MANJRI HORSE BREEDERS FARM PRIVATE LIMITED,MUMBAI, MAHARASHTRA vs. DCIT CIRCLE 2(2)(1), MUMBAI, MUMBAI, MAHARASHTRA

IN THE INCOME-TAX APPELLATE TRIBUNAL, MUMBAI “D” BENCH, MUMBAI BEFORE SHRI SANDEEP GOSIAN, JUDICIAL MEMBER AND SHRI BIJAYANANDA PRUSETH, ACCOUNTANT MEMBER ITA No.9017/MUM/2025 (AY: 2020-21) Manjri Horse Breeders Farm vs. DCIT Circle 2(2)(1), Mumbai Private Limited Aayakar Bhawan, M. K. Road, 41/44, SP Centre, Minoo Desai Mumbai-400020. Marg, Mumbai, Colaba S.O,, Mumbai-400005. PAN/GIR No: AAFCM3756K (Appellant) (Respondent) Assessee by Mr. Rishav Patawari Revenue by Shri Umashankar Prasad (CIT DR) Date of Hearing 30.07.2026 Date of Pronouncement 24.08.2026 O R D E R PER BIJYANANDA PRUSETH, AM:

This appeal filed by the assessee emanates from the order passed u/s250

of the Income-tax Act, 1961 (in short, ‘Act’) by the National Faceless Appeal

Centre [in short, ‘CIT(A)’], dated 18.11.2025 for assessment year (AY) 2020-21.

“I. Grounds on Jurisdiction / Procedural issues:

1.1. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in confirming the assessment order passed by the Assessing Officer ("AO") without adequately considering the written submissions dated 08 September 2022 filed by the Appellant before the AO.

1.2. The Ld. CIT(A) failed to properly appreciate that several additions/disallowances were made by the AO despite these submissions being on record, and without giving due reasoning for rejecting the same. 1

1.3. The Ld. CIT(A) has erred in treating the AO's conclusions as justified without independently examining the facts and documents filed by the Appellant.

1.4. The entire appellate order deserves to be quashed on the ground of violation of natural justice alone.

II. Grounds relating to additions / disallowances on merits:

2.1. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in upholding the incorrect finding of the AO that the Appellant sought to carry forward the loss of Rs. 18,03,58,305/- incurred from the activity of owning and maintaining race horses to future year(s).

2.2. The Ld. CIT(A) has failed to appreciate that the carry-forward loss figure appearing in Schedule CFL was auto-populated due to system design in the ITR, and no such claim was made or intended by the Appellant, particularly since the return was belated.

2.3. The Ld. CIT(A) has further erred in not appreciating that in subsequent years also, no set-off or carry-forward of such loss was ever claimed by the Appellant.

3.1. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in upholding the action of the AO in taxation of race winning stake Income at 30% u/s 115BB of the Income-tax Act, 1961 ("the Act"), ignoring that such income forms an integral part of the Appellant's activity of owning and maintaining race horses.

3.2. The Ld. CIT(A) failed to appreciate that section 115BB of the Act applies only to winnings from horse race (betting) and not to stake money earned by the owner of race horses.

3.3. The Ld. CIT(A) has erred in ignoring the settled legal position that stake money is taxable as "income from the activity of owning and maintaining race horses" u/s 74A and not as windfall income u/s 115BB. 2

4.1. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in confirming the addition of Rs. 33,80,22,101/- made by the AO u/s45(2) in respect of conversion of 9.57 acres of land into stock-in- trade.

4.2. The Ld. CIT(A) failed to appreciate that u/s45(2), capital gains become chargeable to tax only upon the actual sale or transfer of the converted stock-in-trade, and not at the time of conversion from capital asset to stock-in-trade.

4.3. The Ld. CIT(A) further erred in overlooking the fact that even the AO himself recorded this legal position in the assessment order but still made an addition contrary to section 45(2).

5.1. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in confirming the disallowance of Rs. 4,18,56,712/- being the provision for road work, which was contractually agreed upon as part of the land sale transaction to Joyville.

5.2. The Ld. CIT(A) failed to appreciate that Section 48(1) of the Act expressly allows deduction of expenditure Incurred wholly and exclusively in connection with the transfer of a capital asset, even if such expenditure is paid in a subsequent year. The road construction obligation is directly linked to and arises out of the transfer of land, and therefore falls squarely within the ambit of Section 48(1).

5.3. The Ld. CIT(A) erred in treating the provision as contingent. The amount represents a crystallized contractual liability arising from the transfer arrangement and directly connected with the computation of capital gains u/s48(1).

6.1. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in confirming the disallowance of Rs. 15,83,61,815/- u/s 3 40A(2)(b) by treating interest paid at 11.50% to Shapoorji Pallonji & Co. Pvt. Ltd. ("SPCPL") as excessive.

6.2. The Ld. CIT(A) failed to appreciate that the interest rate of 11.50% charged by SPCPL is consistent with the rate at which SPCPL lends to its related parties. Therefore, the rate of interest charged to the Appellant is in line with commercially acceptable lending practices for related- party transactions, and there is no excess rate charged to the Appellant.

6.3. The Ld. CIT(A) erred in adopting 8.60% (interest charged by individuals using personal funds) as the "market rate", which is not comparable to commercial borrowings. The interest rate charged by SPCPL is in accordance with market terms for commercial loans and should not be compared to loans made by individuals or related parties at lower rates.

7.1. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in confirming the disallowance of Rs. 10,11,56,693/- on the allegation that borrowed funds were used for non-business purposes. The Appellant submits that the borrowed funds were utilized for business-related activities, specifically for the purchase of land used in the business of horse breeding. Therefore, the disallowance is unjustified and liable to be deleted.

7.2. Further, the loan from Mr. Cyrus Mistry, who is a promoter of the Appellant company, was obtained for the sole purpose of repaying the DIIPL loan. To secure the DIIPL loan, Mr. Cyrus Mistry has jointly pledged 45,00,000 equity shares of Tata Consultancy Services Ltd., further demonstrating the business nature of the loan. The interest on this loan is therefore also business-related and should not be disallowed.

III. General Grounds:

8.1. Without prejudice, each of the above grounds is independent and without prejudice to one another. The Appellant craves leave to amend, alter, add, or withdraw any ground at the time of hearing.”

submitted that during the year, the appellant sold 32.43 acres of land and offered

capital gains of Rs.82,11,13,141/-. The assessee also converted 9.57 acres of land into stock-in-trade, which had not been sold during the year. Although the AO

acknowledged that the provisions of Section 45(2) provides for taxation of capital

gains arising on such conversion only in the year of sale of the converted stock-in-

trade, he still included capital gains of Rs.33,80,22,101/- in the computation of

income, resulting in premature taxation, which was erroneously upheld by the

CIT(A). He submitted that the reliance placed by the CIT(A) in case of Bai Shirinbai

K. Kooka (supra) and Groz-Beckert Saboo Ltd. (supra) are misplaced. The Ld. AR

submitted that the issue is covered in favour of assessee in cases of Ramesh Abaji

Walavalkar v. Addl. CIT (150 TTJ 725) (Mum.), DCIT v. Karma Lakelands (P.) Ltd.

(144 taxmann.com 44) (Delhi Trib.), PCIT v. Essorpe Mills Ltd. (404) ITR 323) (Mad.)

and CIT v. Essorpe Holdings (P.) Ltd. (83 taxmann.com 280) (Mad.).

5.4 With regard to the road expenses, the Ld. AR submitted that the

expenditure was incurred in connection with the transfer of the property and was

allowable while computing capital gains. He submitted that pursuant to the

development agreement with Joyville, the assessee was contractually obligated

to construct an approach road as an integral condition of the sale of land (Pages

190-192, 224 & 226 of PB). The total estimated road cost was Rs.7,35,49,264/-, of

which Joyville incurred Rs.4,49,31,420/- during the year and adjusted the same

against the sale consideration, while the assessee recognized the balance liability

of Rs.4,18,56,712/-. The entire sale consideration was offered to tax under the head "Capital gains" and the corresponding road construction cost was claimed

as expenditure incurred wholly and exclusively in connection with the transfer. He

submitted that the AO and CIT(A) have wrongly disallowed the amount by treating

it as a provision. However, the liability had crystallized under the agreement itself

and was directly linked to the transfer. He submitted that accrued contractual

liabilities are allowable even where payment is made subsequently, as held in

cases of (i) Calcutta Co. Ltd. v. CIT (37) ITR 1) (SC), (ii) Madras Industrial Investment

Corporation Ltd. v. CIT (225 ITR 802) (SC) and (iii) Taparia Tools Ltd. v. JCIT (260 ITR

102) (Bom.).

5.5 As regards the interest disallowances, the Ld. AR submitted that the interest paid to the related concern at 11.50% was commercially justified and that the borrowed funds were utilised for the business purposes of the assessee. It was therefore contended that the disallowances u/s 40A(2)(b) of the Act and towards non-business interest expenditure were not justified. He submitted that the disallowance u/s 40A(2)(b) of the Act is unsustainable as the AO and CIT(A) failed to establish that interest paid to SPCPL at 11.50% per annum was excessive or unreasonable having regard to the parameters prescribed u/s 40A(2)(b) of the Act. The AO and CIT(A) erred in comparing the interest paid to SPCPL with the rates charged by other related parties, namely Mr. Cyrus Mistry and Hampus Consultancy Services Private Limited, and treating the difference as excessive. Such comparison is not appropriate, as interest rates charged by related parties cannot be treated as a benchmark for determining fair market value. Further, the AO failed to appreciate that the borrowing from SPCPL was a corporate loan, whereas the other borrowings were personal advances carrying interest at 8.60%, and therefore the difference in rates was attributable to the nature of funding, risk profile, and commercial terms. The determination of excessiveness requires comparison with comparable independent third-party transactions after considering factors such as nature of borrowing, tenure, security, credit risk, and commercial terms. The loans from SPCPL, Mr. Cyrus Mistry and Hampus Consultancy Services Private Limited were genuine business borrowings, duly recorded and supported by confirmations and ledgers. Mere variation in interest rates cannot justify disallowance unless excessiveness is established with reference to fair market conditions. He relied on the following decisions (i) CIT v. Sarjan Realities Ltd. (50 taxmann.com 52) (Guj.), (ii) Amit Mehra v. ITO (116 taxmann.com 870) (Delhi Trib.), (iii) Galaxy International Overseas v. ITO (165 taxmann.com 78) (Rajkot Trib.) and (iv) Anilkumar P. Soni Vs ACIT (ITA No. 2511/Ahd/2013) (Ahd. Trib.). Accordingly, he pleaded to delete the disallowance. 5.6 Regarding the disallowance of interest expenditure of Rs.10,11,56,693/-,

the Ld. AR submitted that the disallowance of interest expenditure of Rs.

10,11,56,693/- is unjustified. The borrowing represents a loan of Rs. 120 crores

originally availed from Deutsche India Investments Pvt. Ltd. ("DIIPL") in 2009 for

land acquisition, which was essential for the assessee's horse breeding, stud farm,

and racehorse business. During the relevant year, the loan was settled through sale of pledged shares and continued with Late Mr. Cyrus P. Mistry as the lender,

resulting only in substitution of the lender without any change in the purpose or

business nexus of the borrowing. He submitted that the AO and CIT(A) disallowed

the interest merely on the ground that no fresh land was purchased during the

year. However, the borrowing represented an existing business liability, on which

interest had consistently been allowed in earlier years, and such interest cannot

be disallowed merely due to absence of fresh asset acquisition. The Ld. AR

referred to the board resolution dated 29.09.2009, credit facility letters dated

06.10.2009 and 09.12.2009, loan sanction letter dated 01.09.2015 and no dues

certificate dated 24.03.2020 in support of the above claim. The interest

expenditure was incurred wholly and exclusively for business purposes and is

allowable under the Act. Accordingly, the disallowance of Rs. 10,11,56,693/-

deserves to be deleted.

the Act. There is no dispute that the assessee is engaged in the business of

owning, breeding and maintaining race horses and that the impugned amount of

Rs.3,04,87,100/- received by the assessee from horse races represented stake

money and race winning stakes arising from its business activity. The Ld. AR

submitted that the AO erred in treating the entire receipt as winnings from horse

races taxable at the special rate u/s115BB of the Act. He submitted that section

115BB specifically excludes income derived from the activity of owning and

maintaining race horses. We have gone through provisions of section 115BB of

the Act. The relevant part of the section is reproduced below for ready reference

and clarity:

“115BB. Where the total income of an assessee includes any income by way of winnings from any lottery or crossword puzzle or race including horse race (not being income from the activity of owning and maintaining race horses) or card game and other game of any sort or from gambling or betting of any form or nature whatsoever, the income-tax payable shall be the aggregate of- (i) the amount of income-tax calculated on income by way of winnings from such lottery or crossword puzzle or race Including horse race or card game and other game of any sort or from gambling or betting of any form or nature whatsoever, at the rate of thirty per cent; and (ii) the amount of income-tax with which the assessee would have been chargeable had his total income been reduced by the amount of income referred to in clause (1): ………… 13 Explanation. For the purposes of this section, - (i) "horse race" shall have the meaning assigned to it in section 74A”

7.1.1 Since the above section refers to section 74A for the meaning of “horse

race”, it would be relevant to reproduce the same, which reads as under:

“74A….. (3)…In the case of an assessee, being the owner of horses maintained by him for running in horse races (such horses being hereafter in this sub-section referred to as race horses), the amount of loss incurred by the assessee in the activity of owning and maintaining race horses in any assessment year shall not be set off against income, if any, from any source other than the activity of owning and maintaining race horses in that year and shall, subject to the other provisions of this Chapter, be carried forward to the following assessment year and- (a) it shall be set off against the income, if any, [from the activity of owning and maintaining race horses], assessable for that assessment year Provided that the activity of owning and maintaining race horses is carried on by him in the previous year relevant for that assessment year; and (b) if the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on, so, however, that no portion of the loss shall be carried forward for more than four assessment years immediately succeeding the assessment year for which the loss was first computed. Explanation - For the purposes of this sub-section- (a) "amount of loss incurred by the assessee in the activity of owning and maintaining race horses" means- (i) in a case where the assessee has no income by way of stake money, the amount of expenditure (not being in the nature of capital expenditure) laid out or expended by him wholly and exclusively for the purposes of maintaining race horses; (ii) in a case where the assessee has income by way of stake money, the amount by which such income falls short of the amount of expenditure (not being in the nature of capital expenditure) laid out or expended by the assessee wholly and exclusively for the purposes of maintaining race horses;

(b) "horse race" means a horse race upon which wagering or betting may be lawfully made; (c) "income by way of stake money" means the gross amount of prize money received on a race horse or race horses by the owner thereof on account of the horse or horses or any one or more of the horses winning or being placed second or in any lower position in horse races.”

7.1.2 A conjoint reading of sections 115BB and 74A of the Act makes it clear that

income from owning and maintaining race horses has been expressly excluded

from the provisions of section 115BB of the Act. Further, section 74A(3) of the Act

specifically recognises the activity of owning and maintaining race horses and

provides a separate mechanism for computation and carry forward of loss from

such activity. It is, therefore, clear that stake money received by an owner of race

horses in the course of such business cannot be equated with winnings from races

including horse races. The CBDT Circular No. 240 dated 17.05.1978 also explains

the provisions relating to horse races; the relevant portion being as below:

"The provisions for deduction of tax at source will, however, not apply to income by way of stake money. This is because 'stake money' in common parlance is not regarded as winnings from a horse race, but really constitutes the 'prize money' received on a horse race by the owner thereof on account of the fact that the horse wins the race or stands second or in any lower position."

7.1.3 The Circular clearly recognizes that stake money is not regarded as

“winnings from a horse race”, but constitutes prize money received by the owner

of the horse for winning or placing in a race. This distinction confirms that stake money is separate from gambling or betting or horse racing income. In the present

case, the assessee's income is on account of stake money and not on account of

winning from race horses, and therefore, cannot be taxed u/s 115BB of the Act.

7.1.4 The Hon’ble Karnataka High Court in case of Bangalore Turf Club Ltd.

(supra) has held that stake money arises from the activity of owning and

maintaining race horses and is not in the nature of winning from horse races.

Hence, income from the activity of owning and maintaining horses it is outside

the scope of section 115BB of the Act. The co-ordinate Benches of the Tribunal in

case of Royal Western India Turf Club Ltd. (supra) and K.R. Syamkumar (supra)

have held that income earned by owners of race horses by way of stake money is

distinct from gambling and unreported winning and does not attract special rate

u/s 115BB of the Act. In view of the facts discussed above and the decisions cited

supra, we are of the considered view that the race winning stake of

Rs.3,04,87,100/- received by the appellant cannot be taxed u/s 115BB of the Act.

The AO is accordingly directed to delete the same. The ground is allowed.

7.2 Ground No.4 pertains to taxation of capital gains on conversion of capital

asset into stock-in-trade u/s 45(2) of the Act. As stated earlier, the assessee had

converted 9.57 acres of land into stock-in-trade for business purposes and

recorded it at cost of acquisition. The land was not sold during the year. The AO has added the difference between the FMV and cost of acquisition to tax u/s 45(2)

of the Act. We find that section 45(2) of the Act specifically provides that where a

capital asset is converted into stock-in-trade, the capital gain arising from such

conversion is chargeable to tax in the year in which such stock-in-trade is sold. The

land was not sold during the year. Therefore, no capital gain could be brought to

tax in the year under consideration.

7.2.1 We find that the CIT(A) had incorrectly relied upon the decisions in CIT v.

Bai Shirinbai K. Kooka and CIT v. Groz-Beckert Saboo Ltd., which pre-dated the

insertion of section 45(2) and, therefore, did not govern the issue. The assessment

year in case of Bai Shirinbai K. Kooka (supra) pertains to AY 1947-48 and the case

was not decided u/s 45(2) of the Act because the section did not exist at the time

of the above ruling. Similarly, in case of Groz-Beckert Saboo Ltd. (supra), the AY

involved was 1962-63. On the other hand, section 45(2) was introduced by the

Taxation Laws (Amendment) Act, 1984 w.e.f. 01.04.1985. This governs the

mechanism when the owner turns a capital asset into business inventory (stock-

in-trade). The capital gain is charged in the year the stock in trade is eventually

sold or transferred, as the case may be, and not in the year of conversion. Since

the impugned land was not sold during the year, the AO was not correct in taxing

the impugned amount to tax u/s 45(2) of the Act. The decisions relied upon by

the assessee in cases of Ramesh Abaji Walavalkar (supra), Karma Lakelands (P.) 17 Ltd. (supra), Essorpe Mills Ltd. (surpa) and Essorpe Holdings (P.) Ltd. (supra)

support the above view. Hence, the decision of the CIT(A) confirming the above

addition is not in accordance with law and hence, set aside. The AO is directed to

delete the addition. In the result, the ground is allowed.

7.3 Ground No.5 pertains to disallowance of provision for road expenses from

capital gains. During the subject year, the assessee had sold a substantial portion

of land to Joyville under a development agreement, which included a contractual

obligation to construct an approach road connecting the main road to the sold

plot. The total estimated cost of the road was Rs.7,35,49,264/-. As the assessee

could not undertake the construction directly, Joyville carried out the work and

adjusted the expenditure against the sale consideration payable to the assessee.

Joyville incurred Rs.4,49,31,420/- during the year (Basic Rs.3,80,77,475/- and GST

Rs.68,53,945/-), while the assessee recognised the remaining cost of

Rs.4,18,56,711/- (Basic Rs.3,54,71,789/- and GST Rs.63,84,922/-) for the balance

road construction. While computing capital gains u/s 48, the assessee deducted

the entire road construction cost, including the balance amount, treating it as

expenditure wholly and exclusively in connection with the transfer. The balance

sale consideration was also offered to tax during the year. The AO held that a

provision cannot be capitalized as an expense for the purpose of computing

capital gains and that only real expenses can be claimed as cost of improvement. 18 The CIT(A) upheld the AO's disallowance of Rs.4,18,56,712/-, holding that the

amount represented a provision for expenditure not actually incurred during the

year. He observed that only actual expenditure qualifies as cost of improvement

u/s 55 and as deductible u/s 48. Accordingly, the addition made by the AO was

confirmed.

7.3.1 In this regard, the Ld. AR submitted that the obligation to construct the

approach road arose directly from the terms of the land sale transaction with

Joyville and formed an integral and inseparable condition of the transfer. The said

obligation was contractual, binding and therefore, the related expenditure is

intrinsically linked to the transfer of the capital asset. The entire sale

consideration from the transfer of land was offered to tax under the head "Capital

gains." Correspondingly, the total road construction cost of Rs. 7,35,49,264/- was

deducted while computing capital gains, being expenditure wholly and exclusively

in connection with the transfer of the land.

7.3.2 We have again perused the records and considered the rival submissions.

Section 48 of the Act provides the mechanism for computation of capital gains.

Any expenditure incurred wholly and exclusively in connection with the transfer

is allowable as deduction u/s 48(i) of the Act. In case of the appellant, the road

construction obligation arises directly from the transfer arrangement. The expenditure incurred by the purchaser was adjusted against the sale

consideration. Accordingly, the disallowance made by the AO is not in accordance

with law and is liable to be deleted. The above legal position is supported by the

decision in case of Calcutta Co. Ltd. v. CIT (supra). In the said case, the Hon’ble

Supreme Court ruled that commercial profits must be computed by deducting

accrued and estimated liabilities for definite obligations, even if discharged in the

further. The deduction applies if a real and present obligation binds the assessee.

7.3.3 As the obligation to construct the approach road arose directly from the

land transfer transaction and constituted a crystallized liability, the deduction

claimed by the assessee is allowable as per the ratio of the above decision.

Further, the Hon'ble Supreme Court in case of Madras Industrial Investment

Corporation Ltd. (supra) held that “expenditure” is not necessarily confined to the

money which has been actually paid out. It covers a liability which has accrued or

which has been incurred, although it may have to be discharged at a future date.

Since the obligation to construct the road arose directly from the land transfer

transaction and constitutes a crystallized liability, its cost should be recognised in

the same year the related capital gain was offered to tax. In view of the above

facts and the decisions cited supra, the disallowance made by the AO and

confirmed by the CIT(A) is not in accordance with law and is liable to be deleted.

The ground is allowed. 20 7.4 Ground No.6 pertains to disallowance of interest paid to related party u/s

40A(2)(b) of the Act. The assessee had obtained borrowings from various related

parties, namely, SPCPL, Late Mr. Cyrus Mistry and Hampus Consultancy Services

Pvt. Ltd. at varying interest rates. The borrowings were duly documented,

confirmed and recorded in the books of account. The AO observed that interest

was paid to SPCPL at 11.50%, whereas interest paid to other related parties was

at 8.60%, and on this basis he treated the differential interest as excessive and

disallowed Rs.15,83,61,815/- u/s 40A(2)(b) of the Act. The CIT(A) confirmed the

disallowance.

7.4.1 In this regard, the Ld. AR submitted that the comparison made by the AO

was erroneous since the loans were obtained from different lenders under

different commercial circumstances. It was contended that the loans obtained

from SPCPL were corporate/structured borrowings involving different funding

costs, risks and regulatory requirements, whereas the other borrowings were

personal advances. Therefore, merely because different rates of interest were

charged by related parties, the same could not be treated as excessive or

unreasonable. The Ld. AR relied on the decisions in cases of Sarjan Realities Ltd.

(supra), Amit Mehra (supra), Galaxy International Overseas (supra) and Anilkumar

P. Soni (supra).

7.4.2 We have considered the facts of the case and the decision relied upon by

both sides. Section 40A(2)(b) requires a finding that the expenditure is excessive

or unreasonable having regard to the fair market value, legitimate business needs

or benefit derived by the assessee. We find that no independent market

benchmark was established by the AO. The appellant has relied on various judicial

precedents to contend that mere difference in interest rates cannot, by itself,

justify a disallowance u/s 40A(2)(b). The Hon’ble Gujarat High Court in case of

Sarjan Realities Ltd. (supra) has held that an interest payment to related parties

at different rates cannot be disallowed u/s 41A(2)(b) of the Act, merely because

varying rates were paid, unless the revenue proves that the rate exceeds the fair

market value. The other decisions relied upon by the Ld. AR also supported the

contention of the Ld. AR.

7.4.3 There is no reason as to why the ratio of the above decisions is not

applicable to the instant appeal. The AO has compared the interest rate paid to

SPCPL (11.50%) with other related parties (8.60%) and disallowed the excess

interest u/s 40A(2)(b) of the Act. The interest charged by Mr. Cyrus Mistry and

Hampus Consultancy Service Pvt. Ltd. cannot be treated as FMV because these

lenders are related parties. The AO has not brought on record any evidence from

independent third parties so as to justify the disallowance of excess interest paid

at higher rate to SPCPL. He has also not established that the loans were not for 22 the purposes of business. In view of the facts and the precedents discussed above,

mere differences in interest rates among related parties cannot justify

disallowance, especially where commercial reasons, structured financing and

corporate risk justify the rate charged by SPCPL. Therefore, the disallowance u/s

40A(2)(b) of the Act by the AO, and confirmed by the CIT(A), is not liable to be

sustained. The AO is accordingly directed to delete the disallowance. The ground

is allowed.

7.5 Ground No.7 pertains to disallowance of interest expenditure of

Rs.10,11,56,693/-. During the assessment proceedings, the AO observed that the

assessee had paid interest on loans obtained from DIIPL and Late Mr. Cyrus P.

Mistry. He noted that the loan from DIIPL was specifically taken during the year

for the purpose of purchase of land, and the loan from Late Mr. Cyrus P. Mistry

was obtained to repay the outstanding DIIPL loan. Accordingly, by association, the

interest paid to DIIPL and Late Mr. Cyrus P. Mistry, totalling Rs. 11,45,54,541/-,

was for the purpose of land acquisition. The AO further observed that no land had

been purchased by the assessee during the relevant previous year. On this basis,

he concluded that the interest paid on the aforesaid loans could not be regarded

as expenditure incurred for the purpose of business. The CIT(A) has confirmed the

addition made by the AO.

7.5.1 In this regard, the Ld. AR submitted that the assessee's business of horse

breeding, stud farm operations and maintenance of race horses required

substantial land and infrastructure and, therefore, borrowings for such purposes

were integral to its business. He submitted that the assessee had originally availed

a loan of Rs.120 crores from Deutsche India Investments Pvt. Ltd. in 2009 for

acquisition of land, secured against shares pledged by Late Mr. Cyrus P. Mistry.

During the relevant year, a portion of the pledged shares was sold and the

outstanding loan was adjusted. The balance proceeds were remitted to Mr.

Mistry, who effectively became the lender. Hence, the transaction merely resulted

in replacement of one lender by another, while the original business purpose of

the borrowing remained unchanged.

7.5.2 We have carefully considered the facts of the case in the light of

submissions made by rival parties. We find that the impugned borrowing was a

historical borrowing and had been utilised for the assessee's business purposes

of owning and maintaining race horses. The subsequent repayment/replacement

of the lender did not alter the purpose or business nexus of the borrowing. The

interest on the borrowing had been allowed in earlier years and absence of fresh

land acquisition during the year, by itself, could not sever the nexus between the

borrowing and the assessee's business. The interest expenditure of

Rs.10,11,56,693/- was incurred wholly and exclusively for business purposes and 24 there is no change in the nature of the interest expense in the year under appeal.

There is only replacement of one lender by another lender. The interest

expenditure is, therefore, allowable as a deduction. Hence, the disallowance

made by the AO and confirmed by the CIT(A) is deleted. The ground is allowed.

grounds on merit have been allowed, this ground become academic in nature and

does not require adjudication.

Order is pronounced on 24.08.2026.

Sd/- Sd/- (SANDEEP GOSAIN) (BIJYANANDA PRUSETH) JUDICIAL MEMBER ACCOUNTANT MEMBER

*Aniket Chand; Sr. PS MUMBAI Date: 24.08.2026 Copy of the Order forwarded to: 1. The Assessee 2. The Respondent 3. The CIT(A) 4. CIT 5. DR/AR, ITAT, MUMBAI 6. Guard File

By Order

Assistant Registrar ITAT, MUMBAI