₹ 54,538,780 in both the assessment year i.e., assessment year 2018 – 19 and assessment year 2020 – 21. Therefore, it cannot be the case that assessee is not allowed deduction in any of the years. 12. The learned departmental representative vehemently supported the orders of the learned lower authorities. 13. We have carefully considered the rival contention and perused the orders of the learned lower authorities. The fact clearly shows that the cost of purchase of transferable development rights by invoice No. 31st of March 2020 amounting to ₹ 54,538,780/– has been denied to the assessee either in the assessment year 2018 – 19 or for assessment year 2020 – 21. For the assessment year 2018 – 19 the assessee is denied the deduction because there is no sale of flats during the assessment year 2018 – 19. For the assessment year 2020 – 21 the deduction is denied Printed from counselvise.com ITA Nos.590 to 592/Bang/2025 Page 10 of 19 to the assessee because that the cost of the transferable development right is held to be a prior period expenditure for that year. It is the fact that assessee has incurred the expenditure towards cost of transferable development rights to the tune of ₹ 5.45 crores in assessment year 2020 – 21. The assessee in its books of accounts and for the tax purposes the TDR expenses were considered as part of inventory cost. Such expenses were accounted and claimed in assessment year 2020 – 21 based on invoices raised on the company by the builder. For assessment year 2020 – 21 deduction was claimed only in respect of that portion of TDR cost which pertained to inventory sold during that year. However, in the assessment order for assessment year 2020 – 21 it was concluded that the transferable development right cost pertain to the assessment year 2018 – 19 and therefore same was disallowed for that assessment year holding it to be a prior period expenditure. Thus, in the return filed u/s. 148 of the Act the cost of the transferable development right which was disallowed in the assessment year 2020 – 21 has been claimed as a deduction for assessment year 2018 – 19. Even during this year, the claim of the assessee was not accepted. Therefore, the learned assessing officer has taken a contradictory stand which was his stand for assessment year 2020 – 21 that the cost belongs to the assessment year 2018 – 19 and while framing the assessment order for assessment year 2018 – 19 when such cost was claimed by the assessee for assessment year 2018 – 19 it was disallowed holding that it is pertaining to the assessment year 2020 – 21. Thus, the revenue could not be allowed to blow hot and cold Printed from counselvise.com ITA Nos.590 to 592/Bang/2025 Page 11 of 19 denying the deduction to the assessee of the cost of development right. When the assessing officer has already taken a stand that the above amount is a deduction allowable to the assessee in assessment year 2018 – 19, while framing the assessment order for assessment year 2020 – 21, he cannot disallow the same deduction to the assessee while framing the reassessment order passed for assessment year 2018 – 19 holding that such expenditure is allowable to the assessee only in assessment year 2020 – 21. It is undisputed that assessee has incurred the cost of this TDRs. and it is business expenses. In view of the above facts, we direct the learned assessing officer to stick to the stand already taken for assessment year 2020 – 21 that the claim of the expenses is allowable to the assessee in assessment year 2018 – 19. Accordingly, we direct the learned assessing officer to allow the claim of the assessee for assessment year 2018 – 19. Accordingly ground No. 3 of the appeal of the assessee is allowed. 14. No other grounds are pressed before us and therefore the appeal of the assessee in ITA No. 590/Bangalore/2025 for assessment year 2018 – 19 is partly allowed. 15. ITA No. 591/Bangalore/2025 is filed by the assessee for assessment year 2021 – 22 against the appellate order passed by the Commissioner of income tax (appeals) – 15, Bangalore on 31st of January 2025 wherein the appeal filed by the assessee against the penalty order passed on 22nd of June 2023 was dismissed. Printed from counselvise.com ITA Nos.590 to 592/Bang/2025 Page 12 of 19 16. The fact of the case shows that that the assessee has filed its return of income u/s. 139 of the Act on 13 February 2022 declaring a total income of ₹ 146,167,590/–. The assessee revised its return of income u/s. 139 (5) of the Act on 30 March 2022 declaring total income of ₹ 111,105,048. The case of the assessee was picked up for the scrutiny which has resulted into the assessment order passed u/s. 143 (3) of the Act on 20 December 2022 wherein a sum of ₹ 4,646,000/– was added to the returned of income of the assessee out of the total expenses of ₹ 50 lakhs on account of the keyman life insurance premium paid under employee benefit expenses. Under the terms of insurance premium paid u/s. 37 (1) of the Act a sum of ₹ 4,646,000 was regarded as the investment fund in the various portfolio for the sole purpose of the wealth appreciation which is held to be not an allowable business expenditure. 17. The assessee preferred an appeal before the learned CIT – A against the assessment order. The assessee has also filed form No. 68 seeking immunity from levy of penalty as per the provisions of section 270AJ of the Act on 22 December 2022. However, as the penalty proceedings have been initiated under the circumstances referred to under subsection (9) of section 270 A of the Act the order rejecting the said application is not required to be passed in pursuance to the provisions of section 270 AA (3) of the Act. Therefore, notice u/s. 270A (2) (A) was also issued to the assessee, the assessee explained that that its claim of deduction u/s. 37 (1) of the Act of keyman insurance premium is bona fide and no penalty could have been levied on the Printed from counselvise.com ITA Nos.590 to 592/Bang/2025 Page 13 of 19 same. The learned assessing officer rejected the claim of the assessee and held that the disallowance of ₹ 4,646,000/– has resulted into the underreporting of income in consequence to misreporting thereof and therefore liable for penalty at the rate of 100% of ₹ 1,169,305/–, the learned AO levied the penalty at the rate of 200% amounting to ₹ 2,338,610 by passing an order u/s. 270A of the Act on 22 June 2023. 18. The assessee aggrieved with the same preferred an appeal before the learned CIT – A wherein the appeal of the assessee was dismissed. The learned CIT – A held that assessee has failed to establish that it has not resorted to misrepresenting of income by claiming the premium paid of the directors who are brothers in the appellant company. In view of the fact, it was held that it clearly established that the said insurance scheme is wealth maximization scheme and not claim of any insurance scheme. The assessee has resorted to underreporting in consequence to misreporting income u/s. 270A (9) of the Act, accordingly, appeal of the assessee was dismissed. 19. The assessee is in appeal before us stating that the claim of the assessee is with respect to the keyman premium insurance policy which is allowable to the assessee as a deduction u/s. 37 (1) of the Act in view of the decision of the Coordinate Bench in 151 ITD 470 (Mumbai) in case of Shri Nidhi Corporation v. Addl. CIT. It was further stated that there are several judicial precedents including the decision of the honourable Punjab and Haryana High Court wherein the claim of the assessee is allowable u/s. 37 (1) of the Act. Thus, the disallowance of Printed from counselvise.com ITA Nos.590 to 592/Bang/2025 Page 14 of 19 the expenditure of the keyman insurance policy made by the learned assessing officer itself is not in accordance with those judicial precedents and therefore there cannot be any issue of levy of the penalty resulting in misreporting or underreporting of the income. 20. She further submitted that in the absence of details as to which limb of section 270 A was attracted and how the ingredient of section 270 A (9) was satisfied such notice is bad in law. For this proposition she relied on the decision of the honourable Delhi High Court in case of GE Capital US Holdings Inc. v. DCIT(International taxation) (2024) 163 taxmann.com 146 (Delhi) dated 31st of May 2024 wherein in paragraph No. 27 – 28 it has been held that the show cause notice in terms of which the action u/s. 270 A came to be initiated failed to specify whether the petitioner was being tried on allegation of underreporting of misreporting makes the penalty order invalid. She further referred to the several judicial precedents of the coordinate benches to support her contention. She further referred to the assessment order wherein it did not specify as to under which subclause of section 270 A the penalty is initiated, further the penalty order levying penalty also fails to identify the specific laws of section 270 (9) under which the appellant is guilty of misreporting. 21. The learned departmental representative vehemently supported the orders of the learned lower authorities and submitted that assessee has claimed an investment as an expenditure holding that the Keyman insurance expenses are the insurance charges but in fact they were held Printed from counselvise.com ITA Nos.590 to 592/Bang/2025 Page 15 of 19 to be the wealth maximisation policy of the directors and with the intent of investment. Therefore, there is a clear case of misreporting of the income. 22. We have carefully considered the rival contention and perused the orders of the learned lower authorities. Briefly stated the fact shows that the assessee has claimed deduction of ₹ 50 lakhs towards the Keyman insurance premium paid which is allowed to the extent of the insurance content and to the extent of the investment sum of ₹ 4,646,000 was disallowed. The assessment order also speaks about the initiation of penalty u/s. 270 A of the Act. Accordingly, penalty at the rate of 200% of the tax was charged at ₹ 2,338,610. In fact, we find that Keyman insurance premium payable by the assessee with respect to the life of its director is held to be allowable u/s. 37 (1) of the Act by several judicial precedents. The expenses itself are held to be allowable by some of the Benches of the Tribunal, the issue becomes highly debatable and divergent views are available that where the keyman insurance policy is allowable as deduction or not. The penalty has been levied on such disallowance. However, as the issue of disallowance has already been concluded and not at all before us, it is only a matter that on such disallowance whether the penalty can be levied under the provisions of section 270A of the Act or not? We find that when the disallowance itself is a debatable issue, no penalty could have been levied. Similarly, it is also the claim before us that penalty proceedings are initiated for under-reporting of income in consequence to misreporting of income. Penalty can be levied on 6 types of acts on Printed from counselvise.com ITA Nos.590 to 592/Bang/2025 Page 16 of 19 behalf of the assessee. It is also true that ld. AO, neither in the assessment order nor even otherwise has stated that under which sub- clause of 270A of the Act penalty is levied. The Hon’ble Delhi High Court in GE Capital US Holdings Inc. [2024] 163 taxmann.com 146 (Del) has categorically held that it is incumbent upon the AO to ascertain the provisions of section 270A stood attracted either on account of under-reporting or misreporting of the income. A finding misrepresentation is required to be written and recorded in the assessment order. In the absence of the same, penalty deserves to be deleted. Accordingly, we allow the appeal of the assessee and direct the ld. Ao to delete the penalty levied of Rs.23,38,610 being 200% of tax of Rs.11,69,305 on disallowance of keyman insurance premium expenditure of Rs.46,46,000 in the hands of the assessee. 23. In the result, ITA No.591/Bang/2025 filed by the assessee is allowed. 24. ITA No.592/Bang/2025 is filed by the assessee against the appellate order passed by the CIT(Appeals)-15, Bangalore dated 31.1.2025 for AY 2022-23 wherein the appeal filed by the assessee against the assessment order passed u/s. 143(3) of the Act dated 20.3.2024 was partly allowed. 25. The assessee is aggrieved with the disallowance of interest expenditure to the extent of Rs.39,87,000 u/s. 36(1)(iii) of the Act confirmed by the ld. CIT(A). Printed from counselvise.com ITA Nos.590 to 592/Bang/2025 Page 17 of 19 26. The brief facts show that assessee filed its return of income on 31.10.2022 at a taxable income of Rs.16,10,24,817. The assessee has paid interest expenditure of Rs.107,67,048 on the funds borrowed of Rs.10,80,21,694 for its business of real estate. The ld. AO found that most of the assets is other than the inventories such as non-current investment, long term loans & advances and advances to vendors. The amount of inventory was Rs.5,37,57,135, accordingly he held that part of the interest is not allowable as deduction to the assessee. The AO was of the view that borrowed funds were utilized for the non-current investment of Rs.34.74 crores and other advances. The income from these assets is chargeable to tax under the head capital gains. The assessee explained that it had incurred interest on borrowings of Rs.1.21 crores out of which Rs.13.98 lakhs has been capitalized and the balance sum of Rs.1.07 crores is charged to P&L a/c as business expenditure. The ld. AO disbelieved the explanation of the assessee and disallowed the above interest expenditure holding it to be relatable to other non-current investments. Assessment order u/s. 143(3) of the Act was passed on 20.3.2024 determining the total income of assessee at Rs.77,17,91,915. 27. The assessee aggrieved with the same preferred an appeal before the ld. CIT(A) wherein the ld. CIT(A) held that interest on the advances paid for purchase of assets is held to be not an allowable expenditure, he therefore held that assessee has paid interest of Rs.107,67,048 on total borrowings of Rs.10.80 crores and therefore with respect to advances paid of Rs.4 crores proportionate disallowance of Rs.39,87,000 is to be Printed from counselvise.com ITA Nos.590 to 592/Bang/2025 Page 18 of 19 made. Accordingly, assessee was granted a relief of Rs.67,80,000. The assessee is in appeal against the confirmation of disallowance of Rs.39,87,000. 28. The only contention raised before us is that in this case the assessee has shareholders fund to the tune of Rs.43.78 crores and therefore the disallowance of advances of Rs.4 crores being proportionate interest expenditure could not have been made. 29. The ld. DR vehemently supported the order of the ld. lower authorities. 30. We have carefully considered the rival contentions and perused the orders of the ld. lower authorities. Here the ld. CIT(A) has confirmed the disallowance of advances of Rs.4 crores being advances for purchase of asset. We find that assessee has interest in free funds available in the form of share capital and reserve & surplus of more than Rs.43.78 crores. It is undisputed that assessee has more interest free funds available than the advances on which interest is disallowed. The fact clearly shows that interest free funds are available to the assessee which are sufficient to meet its investments in non-interest bearing advances, no disallowance can be made in the hands of the assessee. Such is the mandate of the decision of the Hon’ble Bombay High Court in the case of CIT v. Reliance Utilities and Power Ltd., 178 Taxman 135 (Bom). Therefore disallowance of interest is not sustainable. Printed from counselvise.com ITA Nos.590 to 592/Bang/2025 Page 19 of 19 31. In the result, the solitary ground raised in the appeal of the assessee is allowed and the ld. AO is directed to delete the proportionate disallowance on interest expenditure to the tune of Rs.39,87,000 in view of huge interest free funds available to the assessee. The appeal of the assessee is allowed. 32. In view of the above, all the 3 appeals filed by the assessee are allowed as indicated above. Pronounced in the open court on this 4th day of December 2025. Sd/- Sd/- ( KESHAV DUBEY ) ( PRASHANT MAHARISHI ) JUDICIAL MEMBER VICE PRESIDENT Bangalore, Dated, the 04th December 2025. /Desai S Murthy / Copy to: 1. Appellant 2. Respondent 3. Pr. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. By order Assistant Registrar ITAT, Bangalore. Printed from counselvise.com "