2020 (9) TMI 863 - AT - Income Tax

Excess interest over and above the receipts of interest - addition has been made exclusively on the basis that the assessee has made interest free advances to its sister concern whereas this money was advanced for business purposes - HELD THAT - Assessee was required to pay interest free refundable security deposit of ₹ 56,00,000/- to the owner of the land in lieu of the owner granting license for carrying out the development project. Thus, the advance made by the assessee was wholly and exclusively for the purposes of business. In view of these facts the A.O. was not justified in making any disallowance out of interest payment. Development Agreement with Kalyan Gems Export Ltd. has been executed on 03.09.2011. As per terms of this agreement, copy of which is available on paper book as cited supra the assessee agreed to develop a plot of land measuring 2994.62 sq. meter situated at K. No. 184 185/685, Village Manoharpura, Tehsil Sanganer, Jaipur the agreement that assessee was to act as a developer and was required to develop a project comprising of multi-storied commercial and residential complex. It was under this agreement that assessee paid a sum of ₹ 2,21,00,000/- Lacs to Shri Kalyan Realty Ltd on 03.09.2011 as a security deposit. This was done in compliance of terms at para 4.1 of the development agreement. As per this para the assessee was required to pay interest free refundable security deposit of ₹ 2,21,00,000/- to the owner of the land in lieu of the owner granting license for carrying out the development project. Thus, the advance made by the assessee was wholly and exclusively for the purposes of business. The development agreements establish beyond doubt that the amount advanced to both the concerns was under business agreements, therefore there is no occasion for making any disallowance of interest. No merit in the disallowance so made by the A.O. - Decided in favour of assessee.

Issues Involved:
1. Validity of the order passed under Section 143(3) read with Section 153A of the Income Tax Act, 1961.
2. Consideration of development agreement as additional evidence.
3. Opportunity to present additional evidence.
4. Disallowance of interest payment.

Issue-Wise Detailed Analysis:

1. Validity of the Order Passed Under Section 143(3) Read with Section 153A:
The assessee contended that the order passed under Section 143(3) read with Section 153A was void ab-initio as no incriminating material was found during the search to justify the issuance of notice under Section 153A. The addition was based on the assessee making interest-free advances to its sister concerns, which were claimed to be for business purposes and disclosed in the books of accounts. The tribunal referred to several judicial pronouncements, including *Anil Kumar Bhatia vs. Assistant Commissioner of Income Tax* and *Singhad Technical Education Society vs. ACIT*, to support the argument that without incriminating material, the issuance of notice under Section 153A was not justified.

2. Consideration of Development Agreement as Additional Evidence:
The CIT(A) had erred in finding that the development agreement was not filed before the AO and considered it as additional evidence. The tribunal found that the development agreements with Shri Kalyan Realty Ltd and Shri Kalyan Gem Exports Pvt Ltd were executed on 03.09.2011 and were available in the paper book. These agreements were notarized and indicated that the advances were made for business purposes, specifically for developing multi-storied commercial and residential complexes.

3. Opportunity to Present Additional Evidence:
The assessee argued that the CIT(A) did not provide an opportunity before rejecting the additional evidence filed in the paper book. The tribunal noted that the development agreements were crucial to establishing the business purpose of the advances and should have been considered. The failure to provide an opportunity to present this evidence was a procedural lapse.

4. Disallowance of Interest Payment:
The AO had disallowed interest payments on the grounds that the assessee had made interest-free advances to its sister concerns for non-business purposes. The tribunal examined the development agreements and found that the advances were made as security deposits under the terms of the agreements for business purposes. The tribunal referred to several judicial pronouncements, including *CIT vs. Shahibag Entrepreneurs (P) Ltd.* and *S.A. Builders Ltd. vs. CIT*, to support the argument that the advances were made for commercial expediency and were incidental to the assessee’s trade. The tribunal concluded that the AO was not justified in making the disallowance and directed the AO to delete the disallowance for the assessment years 2012-13, 2013-14, and 2014-15.

Conclusion:
The tribunal allowed the appeals of the assessee, finding that the orders passed under Section 143(3) read with Section 153A were not justified in the absence of incriminating material. The tribunal also found that the development agreements were valid evidence of the business purpose of the advances and that the disallowance of interest payments was not warranted. The tribunal directed the AO to delete the disallowance of interest payments for the relevant assessment years. The order was pronounced in the open court on 11/09/2020.

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