TaxTMI 
TaxTMI 
2026 (9) TMI 125
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....rounds of appeal: - I. On the facts and circumstances of the case and in law, the learned CIT(A) erred in deleting the disallowance of interest expenditure of Rs.104,622,906 without properly appreciating that the assessee had failed to establish a direct nexus between the borrowed funds and the income earned from business or profession. II. The learned CIT(A) grossly erred in accepting the assessee's mere classification of the use of borrowed funds as being for business purposes, without independently verifying or examining whether the investments were genuinely connected with the assessee's business operations. III. The learned CIT(A) failed to consider that the borrowed funds were either advanced as interest-free loans or used to invest in equity shares of group companies, which did not generate any business income and were not integrated with the assessee's business operations. Accordingly, the interest expenditure incurred on such funds was not allowable as a deduction under the Income Tax Act, 1961. IV. The learned CIT(A) erred in law and on facts in relying on the decision of the Hon'ble Supreme Court in Core Healthcare Ltd. (2008) 298 ITR ....
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....nefiting related parties. The Assessing Officer also referred to several judicial precedents. He noted that the assessee's business receipts were only Rs.494,872, whereas dividend income from investments was Rs.213,137,384 and interest expenditure claimed was Rs.104,622,906. On this basis, he concluded that the financial statements and notes to accounts clearly showed that the assessee had borrowed funds and either invested them in shares or advanced interest-free loans to related parties or partnership concerns. He further held that investment activity could not be treated as business income, since the assessee was neither a venture capital entity nor engaged in the business of investing in shares. If investment in shares was its business, such investments ought to have been classified as stock-in-trade rather than as current or non-current investments or capital assets. In his view, the assessee's accounting treatment showed that the investments were capital assets and, therefore, could not be regarded as part of its business activity. 05. Before the learned Assessing Officer, the assessee contended that the loans were advanced from interest-free funds and that it was engaged ....
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....mbay High Court in CIT v. Srishti Securities Pvt. Ltd., 183 Taxman 159, where it was held that interest paid on funds borrowed for investment in shares and securities-whether held as investments or stock-in-trade for acquiring controlling interest in other concerns-is deductible under section 36 of the Act. (vii) The assessee further submitted that it satisfied all conditions under section 36(1)(iii), as the interest was paid on capital borrowed for business purposes. (viii) The assessee also submitted that the loans were advanced out of its own capital, as reflected in the financial statements and fund-flow statement. It pointed out that loans and advances were about Rs.204 crore, while partners' capital was also approximately Rs.204 crore, demonstrating the availability of sufficient own and interest-free funds. Accordingly, the assessee contended that the advances and investments should be presumed to have been made from such interest-free funds. Reliance was placed on the decision of the Hon'ble Karnataka High Court in Coffee Day Global Ltd. v. ACIT, 33 ITR 321. (ix) The assessee further submitted that similar interest expenditure had been allowed in ....
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....in deleting the disallowance. According to him, interest expenditure is allowable only where the borrowed capital continues to be used for the purposes of the business and cannot be allowed where funds are diverted as interest-free loans to relatives, associates, or related parties. He submitted that, in the present case, the assessee's claim that advances were made from its own interest-free capital is not tenable. He pointed out that the assessee had entered into a loan agreement with an individual for borrowing Rs.120 crore at 9.5% per annum specifically to meet business requirements, whereas the memoranda of understanding with related parties showed that these borrowed funds were extended as interest-free facilities. In his submission, no prudent businessman would borrow funds at 9.5% interest and lend the same funds without charging any interest. He further argued that the learned CIT(A) accepted the assessee's classification without independently verifying whether the specific borrowed funds were directly linked to the assessee's business operations, thereby validating an accounting arrangement under which the assessee's profits were reduced while related parties benefited. H....
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....s to explain the assessee's business. He submitted that the assessee was engaged in several business verticals, including financial consultancy, advisory services, financial and investment solutions, fund syndication, and capital-market advisory services. He further stated that the assessee also promoted business ventures, both on its own account and as a private equity investor. According to him, the assessee had borrowed funds in earlier years and used them to set up special purpose vehicles and to invest in partnership firms, limited liability partnerships, and other securities as part of its business ventures. He submitted that, as promoter of several companies and firms, the assessee had earned substantial returns on its investments over the years and had consistently redeployed surplus funds into new ventures by supporting newly formed entities in select sectors promoted by new-generation entrepreneurs. This support included financial, managerial, and investment assistance. He also explained that these activities involved creating investment vehicles, either through limited liability partnerships or intermediary holding companies, in collaboration with business associates thr....
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....d accounting policy, which showed that it was engaged in the business of investing in shares of entities in which it acted as a promoter. Since these investments were held for strategic business purposes, the related interest expenditure was incurred during the assessee's business. f. He therefore contended that the assessee had paid interest on capital borrowed for the purposes of its business and that such interest expenditure was allowable under section 36(1)(iii) of the Act. g. He further submitted that where sufficient interest-free funds are available to meet the investment requirements, a presumption arises that the investments were made from such interest-free funds. In support of this proposition, he relied on the decisions of the Hon'ble Supreme Court in CIT v. Reliance Industries Ltd. (2019) 410 ITR 466 (SC) and South Indian Bank Ltd. v. CIT, 438 ITR 1 (SC). h. He further submitted that the expression "for the purposes of business" is of wide import. Relying on the decision of the Hon'ble Supreme Court in CIT v. Malayalam Plantations Ltd., 53 ITR 140, he submitted that the expression is broader than "for the purpose of earning profits" and cove....
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....iture. On this basis, he contended that the disallowance was unsustainable. m. He further submitted that the issue is now squarely covered in favour of the assessee by the decision of the Hon'ble Supreme Court in L.K. Trust v. CIT (2026) 186 Taxman 594, rendered on 7 May 2026, whereby the decision of the Hon'ble Karnataka High Court in IT Appeal No. 175 of 2001 dated 1 March 2010 was reversed. He stated that the Hon'ble Supreme Court followed its earlier decisions in Sharp Business Systems v. CIT (2026) 181 taxmann.com 657; 484 ITR 509 and S.A. Builders Ltd. v. CIT, 288 ITR 1. He acknowledged that, before the Supreme Court's decision in L.K. Trust, the issue may have been covered against the assessee by the Karnataka High Court decision. However, that position no longer survives after its reversal by the Supreme Court. Referring to the facts, he submitted that where an assessee borrows funds to acquire a controlling interest in a company through a group concern and claims deduction of interest under section 36(1)(iii), the allowability of such interest must be examined from the standpoint of commercial expediency, and not merely on whether the transaction directly generate....
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....also steps taken to rationalise administration, modernise machinery, preserve the business, protect its assets and property against expropriation or hostile claims, and meet statutory dues or taxes imposed as a condition for carrying on business. At the same time, the Court clarified that the expression has limits: the expenditure must be incurred for carrying on the business and must arise in the assessee's capacity as a businessperson. In essence, the expenditure must fall on the assessee as a person engaged in business and not in any other capacity. 16. Applying the above principles to the assessee's business, it is evident that the assessee is a limited liability partnership engaged in financial consultancy and advisory services, including financial and investment solutions, fund syndication, and capital-market advisory services. The LLP was incorporated on 9 February 2011. Its investment schedule and notes to accounts show that investments in entities where the assessee acted as promoter, and investments held for strategic purposes, were classified as non-current investments, while other investments were classified as current investments. The assessee reported business inco....
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.... followed S.A. Builders Ltd. v. CIT, 288 ITR 1 (SC), where it was held that interest on borrowed funds is allowable when advances are made for commercial expediency. Applying these principles to the present case, the assessee had unsecured loans of Rs.3,190,512,862 and partners' capital of Rs.2,226,460,404, which were applied, inter alia, towards non-current investments of Rs.4,069,184,124. It is therefore evident that, in addition to its own funds, the assessee also used borrowed funds to acquire investments intended to secure controlling interests in group companies. 18. The decision of the Hon'ble Supreme Court in L.K. Trust v. CIT (2026) 186 taxmann.com 594 (SC) also supports this view. In that case, the assessee had borrowed funds to acquire a controlling interest in a company through a group concern and claimed deduction of the related interest under section 36(1)(iii) of the Act. The Supreme Court held that the allowability of such interest must be examined from the standpoint of commercial expediency and not merely by considering whether the transaction directly generated profits. Since the borrowing was for business purposes, the interest was allowable notwithstanding t....
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....assessee are sufficient to cover the investments, it may be presumed that the investments were made from those funds. The facts before us are substantially similar. The same principle was reiterated by the Hon'ble Supreme Court in South Indian Bank Ltd. v. CIT (2021) 130 taxmann.com 178 (SC), while considering disallowance under section 14A of the Act. It was held that where interest-free funds available with assessee-banks exceeded their investments in tax-free securities, no disallowance of interest expenditure could be made under section 14A. Although that decision was rendered in the context of section 14A, the principle applies equally while considering allowance or disallowance of interest under section 36(1)(iii) of the Act. Therefore, on this ground also, the disallowance made by the learned Assessing Officer fails the test of law and is not sustainable. 20. However, we are unable to accept the learned Authorised Representative's reliance on the principle of consistency, based on CIT v. Neo Poly Pack Pvt. Ltd., 245 ITR 492, CIT v. Sridev Enterprises, 192 ITR 165, and Radhasoami Satsang v. CIT, 193 ITR 321 (SC), to contend that the Assessing Officer is barred from examini....