Fair Market Value Of JDA Built-Up Area Determines Consideration

Fair Market Value Of JDA Built-Up Area Determines Consideration; Disallowance Of Interest Expenditure Is Impermissible With Sufficient Interest-Free Funds

Issue

Whether, for computing business income under a Joint Development Agreement (JDA) where land converted into stock-in-trade is exchanged for constructed area, the “full value of consideration” is to be determined based on the Fair Market Value (FMV)/stamp guideline value under Section 50D read with Section 43CA, or on the developer’s cost of construction.
Whether proportionate interest expenditure under Section 36(1)(iii) can be disallowed for interest-free advances to sister concerns when the assessee possesses sufficient interest-free funds and establishes commercial expediency.

Facts

Background & JDA Execution: The assessee, a private family trust in the real estate business, converted its acquired land into stock-in-trade and entered into a Joint Development Agreement (JDA) with a developer.
Terms of Transfer: The assessee transferred 45% of its land in exchange for a 55% share in the constructed commercial area (amounting to 2,74,332 sq. ft. upon completion).
Return of Income: The assessee credited ₹48.43 crores as consideration for the transferred land, offering ₹32.03 crores as Long-Term Capital Gains (LTCG) and ₹14.56 crores as business income.
AO & CIT(A) Action on Consideration: The Assessing Officer (AO) adopted the developer’s construction cost of the assessee’s constructed area, valued the consideration at ₹215.43 crores, and added the difference as additional business income. The CIT(A) upheld the approach in principle while making minor cost adjustments.
AO & CIT(A) Action on Interest Disallowance: The AO made a proportionate disallowance of interest expenditure under Section 36(1)(iii) on the ground that borrowed funds were diverted interest-free to sister concerns. The CIT(A) confirmed the disallowance citing a lack of commercial expediency.
Assessee’s Stand on Borrowed Funds: The assessee held substantial interest-free funds (via customer advances and current liabilities) exceeding the advances, and demonstrated that the interest-free advances to sister concerns served genuine business/commercial purposes.

Decision

Full Value of Consideration under JDA: In favor of Assessee. The developer’s cost of construction represents the developer’s own outlay to fulfill contractual obligations, not the price/income paid to the assessee. The “full value of consideration” must be determined by applying Section 50D read with Section 43CA (FMV or stamp guideline value of the constructed area). The addition based on the developer’s construction cost was deleted.
Interest Expenditure Disallowance: In favor of Assessee. When an assessee maintains interest-free funds exceeding the interest-free advances given, the legal presumption is that such advances came from interest-free sources. Furthermore, as commercial expediency was established, the interest disallowance under Section 36(1)(iii) was deleted.

Key Takeaways

Developer’s Outlay vs. Assessee’s Consideration: A developer’s construction cost is an internal project expenditure, not the consideration received by a landowner under a JDA. The benchmark for tax computation under Section 43CA / Section 50D is the Fair Market Value or stamp guideline value of the constructed space received.
Presumption of Interest-Free Fund Deployment: Where mixed funds are available and non-interest-bearing funds exceed interest-free advances to related entities, courts presume that non-interest-bearing funds were deployed.
Test of Commercial Expediency: Interest deduction under Section 36(1)(iii) cannot be denied for advances made to sister entities if supported by legitimate business purpose and commercial expediency.

IN THE ITAT BANGALORE BENCH ‘A’

L.K. Trust

Deputy Commissioner of Income-tax

SOUNDARARAJAN K., Judicial Member
and Waseem Ahmed, Accountant Member

IT Appeal Nos. 1147 and 1375 (Bang) OF 2025
[Assessment years 2018-19]

JUNE 9, 2026

A Shankar, Sr. Adv. for the Appellant. Shivanad Kalkeri, CIT for the Respondent.

ORDER

Waseem Ahmed, Accountant Member. – These cross appeals filed by the assessee and the Revenue are against the order of the Id. CIT(A)-11, Bengaluru vide order dated 21/03/2024 in DIN No. ITBA/APL/M/250/2024-25/1074816064(1) for the assessment year 2018-19.

First, we take up ITA No. 1147/Bang/2025, an appeal by the assessee.

2. The assessee has raised as many as 10 grounds of appeal and multiple sub-grounds under main grounds of appeal which are running into several pages. Hence, we, for the sake of brevity and convenience, are inclined not to reproduce the grounds of appeal raised by the assessee.

3. The Ground Nos. 1, 2, 9 & 10 of the assessee’s appeal are general in nature and therefore the same do not require any separate adjudication. Likewise, Ground No. 8 of the assessee’s appeal pertains to levy of interest under sections 234A and 234B of the Act which is consequential in nature and the same does not require any separate adjudication. Hence, we hereby dismiss ground Nos. 1, 2, 8, 9, & 10 of the assessee’s appeal as infructuous.

4. The issue raised by the assessee through Ground No. 5 of its appeal is that the assessment order passed is in violation of principle of natural justice.

4.1 At the time of hearing, there was no argument advanced by the ld. AR for the assessee. Therefore, we dismiss the same as infructuous.

5. The next issue raised by the assessee through Ground No. 6 and sub-grounds thereunder is that the ld. CIT-A erred in adopting the cost of construction claimed by the builder as sales consideration of the assessee for computing business income under the JDA.

5.1 The facts in brief are that the assessee, a private family trust, is engaged in businesses of real estate, renting, health care, trading and other services. The assessee was subject to search proceedings dated 9^th February 2021 in the group case of M/s Khoday India Limited and others. In consequence to the search, certain documents were found and seized pertaining to year under consideration. Accordingly, the assessment proceedings under section 153A of the Act were initiated against the assessee. The necessary facts relating to the issue are that the assessee has acquired a land property admeasuring 107511 sq. ft. in the year 1989 for Rs. 1.5 crores. The impugned land property was converted into stock in trade as on 02-04-2009 at a value of Rs. 75,25,76,000/- based on valuation report by the valuer namely Shri S Raja Rao.

5.2 Subsequently, the assessee entered JDA dated 21^st July 2010 with Prestige Estate Project Ltd for development of said land into multi storied commercial building project namely Prestige Trade Tower. The terms and conditions of the JDA were amended through supplementary agreement dated 10-04-2012 and revised supplementary agreement dated 05-062017. An addendum to the revised supplementary agreement was also executed as on 27-04-2018. As per revised supplementary agreement, out of the total built up area of the project 497902 sq. ft., the built-up area allocated to the assessee stand at 274332 sq. ft. which is equal to 55% of the total built-up area. The project was completed, and occupancy certificate was received in April 2017. The assessee received total built up area of 274332 sq. ft. in F.Y. 2017-18. After allotment of built-up area, the assessee credited its profit and loss account by an amount of Rs. 48,43,00,000/- being value of consideration for transfer of 45% of land to the builder. The assessee claimed that the impugned amount was fixed in pursuance to revised supplementary agreement.

5.3 Further the assessee, on the above transaction offered income to tax under the head capital gain and business income in the return of income filed for the A.Y. 2018-19 in the following manner:

Particular	Amount
FMV 1,07,511 sq. ft. of land under JDA (value as on 2^nd April 2009 being	Rs. 75,25,76,000/-
date on which fixed assets converted into stock)
FMV of 45% of Land (48380 sq. ft.) being developer share	Rs. 33,86,59,200/-
Index cost land for 45% of land transferred	Rs. 1,63,60,000/-
Long term capital gain	Rs. 32,02,99,200/-

5.4 Likewise, income of Rs. 14,56,40,800 being the difference between the agreed consideration of 48,43,00,000/- minus 33,86,59,200 (capital gain discussed above) was computed with respect to the JDA under the business head.

5.5 However, the AO was of the view that, when calculating business or capital gain, the assessee should have considered the gross value of the consideration for the transfer of land under the JDA. This includes the cost of construction incurred by the builder for the constructed area (measured in square feet) received by the assessee. As per the AO, the JDA (Joint Development Agreement) refers to an arrangement where the assessee transfers land to a builder, who then constructs property on that land. The ‘gross value of consideration’ encompasses both any monetary payments and the value of the constructed area received by the assessee. This value is calculated based on the builder’s cost of construction.

5.6 The AO also noticed that a survey proceeding was carried out at the premises of the Prestige Group. The AO based on materials found during the survey and information received in consequence to notice issued under section 133(6) worked out the cost of construction of the project at Rs. 383,69,47,000/- only for the total built-up area 4,97,902 sq. feet. Accordingly, the average cost of construction per sq. ft was computed at Rs. 7,706/- only. Thus, the AO proposed to adopt the value of sale consideration at rate of Rs. 7,706 per sq. ft. for 274332 sq. ft of super built-up area received by the assessee and proposed to bring the same to the income to tax as business income/ capital gain.

5.7 During the assessment proceedings, the assessee explained that in return of income, the value of land given to the developer had been considered against the cost of the built-up area received in exchange. The income-generating transaction in a JDA arises when the land is transferred to the developer. Therefore, the assessee had adopted the value of land transferred based on the valuation prescribed by the Government of Karnataka for payment of stamp duty or registration, since the consideration was received in kind in the form of built-up area. This treatment was said to be consistent with standard accounting principles and was supported by judicial precedents of the Hon’ble Karnataka High Court, including Pr. CIT v. CPC Logistics Ltd. [2022] (Kar) and Pr. CIT v. Smt. Sarojini M. Kushe P.V.S. Beedies (P.) Ltd. 442 ITR 327 (Kar)

5.8 The assessee submitted that in both of the above decisions, the Hon’ble High Court had rejected the Revenue’s approach of adopting the cost of construction declared by the developer as the consideration accruing to the landowner. The Hon’ble Court held that such figures provided by the developer could be inflated to suit his own requirements and hence could not form the appropriate basis for determining the full value of consideration. The assessee further explained that, as a landowner, there was no way to ascertain or verify the cost of construction incurred by the developer, since in a joint development arrangement, such information is not shared with or available to the landowner. Moreover, the cost may include several expenses borne solely by the developer under the terms of the JDA, and no verified details or supporting evidence of such construction costs had been provided by the Assessing Officer.

5.9 It was emphasized that the valuation adopted by the assessee was fully in line with the law and judicial interpretation. The Hon’ble Karnataka High Court in the above cases had already clarified that section 50D read with section 50C of the Act provides the correct mechanism for determining the “full value of consideration” where it cannot be ascertained. Accordingly, the guidance value prescribed for stamp duty purposes should be considered as the deemed full value of consideration. The assessee also relied on the principles laid down by the Hon’ble Supreme Court in K.P. Varghese v. ITO 131 ITR 597 (SC) wherein it was held that the burden of proving understatement of consideration rests entirely on the Revenue. Shifting this burden to the assessee to prove a negative that no higher consideration was received would be unjust and legally untenable.

5.10 In conclusion, the assessee contended that the adoption of construction cost furnished by the developer as the basis of computation was unsustainable, since such figures were unverifiable and unsupported by evidence. The assessee’s method of adopting the government-prescribed guidance value for the land as consideration under section 50D of the Act was appropriate, lawful, and consistent with judicial precedents.

5.11 In continuation of earlier submissions, the assessee alternatively further contended that the AO’s proposed adoption of the developer’s total cost of construction, including finance cost, statutory approval cost, administration expenses, and TDR purchase cost, as the measure of consideration for the assessee’s share of built-up area, was wholly incorrect and contrary to commercial logics as well as legal principles. The assessee submitted that, as per the details furnished by the developer, the total cost per square feet was arrived at Rs. 7,706, which included not only the basic construction cost but also additional heads such as cost towards statutory approvals, finance cost, and TDR purchase. These costs, according to the assessee, cannot be regarded as part of the actual construction cost of the built-up area received by the landowner.

5.12 It was explained that under the norms of any standard JDA, the built-up area transferred to the landowner represents construction executed to the agreed specifications and finishes — referred to as a “warm shell”. The developer constructs the building in accordance with the agreed standards and specifications, and the finance, administration, and statutory costs are exclusively the developer’s own business expenses, incurred for his project management and funding. Therefore, they do not form part of the cost of construction attributable to the landowner’s share. The assessee pointed out that the value of the asset received by the landowner should be restricted to the material and labour costs incurred in constructing the building up to the agreed level of completion and not to the additional financial or administrative costs borne by the developer.

5.13 To further clarify, the assessee illustrated a scenario where two landowners owning identical pieces of land enter separate JDAs with different developers, each constructing an identical building. If one developer constructs using borrowed funds while another uses his own capital, the finance cost incurred by the first developer would inflate the overall cost of construction, even though the buildings are identical. In such a case, treating the inflated finance cost as part of the landowner’s consideration would result in differing deemed considerations for identical properties, which is illogical and commercially unsound. Hence, the inclusion of finance cost, statutory fees, or TDR purchase in the computation of consideration would lead to arbitrary and inconsistent outcomes.

5.14 The assessee maintained that a landowner enters a JDA with full awareness of what he is entitled to receive in return for parting with land — namely, a specified portion of built-up area constructed according to agreed specifications. Therefore, the landowner’s consideration is limited to the intrinsic cost of construction (materials and labour) of that built-up area. Other costs such as finance cost, TDR purchase, statutory approvals, or administrative overheads are independent of the landowner and remain the developer’s responsibility. Including them as part of the landowner’s deemed consideration would be contrary to the accepted commercial practices, unjustified under the terms of the JDA, and unsupported by law.

5.15 Accordingly, the assessee objected to the adoption of Rs. 7,706 per sq. ft. as the cost of construction and submitted that the Assessing Officer’s approach of including extraneous costs inflated the figure unreasonably. The assessee reiterated that only the actual construction cost relevant to the built-up area received should be considered for computation, and that all other costs are to be fully borne by the developer and excluded from the landowner’s consideration under the Income Tax Act.

5.16 The assessee Further alternatively submitted that the part of the project sold by the developer was at the average rate of Rs. 2220/- per sq. ft. which is much power than the value (Rs. 7706 per Sq. Ft.) proposed in show cause notice. The assessee in support furnished copy sale deed executed. The assessee pointed out that the impugned average sale rate of Rs. 2220/- per sq. ft. included built area and additional space. Therefore, factoring the additional undivided area and building constructed area the rate will come at 1835 per sq. ft.

5.17 However, the AO rejected the assessee’s argument that the stamp value of the land transferred should be brought to tax. The AO reiterated that in lieu of transfer of land under JDA to the developer, the assessee received constructed building. Therefore, the cost of construction shall be the value of consideration. The AO acknowledged the case law relied by the assessee. However, the AO found that the facts involved in those cases are distinguishable from the facts of the case of the assessee. The AO noted that in those 2 cases CPC Logistics Ltd. (supra) and Smt. Sarojini M. Kushe P.V.S. Beedies (P.) Ltd. (supra)] the revenue has adopted construction cost at the rate of 1200 per sq. ft. and 1600 sq. ft. respectively merely based on a letter provided by the developer. Therefore, the Hon’ble Court held estimation of construction cost on the basis of letter from the developer is not right and directed to take consideration as FMV as per section 50D of the Act in the absence of reliable data of the cost of construction. On the contrary, in the case of the assessee, the average cost of construction was worked out based on detailed examination of materials collected during the survey proceedings at the premises of the developer and further material information were provided by the developer in response to the notice issued under section 133(6) of the Act. The AO noted that during the survey proceedings, a statement of CFO of the developer M/s Prestige Estate Project Limited namely Shri Balasubrahmanya Sarma V.V was recorded under section 131 of the Act who was working with the group for more than 25 years. The CFO in the statement recorded has provided the details of cost of construction of the impugned project i.e. Prestige Trade Tower based on materials found. The details furnished by the CFO were further verified by the DGM account and associate director of Prestige M/s Prestige Estate Project Limited. Further, the developer in response to the notice issued under section 133(6) of the Act, provided detailed statements of cost of construction of the Project Prestige Trade Tower as well as other projects carried out by them along with supporting evidences being sample copy of invoices of expenses incurred. Thus, the AO held that case law relied by the assessee is not applicable for the above stated reason as in the case of assessee the cost of construction is based on reliable and verifiable data. The AO also noted that in those cases the issue was respect to capital assets on which capital gain was computed whereas in the case on hand the assessee already converted the assets into stock in trade hence it the case of business income.

5.18 Regarding the additional argument of the assessee with respect to certain costs such as administrative and Statutory cost, finance cost and TDR purchase cost that these should not be included in the cost of construction, the AO pointed out that administrative, supervisory, and finance costs formed an integral part of construction costs. The AO emphasized that these expenses are essential for successful completion of a project, as they include planning, budgeting, supervision, legal compliance, and financial management. Since, the JDA allowed the developer to raise loans for construction and the project’s success depended on timely completion, the AO held that finance costs were a necessary component of the construction cost and must be considered for determining the fair value of consideration.

5.19 The AO further observed that the assessee had a significant role and influence in the overall project execution as per the terms of the JDA dated 21.07.2010. The AO noted that, although the developer was responsible for construction and related costs, the assessee was actively involved in important aspects of the project such as finalising plans, designs, and approvals along with the developer. The JDA specifically mentioned that both parties would mutually finalise the concept of designs and plans prepared by reputed architects. This indicated that the assessee was not a passive landowner but had a decisive say in the project’s execution.

5.20 Hence, the AO concluded that the assessee’s argument—that he had no connection with or responsibility for such expenses was incorrect. The AO held that these administrative & statutory costs and finance costs were part of the project development expenses and were to be included while computing the cost of construction and fair value of the built-up area received by the assessee.

5.21 Likewise, the AO with respect to TDR purchase cost observed that the TDRs were used by the JDA parties for better utilization of the project and untap its full potential. TDR purchased were utilized in the original property for the construction additional built up and the assessee has share of 55% in the additional built-up area without incurring any additional cost. Hence, the purchase of the TDR has resulted in direct benefits to the assessee, therefore cost of TDR rightly allocated to the cost of construction of assessee share.

5.22 The AO further rejected the assessee submission regarding a portion of the project sold by the developer at much lower rate than proposed average cost of construction. The AO held that the assessee’s attempt to correlate the cost of construction with the sale consideration received by the developer for certain portion of the project is misplaced. What the assessee has received is the share in constructed area and therefore the value of construction cost is the consideration for the assessee. The AO acknowledged that the developer has sold certain portion of the project to certain parties and as per the sale deed same was sold at Rs. 2220 per sq. ft. However, the FMV of the same was much higher (Rs. 10529 to 10750 per sq. ft.) which has been duly noted by the office of the sub-registrar in the sale deed. The stamp duty on the impugned property transferred was paid at FMV only. Therefore, the assessee argument that the value of the constructed project is lower than the sale consideration received by the developer is not acceptable.

5.23 The AO from revised supplementary agreement dated 05-06-2017 noted that assessee itself has purchased additional super built-up area of 486 sq. ft. (in addition to his entitled share) from the developer at the rate of Rs. 10000 per sq. ft. At the same time the assessee also transferred additional terrace area of 640 sq. ft. to the developer at the consideration of Rs. 2500 per sq.ft. Accordingly the AO held that when the assessee himself has purchased portion of built-up area at Rs. 10000 per Sq. Ft. and sold terrace area at Rs. 2500 per Sq. Ft. then the argument that the cost of construction is less than Rs. 2220 per Sq. Ft. is not acceptable.

5.24 Thus, the AO finally worked out the cost of construction for assessee’s share of built-up area at an average of Rs. 7853/- per Sq. St. which aggregates to Rs. 215,43,29,196/- (274332 sq. ft. X 7853). As the assessee has already credited its profit and loss account by Rs. 48,43,00,000/- the AO worked out the additional business income from the JDA at Rs. 167,00,29,196/- and added the same to the total income of the assessee as undisclosed business income.

6. The aggrieved assessee preferred an appeal before the learned CIT(A).

6.1 Before the learned CIT(A), the assessee submitted a detailed and reasoned argument challenging the addition made by the AO in respect of the JDA entered with M/s Prestige Estate Projects Ltd. The assessee argued that the AO had wrongly adopted the cost of construction incurred by the developer as the deemed sale consideration for computing business income, rather than the value of land transferred by the assessee under the JDA.

6.2 The assessee explained that he was the owner of land measuring 1,07,511 sq. ft., which was converted into stock-in-trade at Rs. 75.25 crores based on a valuation report. He entered into a registered JDA on 21 July 2010 with the developer for constructing a commercial complex called Prestige Trade Tower. Under this JDA, the built-up area was to be shared between the developer and the assessee in the ratio of 45% and 55% of the total built-up area. The project was completed, and the BBMP issued the occupancy certificate on 13 April 2017. The assessee received his share of 2,74,332 sq. ft. of the built-up area in the financial year 2017-18, corresponding to assessment year 2018-19.

6.3 The assessee contended that the consideration for land transfer had been correctly taken at Rs. 48.43 crores, being the value mutually agreed upon in the JDA and higher than the stamp-duty guideline value prescribed by the Government of Karnataka. Hence, there was no undervaluation, and the computation was in accordance with section 43CA of the Act, which mandates adoption of the higher of the declared or guideline value. The AO’s adoption of Rs. 215.43 crores as consideration, based on the developer’s cost of construction, was therefore arbitrary and contrary to law.

6.4 It was strongly urged that the landowner’s consideration in a JDA is the value of land transferred, not the cost of construction incurred by the developer. The assessee relied on binding judgments of the Hon’ble Karnataka High Court in CPC Logistics Ltd. (Supra) and Smt. Sarojini M. Kushe P.V.S. Beedies (P.) Ltd. (Supra) where the Hon’ble Court had categorically held that the cost of construction cannot be treated as the full value of consideration in such cases, especially when the figures are derived from letters of the developer unsupported by evidence. The assessee also cited section 50D of the Act to show that, when consideration cannot be directly ascertained, the fair market value or guidance value should be adopted.

6.5 The assessee pointed out that the AO had mechanically accepted the developer’s unverified cost statement of Rs. 391 crores without any cross-verification or supporting proof. Even the breakup given by the AO showed inclusion of administrative expenses, finance cost, statutory charges, and TDR cost, which were neither incurred nor relevant to the landowner. The assessee demonstrated through a tabular comparison that, if the AO’s adopted rate of Rs. 13,833 per sq.ft. were correct, the developer would be operating at a loss of Rs. 92.23 crores, which is commercially illogical and therefore undermines the credibility of the AO’s computation.

6.6 The assessee also emphasized that under the JDA, the landowner had no control or knowledge of the developer’s construction cost, as those expenses were exclusively the developer’s responsibility. The landowner merely received a “warm-shell” structure as per agreed specifications. Therefore, any additional costs such as finance or administrative expenses could not influence the value of the assessee’s share. To illustrate this, the assessee gave a simple example: if two identical lands are developed under separate JDAs, one with borrowed funds and the other with selffunds, the landowner’s consideration can vary merely because of the developer’s differing finance costs.

6.7 It was further argued that the AO’s reliance on the developer’s CFO’s statement recorded under section 131 of the Act was a clear violation of natural justice since the assessee was neither provided a copy of the statement nor given an opportunity to cross-examine the CFO. Similarly, documents collected from the developer under sections 133A and 133(6) of the Act were never shared with the assessee before being used against him. The assessee therefore urged that the entire assessment was vitiated by breach of audi-alteram partem, relying on the decisions of the Hon’ble Supreme Court in Pr. CIT v. Hadoti Punj Vikas Ltd. (SC), SKM Animal Feeds and Foods (India) (P.) Ltd. v. Asstt. CIT 2024] 464 ITR 213 (Mad), and Andaman Timber Industries v. CCE [2015] 127 DTR 241 (SC).

6.8 The assessee further submitted that the AO had ignored the legal framework of sections 43CA and 50D of the Act, the binding judicial precedents, and the factual matrix showing that the guidance value adopted by the assessee was higher than the statutory value. The AO’s reliance on unverifiable developer data was arbitrary, and the resultant addition of Rs. 167 crores was unjustified. The assessee thus prayed that the addition made by the AO be deleted and that the consideration declared in the return of income, supported by documentary evidence and statutory provisions, be accepted as correct and final.

6.9 The learned CIT(A) after considering the facts in totality rejected the assessee’s argument that value of the land transferred should be taken into consideration instead of cost of construction incurred by the developer. The relevant observation of the learned CIT(A) in this respect is extracted as under:

7.7 I have considered the findings of the AO and the contentions and the submissions of the appellant during the appellate proceedings. As observed, the appellant has received constructed area in exchange for the land given up to the Developer. The submission of the appellant that the consideration as agreed mutually should be adopted is flawed as the appellant has received constructed area in lieu of the land transferred to the developer. In a JDA, the full value of consideration is to be computed in relation to what has been received in exchange of the land transferred. In this case, it is the constructed area received in exchange of land transferred. The contention that the provisions of section 43CA, if the consideration received in exchange of land transferred is also flawed as the provisions of section 43CA are applicable to the facts of his case is also flawed as the provisions of section 43CA are applicable on transfer of an asset, being land or building, and what should be the full value of consideration received or accruing on such transfer. As per the provisions of section 43CA, if the consideration received or accruing as a result of transfer is less than the value adopted or assessed or assessable by any authority of the State Government for the purpose of stamp duty, then the value so assessed or assessable shall be considered as the full value of consideration.

7.8 In the present case, the appellant pursuant to the JDA and supplementary Agreement has received constructed area in exchange for the transfer of land. Therefore, it is the constructed area which was received by the appellant that should be considered as the full value of consideration received by the appellant in lieu of land foregone. Although it is the land that has been transferred, what the appellant has received in exchange is the question. Hence, I am of the opinion that the cost of construction incurred by the developer should be considered as the full value of consideration as per the provisions of section 48 of the Act. Whether such cost of construction should include add on like costs, incurred towards statutory approvals, administrative costs, finance costs and TDR costs depend on how the JDA and the subsequent agreements are worded. Before that it is to be deliberated whether the cost of construction as given by the Developer is verifiable or unverifiable as contended by the appellant. The Appellant has contended that the details obtained by the AO from the developer u/s 133(6) were not shared with it and it was not allowed to cross examine the CFO of the Developer, M/s PEPL violating the principles of natural justice.

6.10 The learned CIT(A) also rejected the assessee argument that cost of construction adopted by the AO is not verifiable and the details were not provided for rebuttal. The relevant observation of the learned CIT(A) after considering the remand report and the assessee’s rejoinder is extracted as under:

7.14 I have seen that the details of the cost of construction as obtained by the AO from the developer which also contains the details like copies of the ledger extracts and bills submitted by major contractors during construction. These details have been extracted as a part of the assessment order on pages 21 to 32 of the assessment order. Therefore, the details of the cost incurred by the developer are verifiable. Those details as contended by the appellant are not mere unverifiable figures. Further the appellant has cited the decisions rendered by the Hon’ble High Court of Karnataka in the CPC Logistics and Smt. Sarojini Kushe. The facts of the relied upon cases are distinguishable from the facts in the present case.

7.15 In the case of CPC logistics, the issue was whether the guidance value should be the full value of consideration pursuant to JDA where in the appellant was supposed to receive some percentage of the constructed area. The AO had adopted the cost of construction of the percentage of the constructed area to be received by the landowner as the sale consideration for computing the capital gains.

7.16 The Hon’ble High Court in this case observed that the AO had adopted Rs 1250/sq feet as cost of construction merely based on a letter given by the developer which is not supported by any particulars. The developer may have inflated the figures to suit its requirements and so basis for determination of the full value of the consideration by the AO on the letter given by the developer cannot be appropriate. The Hon’ble Court held that although the provisions relating to section 50D came into effect from 1/4/2013 (the A.Y involved in the cited decision of CPC logistics is 2010-11), it can throw light on the mode of computation u/s 48 of the Act. It was held that in such circumstances, the guidance value of the land or building can be adopted to determine the full value of consideration.

7.17 As can be seen, the facts of the case are distinguishable from the facts of the present case. Firstly, the cost of construction was not merely based on any letter, rather it is based on analysis of documents impounded during the survey proceedings. The same were confronted to the CFO of the developer in the statement recorded during Survey. More importantly no adverse findings were made during the course of survey with regards to the cost of construction. The details of the cost of constructions of the project were submitted by the CFO of the company in response to Q. No. 26 of the statement. During assessment proceedings the developer M/s. PEPL was issued a notice under 133(6) of the Act on 28.02.2023 calling for documents and information with respect to cost of construction in respect of Prestige Trade Towers along with the documentary evidence. Secondly, the provisions of section 50D are applicable in only those cases where the consideration received or accruing as a result of transfer is not ascertainable or cannot be determined, then the fair market value of the said asset on the date of transfer shall be deemed to be full value of consideration. In the present case, the consideration received is ascertainable and hence provisions of section 50D have no application.

7.18 In the cited case of PCIT v. Sarojini M Kushe the appellant had sold a capital asset on which computation of full value of consideration and resultant capital gain was the issue. In this case also, the AO had adopted a rate of Rs 1600/sq feet on the basis of a letter given by the developer. This decision of the Hon’ble High Court is on similar lines with that of CPC logistics. As stated earlier, the facts are distinguishable. Further, as noted from the assessment order, the CFO of the developer had verified and certified the information and no adverse findings have been drawn by the AO. Hence, the information and the documents passed the tests of creditability and reliability. Further, the details obtained from the Developer and relevant part of the Statement recorded u/s 131 are part of the assessment order. Hence the grounds raised by the appellant that the details obtained from the developer are unverifiable and in violation of principles of naturaljustice do not have merits. Hence the grounds raised are dismissed.

6.11 However, the learned CIT(A) accepted the assessee’s contention about additional cost being administrative & statutory costs, finance costs and TDR purchase costs are not to be included in the computation of cost of construction for assessee’s share in built up area. The relevant observation of the learned CIT(A) reads as under:

7.23 I have perused the contentions raised by the appellant in this regard and the findings of the AO. In view of the fact that the appellant itself has purchased from as well as sold to the developer at a rate of Rs 10,000/sq. ft. as stated in the preceding paragraphs, the contention of the appellant that a rate of Rs. 1,835 sq. ft. should be adopted cannot be accepted. With respect to the add on costs like costs towards Statutory approvals, admin costs, finance costs and TDR costs, it is necessary to look into the JDA and other related agreements to see whether such costs are to be shared or borne by only one party.

7.24 On perusal of the JDA dated 21/7/2010, it is seen that the second Party,

the Developer would secure all the sanctions/approvals for plans/drawings/designs etc. along with the NOCs required from various authorities and all fees, statutory charges, levies and expenses for obtaining such approvals shall be borne by the Second Party, that is, the Developer. In view of this fact, it is held that the expenses incurred towards the statutory approvals being borne by the Developer cannot be part of the cost of construction. As regards the Finance costs, it is seen that as per the JDA dated 21/7/2010, the Developer has to raise the loans from the Banks/Financial institutions and the first Party, that is the appellant is not liable with regards to such debts and in the event of such default by the Developer, the recovery shall be enforced only to the extent of the Developer’s share in the building to be constructed.

7.25 On plain reading of this part of the JDA, it is inferred that the finance cost has been borne by the Developer alone and hence cannot be considered as a part of the construction cost. As regards the administrative costs and taxes, it is observed that the JDA is silent on this aspect as to who will bear this cost. However, the normal practice is that the Developer does the planning, execution, marketing and supervising of the project to earn more profits. Hence, it is opined that the administrative cost is to be borne by the Developer and this item of expenditure cannot form part of the cost of construction.

7.26 As regards the TDR cost, it is seen from the JDA dated 21/7/2010 that the Developer has purchased the TDR to better utilize the potential of the Property to an extent of 1,25,000 sq ft of built-up area. The second party, that is the Developer alone purchased the TDR at its cost. However, the developer agreed to construct the additional built-up area at its cost and agreed to share the Super BUA in the ratio of 55% to the Land owner and 45% to the Developer.

7.27 On plain reading these clauses of the JDA, it is evident that the TDR has been purchased by the Developer alone. Therefore, it is seen that the developer has purchased the TDR, incurred cost towards additional constructed area and shared it with the appellant. Hence, I am of the opinion that the TDR cost has been borne by the Developer and cannot be part of the construction cost.

7.28 In view of the above discussion, I hold that the AO was correct in adopting the cost of construction incurred by the Developer as the full value consideration received or accruing as a result of the transfer of the land by the appellant. However, the add on costs as discussed above will not form part of the cost of construction to be determined for computing the full value of consideration received in exchange for the land transferred by the appellant to the Developer. The Grounds raised with respect to additional business income brought to tax on account of JDA are adjudicated accordingly and are partly allowed. The Ground Nos. 10 to 26 are adjudicated accordingly and are partly allowed.

6 .12 In view of the above, the ld. learned CIT(A) after considering the facts of the case, assessment order, remand report and arguments advanced by the assessee in the manner discussed above partly allowed the appeal of the assessee.

7 . Being aggrieved by the order of the learned CIT(A), both the assessee and the revenue are in appeal before us.

7.1 The assessee is in appeal against the addition sustained by the learned CIT(A) whereas the Revenue is in appeal for exclusion of additional costs being in the nature administrative & statutory costs, finance costs and TDR purchase costs from the cost of construction. The relevant of ground of the revenue’s appeal in ITA No. 1375/Bang/2025 reads as under:

“a)

Whether the Ld. CIT(A) has erred on law and facts allowing the nature of expenses which has not been crystalised as expense of the assessee during the relevant assessment year

(b)

Whether the Ld. CIT(A) has erred on law and facts for not considering the fact about the guidance value of the said property or actual cost of construction as cost of transfer of said property under)DA for development.

(c)

Whether the Ld. CIT erred on facts and law in holding that expenses exclusively borne by the developer cannot be included in computing the cost of construction.

(d)

Whether the Ld. CIT erred on facts and law to conclude that expenses incurred by the developer wholly and exclusively for the development of the impugned land where the assessee has obtained a definite share of the developed property shall not be included in the cost of /construction/development of the impugned property.”

7.2 The learned AR submitted that the addition made under the head “Income from business” in respect of income arising from the Joint Development Agreement (JDA) is not justified either in law or on facts. The ld. AR explained that the assessee is the owner of land at No. 46, Palace Road, Sampangiramanagar, Bangalore, measuring about 1,07,511 sq. ft., acquired in 1989 for Rs. 1.5 crores. The land was held as a capital asset since its purchase and was later converted into stock-in-trade in 2009 at a value of Rs. 75.25 crores based on a professional valuation report.

7.3 The ld. AR further explained that a registered Joint Development Agreement was entered into with Prestige Estate Projects Limited on 21.07.2010 for developing the land into a commercial complex named Prestige Trade Tower. As per the JDA, the assessee was to receive 55% of the built-up area and the developer 45% of the built-up area. The plan was sanctioned in December 2011. A supplementary agreement dated 10.04.2012 was fixed for the consideration for transfer of 45% of undivided land interest at Rs. 48.43 crores. Later, a revised agreement dated 05.06.2017 confirmed that the total built-up area of 4,97,902 sq. ft. was to be shared, giving the assessee 2,74,332 sq. ft. The occupancy certificate was received in April 2017, and the assessee’s share of built-up area was accordingly received and accounted for in FY 2017-18 relevant to AY 2018-19.

7.4 The ld. AR pointed out that the agreed sale consideration of Rs. 48.43 crores were duly credited to the profit and loss account and was more than the guideline value of Rs. 33.86 crores as per the registration authority. Hence, the computation was fully in accordance with section 43CA of the Income Tax Act.

7.5 The ld. AR submitted that the dispute arose only on the value of consideration. The AO, instead of accepting the agreed value, adopted an inflated figure of Rs. 2,15.43 crores based on the cost of construction per sq. ft. allegedly obtained from the developer during a survey. This led to an addition of Rs. 167.00 crores, which was partly reduced by the CIT(A) to Rs. 67.91 crores. The ld. AR argued that this entire approach was erroneous.

7.6 It was submitted that what was transferred to the developer was land, not the constructed portion. Hence, the value of land transferred should alone be considered. The AO’s method of using the developer’s cost of construction to determine sale value was wrong and contrary to law. The ld. AR relied on judgments of the Hon’ble Karnataka High Court in CPC Logistics Ltd. (Supra) and Smt. Sarojini M. Kushe P.V.S. Beedies (P.) Ltd. (Supra). In both these cases, it was held that adopting inflated figures based merely on a letter from the developer is unsustainable, as developers may inflate costs to minimize their own tax liability.

7.7 The ld. AR emphasized that the assessee’s consideration was bona-fide and higher than the government-prescribed value. Even if the cost of construction was to be considered for argument’s sake, the guideline value as per the Government of Karnataka notification dated 31.03.2017 fixed for the construction cost at Rs. 1,208 per sq. ft., and the earlier notification dated 17.04.2007 fixed it at Rs. 680 per sq. ft. Both were far lower than what the AO adopted at Rs. 7,853 per sq. ft. Thus, the valuation upheld by the ld. CIT(A) at Rs. 4,241 per sq. ft. was also excessive.

7.8 The ld. AR also pointed out that the developer’s figures were unverified and unreliable. They included other expenses such as statutory approvals, administrative overheads, finance costs, TDR purchases, and taxes that had no connection with the assessee’s share. The ld. CIT(A) had rightly excluded some of these but failed to appreciate that even the remaining figures i.e. material plus labour cost lacked credibility.

7.9 It was further argued that the agreement between the assessee and the developer was contractual and binding. As held by the Hon’ble Supreme Court in Mangalore Ganesh Beedi Works v. CIT 378 ITR 640 (SC) the Revenue cannot alter a contractual consideration unless there is a statutory basis to do so. Section 43CA also supports the assessee’s stand that where the consideration adopted exceeds the guideline value, no addition can be made.

8. The ld. AR therefore submitted that the AO’s action of adopting the developer’s cost of construction as the basis for determining consideration is against settled law and facts. The learned AR concluded that the addition sustained by the ld. CIT(A) of Rs. 116.34 crores is unsustainable and deserves to be deleted in full. In summary, the ld. AR urged that—

•

The consideration of Rs. 48.43 crores is fair and exceeds the statutory guideline value;

•

The cost of construction adopted by the AO is not a valid method;

•

The developer’s data is unreliable; and

•

The addition is bad both in law and on facts.

8.1 Accordingly, the learned AR prayed that the entire addition made by the AO and sustained by the ld. CIT(A) be deleted and the appeal be allowed in full.

8.2 On the other hand, the learned DR supported the orders of the AO and CIT(A), contending that the cost of construction incurred by the developer represented the true consideration received by the assessee under the JDA. Both the ld. DR and AR vehemently supported the order of lower authorities to the extent favourable to them.

8.3 We have heard the rival contentions of both the parties and perused the materials available on record. The key issue for adjudication is whether the cost of construction claimed by the developer can be taken as the full value of consideration for computing business income arising to the assessee from the Joint Development Agreement (JDA), where the assessee received constructed space in lieu of land (capital asset) earlier converted into stock-in-trade.

8.4 Before going into detail, we first proceed to discuss the relevant legal framework in the given facts. The transaction is governed primarily by section 45(2) of the Act. The assessee had converted the capital asset, being land, into stock-in-trade in the financial year 2009-10. Under Section 45(2) of the Act, such conversion is regarded as a “transfer” for capitalgain purposes, but the gain is taxable only in the year when the stock-intrade is actually sold or transferred. In this case, the sale took place in FY 2017-18 (AY 2018-19) when the assessee received a specified portion of the constructed commercial building from the developer.

8.5 Further, as the assessee received consideration in kind and not in cash, Section 50D of the Act becomes relevant. This section provides that when the consideration is not ascertainable or cannot be determined, the fair-market value (FMV) of the asset on the date of transfer shall be deemed to be the full value of consideration. Hence, the FMV of the constructed space or the stamp-duty value of the built-up area is to be adopted, and not the unverified construction cost claimed by the builder.

8.6 In addition, since the asset in question after conversion is stock-intrade, the provisions of section 43CA of the Act are also attracted. Under this section, if the consideration received or accruing as a result of transfer of land or building held as stock-in-trade is less than the value adopted or assessed by the Stamp Valuation Authority (SVA), the SVA value shall be deemed to be the full value of consideration. In the present case, the assessee’s declared consideration of Rs. 48.43 crore was higher than the guideline value fixed by the State authority. Hence, no substitution under section 43CA of the Act was called for.

8.7 At this stage, we also tend to reference section 45(5A) of the Act. We note that provision applies to individuals or HUFs entering specified JDAs, where taxability of capital gain is deferred to the year in which the completion certificate is issued and it also provided that the value of the consideration should be the stamp value of land or building received by the assessee in the JDA. However, the present assessee is private trust which entered into the JDA and property is being stock in trade. Therefore, in our considered view section 45(5A) has no application to this case, but for the determination of consideration this section can be referred.

8.8 Moving ahead, we find that the AO has adopted the developer’s cost of construction as the measure of consideration for the assessee’s share of built-up area. This approach is legally untenable. The cost of construction incurred by the developer is not the price paid to the assessee, but merely the developer’s expenditure in fulfilling his contractual obligation to deliver the constructed area. In our considered view, the “consideration” refers to what is received or accruing to the assessee as a result of the transfer. It cannot be equated to the expenditure incurred by another party in performing his obligation. The builder’s cost of construction is his outlay, not the assessee’s income. Adopting it would amount to taxing someone else’s expenditure in the hands of the assessee, which is contrary to the scheme of the Act.

8.9 Further, the JDA clearly states that the developer alone shall bear the entire cost of construction, including finance, statutory approvals, administration, and TDR purchase. The assessee has no obligation to share or reimburse these costs. Once the contract fixes the developer’s responsibility, those expenses remain his business costs. They do not add to what the assessee “receives”. Hence, they cannot be treated as part of the assessee’s consideration.

8.10 Furthermore, the material relied upon by the AO was collected from the developer during a survey. Such internal data cannot be treated as independently verified evidence of market value. The developer’s computation included items like finance charges, administrative overheads, and statutory levies, which are specific to his business operations. These costs can vary widely and are susceptible to inflation. In the judicial precedents of the Hon’ble Karnataka High Court in CPC Logistics Ltd. (Supra) have categorically held that adopting the developer’s cost of construction as the landowner’s sale consideration is impermissible, since the developer may inflate or manipulate such figures to suit his purpose. These decisions, though rendered in the context of capital-asset transfers, apply with equal force to cases where the capital asset has been converted into stock-in-trade and sold thereafter. It is also important to note that if cost of construction were accepted as the measure of consideration, identical landowners entering into separate JDAs with different developers would be taxed differently merely because one developer used borrowed funds and another used his own capital. Such an interpretation would lead to unequal and arbitrary taxation, which the legislature never intended. Hence, we hereby hold the cost of construction of the developer cannot be held as consideration for the assessee.

8.11 At the same time, we are also not in agreement with the assessee’s contention that the value of land transferred should be considered as the sale consideration. It is a matter of fact that the assessee in lieu of transfers of 45% share of land under JDA to the developer, has received constructed/built-up space in commercial projects. Therefore, the measure of consideration must be the value of the property (built-up space) received, not the value of the property (45% land) given up. The consideration received is a tangible built-up area, and its market value should be used for computation.

8.12 The core question is how to determine the FMV of the consideration received by the assessee. The FMV should represent the price that the property would ordinarily fetch if sold in the open market on the date of transfer. In this case, what the assessee received a built-up area of 2,74,332 sq. ft. in a completed commercial building. Hence, the FMV of the assessee’s consideration should be based on the prevailing market rate or the stamp-duty value of such commercial property at the time of receipt. The FMV cannot be equated with or determined on the basis of the developer’s internal construction cost, since construction cost only reflects the developer’s expenditure and not the market value of the property. Therefore, the correct method is to adopt the guideline value notified by the State Government or the fair market price of the built-up space (only building not land) determined by an approved valuer. The stamp-duty value (for building not land) is generally the best available proxy for FMV because it represents a statutory valuation benchmark for similar transactions. This approach is consistent with the intent of sections 43CA and 50D and 45(5A) of the Act.

8.13 Before parting, we note that the learned AR contended that the Government of Karnataka, through the Central Valuation Committee, has issued guidelines for estimation of building value in the locality of Urban Bangalore District. As per the revised guideline issued vide notification dated 30-03-2017, the fair market value shall be Rs. 1,208 per sq. ft., and as per the 2007 notification, the same should be Rs. 680 per sq. ft. The relevant copy of the said notification, issuing the guideline for estimation/valuation of buildings, is available at pages 383 to 393 of the paper book (case law compilation, Volume-1).

8.14 We have examined this contentions carefully. The guideline value is intended for administrative purposes such as determining the estimated value of buildings and immovable properties. Therefore, in our considered view, this guideline value can be adopted as the FMV for the valuation of the constructed area received by the assessee, which is far less than what the AO has adopted.

8.15 Hence, adopting the same as the FMV under section 50D of the Act, the value of the constructed area received by the assessee is computed at Rs. 33,13,93,056/- (2,74,312 Sq Feet X Rs. 1208 per Sq feet, whereas the assessee has offered income from the JDA at Rs. 48 crores. In view of the above detailed discussion and considering the entire records and applicable provisions, we hold that, in the present case, the first capital gain on conversion of land into stock-in-trade shall be computed as per section 45(2) of the Act. In this respect, we find that the assessee has already computed long-term capital gain of Rs. 32,02,99,200/- by taking the value as on the date of conversion at Rs. 33,86,59,200/-, and the same has been accepted. Hence, there is no dispute regarding the capital gain.

9. The next step is the computation of business income. Since the consideration is received in kind and not in cash, the FMV of the built-up area (i.e., only the building) shall be determined in accordance with section 50D read with section 43CA of the Act. The government guideline value for the same is Rs. 71,208 per sq. ft., as discussed above. However, the assessee has adopted a value of Rs. 748.43 crore, which is more than the value as per the guideline rate. Therefore, in our considered view, Rs. 748 crore as adopted by the assessee is the FMV of the constructed space received by the assessee. Thereafter, the business income is to be computed by deducting the FMV of the land on the date of conversion (Rs. 733,86,59,200/-) from the FMV of the building (Rs. 748.43 crore) which comes out at Rs. 714,56,40,800/- only. We find that the assessee has computed business income exactly in the same manner; hence, no interference is required in the income offered by the assessee.

9.1 Without prejudice to the above, we note that the assessee continues to show the constructed space received as stock-in-trade and has entered into sale agreements for the same in subsequent years. Whatever value is adopted for computation of business income on account of receipt of constructed space/built-up area shall become the value of such stock-in-trade. When such stock is sold, the assessee will be eligible to claim the same as cost. Hence, there will be no consequence on the ultimate business profit. If today we adopt a higher FMV, the assessee will ultimately get a higher cost benefit when the stock is sold. Let us understand this through an illustration:

Suppose the assessee sells the constructed space/built-up area received in the year 2019-20 for Rs. 7100 crores.

(A) FMV as adopted by the assessee (₹48 crore):

Business income in the year under consideration: ₹14,13,40,800/- (₹48 crore – ₹33,86,59,200/- capital gain on conversion into stock) Business income in 2019-20 when actually sold: ₹52,00,00,000/-

(₹100 crore – ₹48 crore)

Total business profit from the project:

₹66,13,40,800/

(B) If FMV taken at ₹80 crore:

Business income in the year under consideration: ₹46,13,40,800/- (₹80 crore – ₹33,86,59,200/- capital gain on conversion into stock) Business income in 2019-20 when actually sold:₹20,00,00,000/-

(₹100 crore – ₹80 crore)

Total business profit from the project:

₹66,13,40,800/-

9.2 Hence, in both situations, the ultimate profit from the project remains the same, as illustrated above. Only the tax liability shifts from one year to the next. Therefore, in our considered view, the valuation of the FMV of the constructed space received by the assessee in the year under consideration is a tax-neutral exercise. In holding so, we draw support and guidance from the judgment of the Hon’ble Supreme Court in Pr. CIT v. Deccan Mining Syndicate (P.) Ltd. (SC), wherein it was held as under:

7. We are satisfied that in the facts of the present case before us, since the Tribunal has reiterated the findings of facts that both the additions made to the income of the Assessee having been set aside following the decision of the High Court in the case of Tata Elxsi Ltd., [supra] as far as issue of Section 10B is concerned and on the issue of excess stock being tax neutral, such cogent and reasonable findings of facts returned by the learned Tribunal and consequentially—-

9.3 In view of the above detailed discussion, we hereby set aside the finding of the learned CIT(A) and direct the AO to delete the addition made by him. Hence the ground of appeal raised by the assessee is hereby allowed whereas the ground of appeal raised by the revenue is hereby dismissed.

10. The next issue raised by the assessee is that the learned CIT(A) erred in confirming the disallowances of proportionate interest expenses of Rs. 15,34,77,989/- on account of alleged diversion of funds.

10.1 The relevant facts are that the assessee has availed various loans from the bank and financial institutions during the F.Ys. 2016-17 and 2017-18 and major portion of such loan was diverted to sister concerns, trustees/beneficiaries in the form of interest free advances which are detailed as under:

Bank/FI	Year of sanction	Loan amt.	Amt. diverted
Kotak Mahindra	2016-17	170,00,00,000/-	117,94,46,796/-
Bajan Finance	2017-18	19,30,00,000/-	14,44,39,720/-
Kotak Mahindra	2017-18	55,00,00,000/-	37,56,75,617/-
Bajaj Finance	2017-18	18,09,00,000/-	10,17,36,994/-

10.2 In this respect, a statement of the managing trustee of the assessee shri KL Swamy was recorded as on 17-09-2021 wherein he only stated that the loan was advanced to the sister concern for the purpose of the business, but failed to provide other details justifying the commercial nexus. During the assessment proceeding also, various details including the application filed with bank for sanction of loan along with enclosure, copy of loan sanction letter by the bank, copy of CA certificate for utilization of loan fund for intended purpose etc. were called for. However, the assessee failed to make submission in this respect. Hence, the AO through show cause notice proposed to disallow the proportionate finance cost by invoking the provision of section 36(1)(iii) of the Act.

10.3 The assessee in response to the show cause notice furnished copy of the loan sanction letter and ledger copy of the loan showing utilization of funds. However, the assessee expressed inability to furnish copy of loan application letter showing the purpose for which the loan was applied and certificate of chartered accountant verifying the utilization of loan for the intended purpose. In addition, the assessee contended that the proposed disallowance of interest expenditure amounting to Rs. 15,34,77,989/- is not justified either on facts or in law. The funds advanced to sister concerns were made purely on grounds of commercial expediency and for the overall benefit of the business group to which the assessee belongs.

10.4 It was explained that L.K. Trust had advanced certain amounts to its sister concerns, and majority of the interest free loan advanced to M/s Khoday India Limited, out of borrowed funds. The funds were utilized by Khoday India Limited to meet its working capital requirements during a period of financial stress. Being the flagship company of the Khoday Group, its smooth functioning was essential for the stability and reputation of the group as a whole, which directly affected L.K. Trust as well.

10.5 The assessee further submitted that L.K. Trust is a shareholder in Khoday India Limited and hence has a direct beneficial interest in the success and profitability of that company. Supporting a sister concern in the times of need, therefore, served a clear business purpose, as it helps safeguard the assessee’s own commercial interests.

10.6 The assessee relied heavily on the judgment of the Hon’ble Supreme Court in the case of S.A. Builders Ltd. v. CIT (Appeals) 288 ITR 1 (SC)The Hon’ble Court held that the term “commercial expediency” is of wide import and includes any expenditure incurred by a prudent businessman for the purpose of business. It is not necessary that such expenditure should result in immediate profit or be incurred under legal obligation; it is sufficient if the expenditure is made for furthering business interests or preserving goodwill.

10.7 Further reliance was placed on CIT v. Malayalam Plantations Ltd. [1964] 53 ITR 140 (SC) and CIT v. Birla Cotton Spinning & Weaving Mills Ltd [1971] 82 ITR 166 (SC), where the Hon’ble Supreme Court clarified that the expression “for the purpose of business” is wider in scope than “for the purpose of earning profits.” Hence, an assessee cannot be compelled to demonstrate immediate profit motive in order to justify business expenditure.

10.8 Additionally, in Hero Cycles (P.) Ltd. v. CIT [2015] 379 ITR 347 (SC)/Civil Appeal No. 514 of 2008, the Hon’ble Supreme Court reiterated that once a nexus between the expenditure and the business purpose is established, the Revenue cannot substitute its own judgment for that of a prudent businessman. The Income Tax authorities must step into the shoes of the assessee and evaluate the expenditure from the standpoint of commercial prudence rather than revenue-centric perception.

10.9 The assessee emphasized that helping a group company to tide over a temporary financial crisis is an act of commercial prudence, as the survival and financial health of Khoday India Limited directly impact L.K. Trust. A group operates as an integrated business family, and intra-group financial assistance cannot be viewed in isolation. The advances were not made for any personal, sentimental, or non-business reasons but purely to protect and preserve the business interests of the group.

10.10 The assessee reiterated that such interest-free advances were not diversion of borrowed funds for non-business purposes but rather a strategic decision consistent with prudent commercial behaviour. Therefore, disallowance of interest under section 36(1)(iii) or under section 37(1) of the Act is not warranted.

11. After examining the submissions made by the assessee, the AO found that the assessee had failed to provide complete and satisfactory details regarding the utilization of borrowed funds. Despite being asked during the proceedings and in the notices issued under section 142(1) of the Act, the assessee did not furnish copies of loan applications made to banks nor any certificate from a Chartered Accountant certifying the utilization of such loans for intended purposes.

11.1 The AO observed that the assessee did not submit any documentary evidence to prove that the loans taken and the interest claimed were actually used for business or that they were advanced to sister concerns out of commercial expediency. There was no evidence to show any business plan, approvals, project details, or activity undertaken that could establish a genuine business purpose for advancing interest-free funds to sister concerns. According to the AO, business purpose cannot exist in thin air — it must be supported by facts, plans, and actions.

11.2 On further verification, the AO noted that the mortgage deeds executed with Bajaj Finance Limited clearly mentioned that the purpose of loans amounting to Rs. 19.30 crores and Rs. 9.00 crores was “for the purpose of personal and family necessities.” The AO reproduced relevant portions from the mortgage deeds to show that the funds were borrowed for personal use and not for business. Since the purpose of the loans was personal in nature, the AO held that the finance cost incurred thereon could not be claimed as a business expenditure in the books of the assessee’s trust. Therefore, the claim of the assessee failed the test of commercial expediency under section 36(1)(iii) of the Act.

11.3 The AO acknowledged that the assessee had relied on the Hon’ble Supreme Court’s decision in S.A. Builders Ltd. (Supra) to justify its claim of commercial expediency. However, the AO pointed out that the facts of that case were distinguishable. The Hon’ble Supreme Court had clarified that each case must be examined based on its own facts. If the directors of the sister concerns use the funds for their personal benefit, such advances cannot be considered commercially expedient. The AO emphasized that, in the present case, it was evident that the borrowed money had been diverted for non-business purposes and for the personal benefit of the trustees and beneficiaries of the trust.

11.4 The AO also noted that the trustees who decided to divert the borrowed funds as interest-free advances to sister concerns were themselves directors or partners in those concerns. This clearly indicates that the advances were not made for business purposes but for the benefit of related parties. The managing trustee, Mr. K.L. Swamy, in his statement, could not explain the exact business purpose for which the interest-free advances were given. He only stated that the funds were diverted to the sister concerns without producing any supporting evidence or documents.

11.5 Based on the financial analysis, the AO found that the beneficiaries of the trust had overdrawn their capital accounts to the extent of Rs. 312.78 crores, which further confirmed that there was no genuine business purpose behind the transaction. The entire arrangement appeared to be a well-planned scheme to reduce tax liability by claiming interest expenditure on loans that were not used for business.

11.6 Accordingly, the AO concluded that there was no business purpose or commercial expediency in giving interest-free advances to sister concerns. The interest-bearing funds borrowed by the assessee had been diverted to sister concerns and related parties without any evidence of corresponding business benefit to the trust. Hence, the finance cost claimed on such diverted funds could not be allowed as a deduction under section 36(1)(iii) of the Act. The AO computed the disallowance based on the proportion of borrowed funds diverted to sister concerns. The computation was as follows:

•

Out of a loan of Rs. 170 crores from Kotak Bank, Rs. 117.94 crores (69.37%) were diverted to sister concerns.

•

Out of a loan of Rs. 19.30 crores from Bajaj Finance, Rs. 14.66 crores (75.98%) were diverted to sister concerns.

•

Out of another loan of Rs. 18.09 crores from Bajaj Finance, Rs. 10.17 crores (56.24%) were diverted to sister concerns.

11.7 On this basis, the AO disallowed a total finance cost of Rs. 15,34,77,989/- being the proportionate interest expenditure not attributable to business purposes. The AO held that such expenditure was inadmissible under section 36(1)(iii) of the Act.

12. Being aggrieved, the assessee preferred an appeal before the learned CIT(A).

12.1 The assessee, before the learned CIT(A) submitted that during the normal course of business, it had borrowed funds from various banks and financial institutions on which interest was paid and debited to the Profit & Loss Account. The AO wrongly concluded that the borrowed funds were used for non-business purposes and therefore disallowed a proportionate amount of interest expenditure. The AO worked out the proportion of loans advanced to sister concerns and disallowed interest aggregating to Rs. 15,34,77,989/- only.

12.2 The assessee explained that the borrowed funds were used in the course of business and that part of it was advanced to sister concerns for business reasons. The advances were made keeping in mind the commercial requirements and overall interest of the group. The nonproduction of certain documents such as the loan application forms or Chartered Accountant’s utilization certificate cannot be held against the assessee because these documents were never demanded by the bank. Hence, their non-availability was of no real consequence. The loan sanction orders themselves were sufficient evidence of the loans being genuine and for business use.

12.3 The assessee submitted that major advances were made to Khoday India Limited, the flagship company of the Khoday Group. This company has been in business since 1965 and has played a key role in maintaining the goodwill and reputation of the group. Khoday India Limited was undergoing a financial crisis and facing cash losses. Therefore, in the business interest of the appellant, it was necessary to assist Khoday India Limited to overcome its working capital problems. Since the appellant is a stakeholder in Khoday India Limited, it had a direct beneficial interest in ensuring its financial stability. The continued success of Khoday India Limited would also safeguard the assessee’s investment and business reputation.

12.4 The assessee further argued that during the course of business, similar advances were also made to other sister concerns, keeping in view the principles of commercial expediency. It was commercially prudent to extend financial help to associated entities, as their functioning directly impacted the appellant’s own business. The Revenue authorities cannot question or sit in the judgment over such business decisions or commercial wisdom exercised by the assessee.

12.5 The assessee pointed out that the AO, in the show-cause notice, had originally proposed to invoke section 37 of the Act, but later, in the assessment order, changed the section to 36(1)(iii) of the Act without giving proper reasoning. The AO’s observations about the mortgage deeds mentioning “personal and family necessities” were also misplaced. The mention in the mortgage deeds was only a formal statement and not indicative of the actual use of funds. In reality, the funds were advanced to group entities for business purposes, and no evidence had been brought by the AO to prove otherwise.

12.6 The assessee submitted that each business entity has its own way of conducting business and there cannot be a single fixed rule or “fit-for-all” method to determine commercial expediency. A businessman is the best judge of what is necessary for the smooth running of his business, and the AO cannot dictate how business decisions should be taken. The AO’s approach was based on assumptions and not supported by concrete evidence.

12.7 The assessee also stated that AO’s conclusion that there was no commercial expediency in advancing money to sister concerns was based merely on conjectures and presumptions. The AO failed to appreciate that such advances were made in the ordinary course of business to protect the group’s interests and ensure continuity of operations.

12.8 Lastly, the assessee relied on the principles laid down by the Hon’ble Supreme Court in S.A. Builders Ltd. (Supra), where it was held that the expression “for the purpose of business” is of wide scope and that the tax authorities must view expenditure from the standpoint of a prudent businessman. The AO cannot impose his own perception of what constitutes a business necessity. Therefore, the disallowance of interest of Rs. 15,34,77,989/- was unjustified and deserved to be deleted. However, the learned CIT(A) considering the facts in totality confirmed the disallowances made by the AO by observing as under:

8.7 However, as noted by the AO and also observed during the appellate proceedings, the business purpose, which is emphasized as the reason for making such advances has neither been elaborated nor demonstrated. For claim of deduction of interest paid on finances borrowed U/s 36(1)(iii) of the Act, it is expedient to demonstrate the same. The section is extracted as under:

Other deductions.

36. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28—

(i) …

(ii) …

(iii) the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession:

On perusal of the section, it is noted that for allowance of a claim for deduction of interest under this provision following three conditions are there:

(i) The money, that is capital, must have been borrowed by the assessee

(ii) It must have been borrowed for the purpose of business.

(iii) The assessee must have paid interest on the borrowed amount i.e. he has shown the same as an item of expenditure.

The burden of proving, that the money borrowed has not been utilized for nonbusiness purpose and the lending has all ingredients of “commercial expediency”, is on the assessee.

8.8 It is observed that the appellant, in addition to citing case laws on commercial expediency, has not brought out the business purpose for which the loans were advanced interest free to the sister concerns.

8.9 As observed, it is noticed that the appellant had submitted the details of the intended purpose for which the loans were utilised by the sister concerns and there was no auditor’s certification regarding the same. With respectto the loans given availed from Bajaj Finance Limited of Rs 19,30,00,000/-, the purpose of the loan as noticed from the Mortgage deeds executed is mentioned as “for the purpose of personal and family necessities”. Of the total amount of Rs 19.30 crores, the appellant had advanced Rs 11,27,86,005/- to Khoday India Ltd. Rs 1,27,60,048/- to the trustees/beneficiaries and Rs 2,93,08,156/- to other sister concerns. It is seen that a large part of the amounts advanced by the appellant have gone towards payment of interest to the banks for the loans availed by Khoday India Limited and for other meeting business operation expenses in the case of other sister concerns.

8.10 As the reason mentioned in the mortgage deeds to avail loans from Bajaj Finance is for personal and family necessities, I am of the opinion that the finance cost incurred by the appellant cannot be claimed as expenses incurred for business purposes and towards any commercial expediency. The facts of the present case are distinguishable from the case laws cited by the appellant in support of the transaction being commercial expedient for its benefit. After considering the material available on record, I am of the opinion that the appellant has not been able to demonstrate the larger business purpose in advancing the moneys out of loans taken by it. Hence the stand of the AO is upheld as the intention or the commercial expediency is not forthcoming in this transaction.

8.11 The Hon’ble Supreme Court in S.A. Builders Ltd., v. CIT – 288 ITR 1 (SC) held that the expression “commercial expediency” is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure if it was incurred on grounds of commercial expediency.

8.12 In the case of Dwarasana Constructions Pvt Ltd, the jurisdictional ITAT, Bangalore cited in ‘TS-851-ITAT, Bangalore,2021′, denied the interest expenses claimed by the expenses on borrowed funds which were advanced to the sister concerns, for the reason that the sister concern used the funds to make advances to related parties year on year and such loans were not all utilised for business purposes. Hence the Hon’ble Tribunal found no case of “commercial expediency” in this case and upheld that disallowance made by the AO.

8.13 The Hon’ble Apex Court in SA Builders also held that each case has to be considered on facts and no general rule can be applied in cases such as this. It was held:

“We wish to make it clear that it is not our opinion that in every case interest on borrowed loan has to be allowed if the assessee advances it to a sister concern. It all depends on the facts and circumstances of the respective case. For instance, if the Directors of the sister concern utilize the amount advanced to it by the assessee for their personal benefit, obviously it cannot be said that such money was advanced as a measure of commercial expediency. However, money can be said to be advanced to a sister concern for commercial expediency in many other circumstances (which need not be enumerated here).”

8.14 In the present case also, it is seen that the sister concerns have utilized these funds to repay their loans with related parties and banks and not for business purposes. Accordingly, I see no case of commercial expediency in the transaction and accordingly, I confirm the disallowance made by the AO of the interest expenses on borrowed loans u/s 36(1)(iii) of the Act.

13. Being aggrieved by the order of the learned CIT(A), the assessee is in appeal before us.

14. The learned AR before us submitted that the assessee had borrowed total funds of Rs. 207.39 crores from various financial institutions for the purpose of its business activities. These funds were used in the normal course of business, and a portion of them was advanced to others for legitimate business purposes. The assessee had debited the entire interest cost incurred on these loans to the Profit and Loss account for the year ended 31.03.2018.

14.1 The AO, however, held that a portion of these loans amounting to Rs. 142.78 crores was diverted to sister concerns and hence proportionate interest expenditure of Rs. 15.34 crores should be disallowed. The learned CIT(A) confirmed this disallowance without appreciating the correct facts and financial position of the assessee.

14.2 The learned AR pointed out that the assessee had submitted detailed financial statements during the assessment as well as appellate proceedings. These statements show that the assessee had huge interest-free funds and advances received from customers which were much higher than the alleged diverted amount. As per the balance sheet, the current liabilities as on 31.03.2018 were Rs. 418.25 crores, out of which Rs. 371.33 crores represented advances received for joint development and sale of properties. These advances are interest-free funds available with the assessee. Since these funds far exceed the amount of Rs. 142.78 crores alleged to have been diverted, there is no case for disallowance of any interest expenses.

14.3 Alternatively, the learned AR submitted that as against total secured and unsecured loans of Rs. 238.00 crores, the assessee had total current assets, loans, and advances amounting to Z231.44 crores which are part of regular business operations. These include inventories of Rs. 139.90 crores, sundry debtors of Rs. 3.50 crores, cash and bank balance of Rs. 19.38 crores, and other current assets of Rs. 44.56 crores. Therefore, it is clear that the assessee had sufficient business assets to justify the utilisation of loan funds for its normal business purposes. The presumption that the borrowed funds were diverted is without basis.

14.4The learned AR submitted that it is a settled legal principle that when an assessee has sufficient own funds or interest-free funds available, no disallowance of interest can be made merely on the ground of alleged diversion. Reliance was placed on judicial precedents including CIT v. Reliance Utilities & Power Ltd 313 ITR 340 (Bom),Gurdas Garg v. CIT (Appeals) (Punj & Har), and CCIT (OSD)/Pr. CIT v. Bhupendra Champaklal Delal [2024] (Bom), wherein it has been consistently held that where both interest-free and interest-bearing funds are available, a presumption arises that the interest-free advances are made out of interest-free funds.

14.5 The ld. AR also emphasized that the assessee has paid all interest expenses in the ordinary course of its business and that the genuineness of the expenditure has not been doubted by the AO. The availability of huge interest-free funds and the absence of any evidence showing use of borrowed funds for non-business purposes clearly establish that the disallowance made by the AO is factually and legally untenable. In conclusion, the learned AR prayed that the disallowance of Rs. 15,34,77,989/- be deleted in full, as the assessee had sufficient interest-free funds, no diversion of borrowed funds was established, and the advances were made purely for business purposes. The disallowance, therefore, is bad in law and deserves to be set aside.

15. On the other hand, the learned DR strongly supported the orders of the Assessing Officer and the CIT(A). It was submitted that the assessee had admittedly borrowed substantial funds from banks and financial institutions and diverted a significant portion thereof to sister concerns, trustees, and beneficiaries without charging any interest. Despite repeated opportunities, the assessee failed to furnish loan applications, utilization certificates, board approvals, or any contemporaneous evidence establishing commercial expediency behind such advances. The managing trustee was also unable to explain the precise business purpose of the advances during his statement. Reliance was placed on the observations of the Hon’ble Supreme Court in S.A. Builders Ltd. that commercial expediency must be established on facts of each case. Since no nexus between the advances and the assessee’s business interests was demonstrated, the proportionate disallowance under section 36(1)(iii) was rightly made and sustained.

16. We have heard the rival contentions of both the parties and examined the materials placed on record. The issue for adjudication before us is whether the disallowance of interest expenditure of Rs. 15,34,77,989/- made by the AO and sustained by the learned CIT(A) on account of alleged diversion of borrowed funds to sister concerns is justified in law and on facts.

16.1 It is an admitted position that the assessee has borrowed funds from various banks and financial institutions. The assessee debited the entire interest expenditure on such loans to its Profit and Loss Account for the year ended 31.03.2018. The AO, however, disallowed a proportionate interest expenditure on the ground that a portion of the borrowed funds was advanced interest-free to sister concerns and related parties. The learned CIT(A) also confirmed this disallowance on the reasoning that the assessee could not establish the element of “commercial expediency.”

16.2 On perusal of the records and the submissions, we are of the considered view that the approach of the AO and the ld. CIT(A) cannot be sustained. The assessee has demonstrated that it had substantial interest-free funds available in the form of customer advances and other current liabilities. As per the financial statements, the current liabilities as on 31.03.2018 stood at Rs. 418.25 crores, of which Rs. 371.33 crores represented advances received for proposed joint development and sale of properties. These are interest-free funds available with the assessee, far exceeding the amount of Rs. 142.78 crores alleged to have been advanced to sister concerns. Once sufficient interest-free funds are available, the presumption in law is that such advances are made out of interest-free funds. This settled legal principle has been upheld by the Hon’ble Bombay High Court in Reliance Utilities & Power Ltd. (Supra), and followed in Gurdas Garg (Supra)and Bhupendra Champaklal Delal (Supra).

16.3 Further, the assessee has established that advances to its sister concerns were made for business and commercial considerations. The sister concerns form part of the same group, and the assessee is also a stakeholder in the flagship company, M/s Khoday India Limited. The financial well-being of this company directly affects the reputation and stability of the group, including the assessee trust. The assistance provided to the sister concerns was therefore in line with sound business judgment and commercial prudence. It is well settled by the Hon’ble Supreme Court in S.A. Builders Ltd. (Supra) that the term “commercial expediency” is of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The Revenue authorities cannot substitute their own judgment for that of the assessee regarding what constitutes a prudent business decision.

16.4 The AO’s reliance on the mention of “personal and family necessities” in the mortgage deeds of Bajaj Finance loans is misplaced. Such statements, in standard loan documents, do not determine the actual use of funds. The AO has not brought any tangible evidence on record to show that the funds were used for personal benefit or non-business purposes. Mere suspicion cannot take the place of proof.

16.5 It is also important to note that the genuineness of the loan transactions and payment of interest has not been doubted by the AO. The disallowance was made purely on assumption that borrowed funds were diverted, without any fund flow analysis or verification of nexus between the borrowed funds and advances made. When both interestbearing and interest-free funds are available, and no direct link is established between the borrowed funds and alleged advances, the disallowance cannot be sustained.

16.6 It is further observed that the business decision to extend financial assistance to a sister concern in temporary financial distress is a matter of commercial judgment. The Hon’ble Supreme Court in S.A. Builders Ltd. (supra) and Hero Cycles (P.) Ltd. (Supra) has clearly held that if an expenditure or loan is made on grounds of commercial expediency, the interest thereon cannot be disallowed merely because it does not yield immediate profit. The test is whether the advance serves the business interest of the assessee, directly or indirectly. In this case, we find that the advances to sister concerns were made with a view to protect the group’s business and financial reputation and hence fall within the ambit of commercial expediency.

16.7 Considering these facts, we hold that the AO and ld. CIT(A) were not justified in disallowing the proportionate interest expenditure of Rs. 15,34,77,989/-. The assessee had sufficient interest-free funds, and the advances were made on grounds of commercial expediency. No nexus has been established by the AO between the borrowed funds and the advances made. The disallowance is therefore based on assumptions and conjectures and cannot be upheld. Accordingly, we direct the AO to delete the disallowance of Rs. 15,34,77,989/-. Hence the ground raised by the assessee is allowed.

17. The issue raised by the assessee through Ground Nos. 3 & 4 and subgrounds thereunder is that the approval granted under section 153D of the Act is not proper and therefore leads to the assessment order being invalid. At the outset, the ld. AR submitted that the assessee has not pressed the impugned ground of appeal. Therefore, we dismiss the same as not pressed.

18. In the result, the appeal of the assessee is hereby partly allowed whereas the appeal of the Revenue is hereby dismissed.