Daftari Realtors Pvt. Ltd. Vs ITO (ITAT Kolkata)
Project Stalled by Litigation Does Not Defeat Interest Deduction Where Funds Serve Business Purposes
Facts of the case
The assessee, a company engaged in a proposed real estate development project, challenged the disallowance of ₹98,39,938 as interest expenditure under section 36(1)(iii).
It filed its return for AY 2013-14 on 28 September 2013, declaring a loss of ₹8,25,752. During the relevant year, the company had taken unsecured loans of ₹10,53,50,000 and debited the related interest expenditure to its profit and loss account.
The borrowings were primarily intended to finance a construction project jointly with its sister concern, Triara Vyapaar Private Limited, on land situated at Rajarhat, North 24 Parganas.
The company had entered into a Memorandum of Understanding dated 20 September 2010, under which it was required to transfer funds to the sister concern for purchasing the land and undertaking allied activities. The two companies jointly acquired the property through a conveyance deed dated 21 September 2010.
Development arrangements and subsequent litigation
The assessee also entered into a development agreement dated 29 September 2011 with Arpit Nirman Private Limited for developing the property.
However, a civil dispute was subsequently raised by Rajjak Ali Mondal before the Civil Court at Barasat. Because of the dispute and related legal proceedings, the planned development could not proceed.
The Tribunal recorded that the documents demonstrated the assessee’s intention to develop the land, construct buildings and sell them to prospective customers. The absence of further development arose from the civil dispute, rather than from any finding that the proposed project lacked a business purpose.
The relevant MoU, conveyance deed, development agreement and litigation documents were placed before the Tribunal.
Commercial utilisation of funds during the interruption
With the project stalled, the assessee deployed its surplus funds by granting an interest-bearing loan of ₹7,47,86,028 to Arpit Nirman Private Limited.
The company earned ₹84,94,405 as interest income from this advance. The Tribunal noted that lending was permitted by the objects contained in its Memorandum of Association.
The borrowing rates were approximately 5% to 9%, whereas the onward loan carried interest at 12%. Thus, the funds were deployed at a rate higher than the borrowing cost.
The Bench treated this deployment as an act of commercial expediency in the circumstances created by the stalled development project.
Land investment and advances supported by records
The land had been purchased for ₹2,62,00,000, excluding registration charges and other expenses. The assessee held a 50% share in the property.
The Tribunal referred to the balance sheet as at 31 March 2013, which showed investment in land of ₹1,41,61,140. A further amount of ₹1,56,61,140 stood as an advance to the sister concern under the MoU.
These amounts were considered alongside the contractual documents and other evidence explaining the utilisation of funds.
The case therefore involved both expenditure connected with the intended property development and the commercial deployment of funds while that activity remained interrupted.
Tribunal’s reasoning
The Tribunal held that the Assessing Officer and the CIT(A) had failed to appreciate the facts in their proper perspective, despite the documentary evidence being available on record.
Its conclusion rested on the demonstrated purpose of the borrowings, the arrangements for acquisition and development of the property, the litigation preventing progress, and the interest-bearing deployment of surplus funds.
The order does not separately reproduce the detailed reasons given by the lower authorities for disallowance. However, after examining the factual record, the Bench concluded that the interest expenditure had been wrongly disallowed under section 36(1)(iii).
This was the second round of litigation before the Tribunal. Considering the available evidence, the Bench expressly observed that no useful purpose would be served by sending the matter back to either authority for another examination.
Decision
The Tribunal set aside the CIT(A)’s order and directed the Assessing Officer to delete the entire disallowance of ₹98,39,938.
The appeal was allowed on merits, bringing the interest dispute to a conclusion at the Tribunal level rather than prolonging it through another remand.
Author’s comments
The decision highlights the importance of examining what the borrowed funds were intended for and how they were actually deployed. A project’s inability to progress because of litigation does not, by itself, establish that the associated borrowing has ceased to serve a business purpose.
The supporting record was particularly important here: the MoU, joint purchase deed, development agreement, litigation papers and financial statements together explained the commercial setting. The onward lending at 12%, against borrowing rates of approximately 5% to 9%, further supported the Tribunal’s view of the interim deployment.
The ruling should nevertheless be understood as a fact-based allowance of interest expenditure. It does not separately analyse capitalisation requirements or establish that every interest cost relating to an unfinished project must be deducted immediately. Its practical value lies in demonstrating the business connection through evidence and explaining the commercial response to an involuntary interruption.
FULL TEXT OF THE ORDER OF ITAT KOLKATA
This is an appeal preferred by the assessee against the order of the National Faceless Appeal Centre, Delhi (hereinafter referred to as the “Ld. CIT(A)”] dated 07.11.2025 for the AY 2013-14.
2. The issue raised by the assessee is against the order of ld. CIT(A) upholding the disallowance of interest expenses of Rs.98,39,938 made under section 36(1)(iii) of the Income Tax Act, 1961.
3. The facts in brief are that the assessee filed the return of income on 28.09.2013, declaring total loss of ₹ 8,25,752/-. The case of the assessee was selected for scrutiny. The notices u/s 143(2) and 142(1) of the Act along with questionnaire were issued and duly served upon the assessee. During the relevant previous year, the Appellant assessee company has taken an unsecured loan of ₹10,53,50,000/- and paid interest thereon which was debited as interest expenditure in the profit and loss account amounting to ₹98,39,938/-. The said loan was primarily obtained for development of Construction Project, jointly with its sister concern namely M/s. Triara Vyapaar Private Limited, on a property situated at Rajarhat, North 24 Parganas. The assessee company is noted to have entered into a Memorandum of Understanding dated 20.09.2010 with the said M/s. Triara Vyapaar Private Limited for the said purpose. The said Memorandum of Understanding is placed at Pages 56 to 63 of the Paper- book filed before us. As per the terms of the said Memorandum of Understanding, the assessee company was required to transfer fund to M/s. Triara Vyapaar Private Limited for financing the said purchase of land and allied activities. The assessee company and M/s. Triara Vyapaar Private Limited jointly purchased the said piece of land, which was intended for Development, vide Deed of Conveyance dated 21.09.2010. The said Deed of Conveyance dated 21.09.2010 is available at Pages 64 to 93 of the Paper -book.
4. The assessee company also entered into a Development Agreement dated 29.09.2011 with M/s. Arpit Nirman Private Development Agreement dated 29.09.2011 is placed at Pages 94 to 118 of the Paper-book.
5. Thereafter a Civil Dispute was raised by one Mr. Rajjak Ali Mondal in the Civil Court at Barasat and thus the development of the aforesaid Land could not be carried out. The documents related to the said Civil Dispute are placed at Pages 125 to 146 of the Paper-book.
6. The documents on record show that the assessee had purchased the land in order to develop the same and construct buildings on it for sale to prospective customers but due to Civil Dispute and legal cases, no further development could be carried out.
7. As the said development of land was stuck, therefore the assessee company out of commercial expediency utilized its surplus funds by granting interest- bearing Loan of Rs.7,47,86,028 to M/s. Arp it Nirman Private Limited. The assessee derived interest income of Rs.84,94,405 on such loan. The said granting of loan was in accordance with the objects contained in the Memorandum of Associations. The facts on records reveal that the money was borrowed at the rate of around 5% to 9% whereas loan was advanced at a rate of 12% which was more than the borrowing rate.
8. The aforesaid land at Rajarhat was acquired for the sum of Rs.2,62,00,000 (exclusive of Registration Charged and other expenses) and the assessee’s s hare in the said Land was 50%. A perusal of the fixed asset Schedule in Note 7 of the in Land stood at Rs.1,41,61,140. Further a sum of Rs.1,56,61,140 was standing as advance to M/s. Tiara Vyapaar Private Limited as per the terms of above- mentioned Memorandum of Understanding. The said facts are clearly discernible from the documents mentioned above and also the documents placed at Pages 119 to 124 of the Paper- book filed.
9. We find that the AO and Ld. CIT(A) had failed to appreciate the facts in proper perspective despite of all documentary evidences being available on record. We are of the view that, this being the second round of Litigation before the Tribunal, no purpose will be served for again setting aside the case to either of the authorities below. Considering the facts and circumstances of the case, we are of the considered opinion that the interest debited by the assessee was wrongly disallowed by the AO under section 36(1)(iii) of the Act and confirmed by the ld. CIT(A). Therefore we are not in concurrence with the ld. CIT(A) on this issue. Consequently, we set aside the order of ld. CIT(A)( and direct the AO to delete the disallowance of Rs.98,39,938.
10. In the result, the appeal of the assessee is allowed.
Order pronounced on 07.10.2026.
