TaxTMI 
TaxTMI 
2025 (1) TMI 1750
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....4A by the Finance Act, 2022, which is clarificatory and retrospective in nature.? 2. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) has justified in deleting the disallowance of interest expenditure made under section 36(1)(iii) of the Income Tax Act, 1961, without appreciating that the borrowed funds were not utilized wholly and exclusively for the purposes of business and the assessee having no main business activity during the year and the borrowed funds were invested in shares held as investments and in other non-business advances, which do not qualify as business purposes under section 36(1)(iii)? 3. Whether on the facts and circumstances of the case and in law, the Ld.CIT(A) has justified in concluding that the interest expense qualifies for deduction merely on the basis of a broad interpretation of the term "for the purpose of business," without establishing a proximate nexus between the borrowed funds and income-generating business activity?" 2. Brief facts of the case are as under: The assessee is a public limited company engaged into the business of wholesale trading along with acting as distributors and commission ag....
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....atories Ltd. (Now known as Jyothy Labs Ltd) ("JLL") Rs. 9,51,46,462/- in the mutual funds of 'Invesco India Medium Term Bond Funds' and provided Loans and Advances of Rs. 20,88,79,485/-. 3.3. The assessee submitted that it earned dividend income amounting to Rs. 9,00,00,000/- from Indian companies and voluntarily disallowed Rs. 9,00,00,000/- under section 14A of the Act. It was submitted that for the year under consideration, the assessee earned other income of Rs. 39,74,321/- as interest from interest bearing loans (at average rate of interest is 8.62%) and Rs. 15,25,226/- as interest from fixed deposits (at average rate of interest 8.62% 3.4. The assessee submitted that its business objective was to become a distributor of JLL's products also to venture into trading of fast moving consumer goods ("FMCG") related products. The assessee submitted that during May 2011, JLL took over Jyothy Consumer Products Ltd. (earlier known as Henkel India Ltd, a well-established FMCG giant) - hereinafter known as JCPL (which was later merged into JLL with effect from 01.04.2012) to achieve expansion of business by appropriate consolidation of product portfolios, pooling and more efficient ....
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....8,48,630/- and claimed it as deduction under section 36(1)(iii) of the Act. Before the Ld.AO assessee had relied on the decision of Hon'ble Supreme Court in case of S.A. Builders Ltd. v. CIT reported in 288 ITR 1 and Hero Cycles (P) Ltd. v. CIT reported in 379 ITR 347. 3.6. The Ld.AO after considering the submissions disallowed Rs. 27,58,48,630/- by alleging that the expenditure incurred by the assessee is not related to its business. 3.7. Ld.AO further noted that the assessee made suo moto disallowance under section 14A amounting to Rs. 9,00,00,000/- against the exempt income. Whereas in the P& L account, assessee debited expenses in the nature of interest amounting to Rs. 27,58,48,630/-. The Ld.AO thus came to the conclusion that the investment in shares that yielded exempt income was made out of borrowed funds. The Ld.AO noted that the suo moto disallowance under section 14A amounting to Rs. 9,00,00,000/- was not supported by any calculation as per Rule 8D. The Ld.AO thus computed the disallowance under Rule 8D at Rs. 25,48,38,163/-. However, the disallowance was restricted at Rs. 54,28,829/- by observing as under: "7.1.5 In accordance with the provisions of Secti....
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.... is proximate nexus between the business of the assessee - company and that of the company in which investments were made in the form of shares. The assessing officer has merely stated the same without discussing the facts of the case. In case of the appellant also, there is proximate nexus between the business of the appellant and JLL. As stated above, the appellant is also engaged into the business of all kinds and varieties of goods, mercantile, chattels, produce, care products, Fabric Care, Whiteners, Air Care, Hair care, household insecticides, surface cleaning etc whereas the JLL is one of the largest producers of FMCG goods. 6.21 In the present case, the assessing officer also has not been able to demonstrate that the borrowed funds have been used / diverted for non-business purposes. The appellant's submission is that that the onus is on Revenue Authorities to prove nexus between borrowed funds and funds diverted for non-business purposes. Reliance is placed on the following decisions for the settled legal position of law that the burden is on the Revenue to prove that borrowed funds have been used / diverted for non-business purposes free of interest to sustain di....
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..... Siddhartha, having shareholding of 2.63%, 3.98% and 2.87% respectively. It is submitted that Ms. M. R. Jyothy is also the director of JLL He this submitted that the assessee was fully controlled by JLL through shareholder and CMD Shri M.P.Ramchandran. 4.1. The Ld.DR submitted that the assessee is an enterprise significantly influenced by Key managerial personnel of JLL. He submitted that the principal reason of raising a fund in the form NCDs and loans was to fund assessee's existing investment in JLL. It is submitted that, the shares of JLL is not shown as stock in trade in the P&L A/c and Balance Sheet but shown as non current investment vide Note 9 of the Balance Sheet. The Ld.DR submitted that, the benefit of loan is enjoyed by JLL. The Ld.DR submitted that the Ld.CIT(A) completely ignored these facts. 4.2. The Ld.DR further submitted that, the assessee was neither having any business connection with JLL, nor is a subsidiary or holding company of JLL, which could justify that the investment made in JLL for the purpose of business. The Ld.DR emphasized that the assessee did not disclose any business activities since 2015. He thus submitted that the that proportionate....
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....rough preferential allotment and funded the same through borrowings from financial institutions on which interest has been paid and charged to the Profit and Loss Account. 5.2. This Tribunal called upon the Ld.AR to furnish the agreement entered into between assessee and JLL. The Ld. AR was also directed to furnish the board resolution to support the borrowing towards subscription of 1,50,000 equity shares in JLL along with the financials of JLL for relevant period. The same were filed on 16/12/2025. 5.3. The Ld.AR relying on the details filed on 16/12/2025, submitted that assessee had entered into C & F Agreement with JLL with effect from 01/07/2012 for a period of three years for inventory management, account, stocking, storage clearing handling, safe custody and distribution of various types of products sold by JLL in the state of Kerala and Tamil Nadu. Copy of the said agreement is placed on record by the Ld.AR. She submitted that, the services were to be rendered by the assessee against certain commission as specified in Annexure to the C & F agreement filed before this Tribunal. She also referred to the financial statement of JLL for March ending 2014 wherein assessee h....
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....MENTS ( at cest) Trade Investments (Quoted) Jyothy Laboratories Limited 2.62,72,50,000 2,62,72,50,000 15,000,000 (2017 - 15,000,000) equity shares of Re 1 (2017 - Re 1) cach fully paid up 2,62,72,50,000 2,62,72,50,000 Market Value 6,06,82,50,000 5,28,97,50,000 CURRENT INVESTMENTS ( at cost) Invesco India Medium Term Bond Fund - Direct Plan Growth 21,415.273 (2017 - 21,415.273 ) units of Rs 1,000 (2017 - Rs 1,000) each 9,51,46,462 3,54,44,762 Invesco India Credit Opportunities Fund - Direct Plan Growth Nil (2017 - 5227.943) units of Rs Nil (2017 - Rs 1,000) cach 85.11,192 9,51,46,462 4,39,55,954 Market Value 9,88,51,123 4,60.86,554 6.6. The contention of the assessee is that it has been issuing fresh non-convertible debentures to discharge earlier borrowings, and that, therefore, there exists a direct and continuous nexus between the initial investment made in JLL during the financial year 2014 -15 and the borrowings raised in the subsequent years, including th....
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....equires an objective examination of whether a prudent businessman, acting for business considerations, would have incurred such expenditure. Mere continuity of borrowing or neutral substitution of liabilities, by itself, does not dispense with the requirement of establishing business nexus of the later borrowing. 8. Hon'ble Supreme Court in case of Hero Cycles (P) Ltd. v. CIT (supra) categorically held that, onus lies on the assessee to demonstrate clear nexus between the borrowed funds and the business purpose, and that where such nexus is not established, or where borrowed funds are diverted for non-business purposes, the interest attributable thereto is not allowable. Hon'ble Court further clarified that the doctrine of commercial expediency cannot be invoked in the abstract and must be supported by material demonstrating business rationale. 8.1. In cases involving refinancing or repayment of earlier loans, the onus squarely lies on the assessee to prove, with cogent evidence, that the subsequent borrowing was not merely a financial rearrangement divorced from business needs, but was undertaken wholly and exclusively for the purposes of business. The assessee must therefor....
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.... section 14A of the Act. It was submitted that, the disallowance was warranted having regard to the nature of investments and the interest expenditure claimed by the assessee. He submitted that the Ld.CIT(A) failed to properly appreciate the applicability of section 14A read with Rule 8D in the facts of the case. 10.1. The Ld.AR relied on the order passed by the Ld.CIT(A). We have perused the submissions advanced by both sides in light of records placed before us. 11. This issue is no longer res integra. In view of the settled legal position that the disallowance under section 14A of the Act read with rule 8D cannot exceed the exempt income earned by the assessee during the relevant previous year, as held inter alia by the Hon'ble Delhi High Court in Joint Investments (P) Ltd. v. CIT, reported in (2015) 372 ITR 694 (Del), and considering that the assessee has already made a suo motu disallowance of Rs.9,00,00,000/-, no further disallowance under section 14A is called for. Accordingly Ground no.1 raised by the revenue stands dismissed. Order pronounced in the open court on 21/01/2026 ============= Document 1 NOTE 6 LONG-TERM BORROWINGS LONG-TERM BORROWINGS 6% ....