NV PROJECTS PRIVATE LIMITED ,MUMBAI vs. DEPUTY COMMISSIONER OF INCOME TAX CIRCLE 1(2)(2), MUMBAI

ITA 1418/MUM/2025Status: DisposedITAT Mumbai18 September 2025AY 2017-18Bench: SHRI SAKTIJIT DEY, HON'BLE VICE PRESIDENT\n&\nSHRI NARENDRA KUMAR BILLAIYA, HON'BLE ACCOUNTANT MEMBER\nI.T.A. No. 1418/Mum/2025\nAssessment Year: 2017-18\nN V Projects Private Limited\nGround Floor, Block D\nS. No. 30/3, 31/1 & 2A\nWeikfield IT Citi Info Park\nViman Nagar\nPune - 411041\n[PAN: AACCD2669P]\nअपीलार्थी/ (Appellant)\nVs\nDeputy Commissioner of\nIncome Tax, Circle 1(2)(2),\nMumbai\nप्रत्यर्थी / (Respondent)\nI.T.A. No. 1025/Mum/2025\nAssessment Year: 2017-18\nDeputy Commissioner10 pages
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What did the Tribunal hold?

The Tribunal held that the interest expenditure claimed by the assessee under Section 36(1)(iii) is allowable. It reasoned that the capital reduction was approved by the Bombay High Court, and the borrowed funds were utilized for this purpose, which is considered a business purpose. The Tribunal relied on the Gujarat High Court's decision in *Core Healthcare Ltd.*, which held that expenditure incurred for capital reduction is for the purpose of business. Regarding Section 115QA, the Tribunal found that the amendment by the Finance Act, 2016, which broadened the definition of buy-back, was effective from 01/06/2016. Since the assessee's capital reduction scheme was approved on 16/04/2016 and payments were made prior to 01/06/2016, the amended provisions of Section 115QA were not applicable to the assessee. Therefore, the CIT(A)'s deletion of the tax levied under Section 115QA and the disallowance of interest was upheld. The appeal of the assessee was allowed, and the appeal of the revenue was dismissed.

What were the facts?

The assessee, N V Projects Private Limited, engaged in operating an IT Park, undertook a capital reduction during Assessment Year 2017-18. Pursuant to a Bombay High Court order, it cancelled 165,433 redeemable optionally convertible preference shares and returned capital to shareholders, aggregating to Rs. 67,00,03,650/-. The premium of Rs. 3950/- per share, totaling Rs. 65,34,60,350/-, was adjusted against surplus and revaluation reserves. The Assessing Officer (AO) disallowed Rs. 11,56,72,935/- claimed as interest expenditure on funds borrowed for this capital reduction, treating it as capital expenditure. The AO also sought to levy tax under Section 115QA on the capital reduction, viewing it as a buyback. The Commissioner of Income Tax (Appeals) [CIT(A)] deleted this addition and the interest disallowance.

What were the issues?

1. Whether the interest expenditure of Rs. 11,56,72,935/- incurred on capital borrowed for the purpose of capital reduction is allowable as a deduction under Section 36(1)(iii) of the Income Tax Act, 1961? - Assessee's contention: Section 36(1)(iii) is a self-contained code, and interest on borrowed funds used for business purposes is deductible, irrespective of whether the purpose is revenue or capital in nature. Relied on *Deputy Commissioner Of Income-Tax vs Core Healthcare Ltd* and *Eastern Investments Limited v. Commissioner of Income-tax*. - Revenue's contention: Expenditure incurred for payment of owners' funds does not tantamount to expenditure for the purpose of business or profession, and interest can only be allowed if proven to be for business purposes. 2. Whether the capital reduction undertaken by the assessee, involving payment to preference shareholders, is liable to tax under Section 115QA of the Income Tax Act, 1961, as a buyback of shares and distribution of profits? - Assessee's contention: Section 115QA was amended by the Finance Act, 2016, effective from 01/06/2016, to broaden the definition of buy-back. Since the scheme of reduction was approved on 16/04/2016 and payments were made prior to 01/06/2016, Section 115QA is not applicable. - Revenue's contention: The capital reduction amounts to a buyback of shares and distribution of profits, making it liable to tax under Section 115QA. Relied on the substance of the transaction over its form, citing *K.P. Varghese v. TO*, and precedents like *Vodafone International Holdings B.V. v. UOI* and *Cairn India Ltd. v. DCIT*.

Which sections of the Income-tax Act were involved?

Section 36(1)(iii),Section 115QA,Section 115QB

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Cases cited in this judgment(3)Show list

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Income Tax Appellate Tribunal, “B” BENCH, MUMBAI

Before: SHRI SAKTIJIT DEY, HONBLE & SHRI NARENDRA KUMAR BILLAIYA, HONBLE

For Appellant: Shri Vijay Mehta, A/R
For Respondent: Shri Satyaprakash R. Singh, CIT, D/R
Hearing: 16/09/2025Pronounced: 1809/2025

Heard together (2 matters)

I.T.A. No. 1418/Mum/2025
I.T.A. No. 1025/Mum/2025

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PER NARENDRA KUMAR BILLAIYA, AM: I.T.A. No. 1418/Mum/2025 & I.T.A. No. 1025/Mum/2025 are cross-appeals by the assessee and the revenue preferred against the order dated 18/12/2024 by NFAC, Delhi [here

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