MAHARASHTRA STEELS ROLLING MILLS PRIVATE LIMITED,MUMBAI vs. CIRCLE 15(1)(1) MUMBAI, MUMBAI

IN THE INCOME-TAX APPELLATE TRIBUNAL, MUMBAI “D” BENCH, MUMBAI BEFORE SHRI SANDEEP GOASAIN, JUDICIAL MEMBER AND SHRI BIJAYANANDA PRUSETH, ACCOUNTANT MEMBER ITA No.2234/MUM/2026 (AY: 2008-09) Maharashtra Steels Rolling Mills vs. DCIT Circle 15(1)(1) Pvt. Ltd. Aayakar Bhavan, Mumbai-400020. 190, LBS Marg, Bhandup West, MUMBAI-400078. PAN/GIR No: AABCM6109Q (Appellant) (Respondent) Assessee by Shri Subhash Kedia Revenue by Shri Umashankar Prasad (CIT-DR) & Shri Annavaram Kosuri (Sr. AR) Date of Hearing 20.05.2026 Date of Pronouncement 14.08.2026 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 06.01.2026 for the assessment year (AY) 2008-

09.

“1. Ground On the facts and circumstances of the case, notice u/s 148 has been issued beyond the time limit prescribed u/s 149. For the A.Y. 2008-09 the period of limitation ends at 31/03/2013 whereas the notice u/s 148 was served on 16/01/2014 i.e. beyond the period of limitation. It is pertinent to note that the case was earlier assessed to tax u/s 143(3) and all facts and records were available with Ld. A.O. and no new information OR condition has prevailed for issuance of notice u/s 148 as such the assessment per say may please be cancelled ab-initio and all demand may please be scrapped.

The CIT(A) considered the submissions of the assessee and observed that the

assessee had received interest income of Rs.2,89,32,000/- from its

associate/sister concerns, which had not been separately credited to the profit &

loss account or offered to tax, but had been netted off against the finance

charges. The CIT(A) further noted that against loan funds of Rs.24,75,77,811/-, on

which finance charges of Rs.3,10,44,578/- were incurred, the assessee had

advanced Rs.34,63,75,751/- to its associate/sister concerns. The CIT(A) did not accept the assessee's contention that the interest received from the related

concerns was at the same rate as the interest paid to the banks and was,

therefore, rightly netted off. He observed that the advances to the related

concerns exceeded the loan funds availed by the assessee and, therefore, the

entire finance charges ought to have been recovered from the borrower

concerns. The CIT(A) further observed that if the assessee's contention regarding

netting of interest at the same rate was correct, there ought to have been a credit

balance in the interest account instead of the debit balance. Accordingly, the

CIT(A) upheld the disallowance of finance charges of Rs.3,10,44,578/- and

addition of interest income of Rs.2,89,32,000/-, aggregating to Rs.5,99,76,578/-

and dismissed the appeal of the assessee.

Tribunal. The appellant has not pressed ground No.1 and 2 hence, the same are

dismissed as not pressed.

filed a paper book giving various details and submitted that the appellant's gross

interest expense was Rs.6,09,77,833/-. Against this, interest income of

Rs.2,99,33,255/- received from associate concerns and others was credited in the

interest expense ledger and only the net figure of Rs.3,10,44,578/-was debited to

the profit & loss account. He submitted that this is a transparent, consistent and fully-disclosed accounting practice. The AO was fully aware of this netting, having

examined the same. However, has disregarded the very fact of interest netting

off. The ld. AR submitted that this is elementary double counting. The interest

income of Rs.2,89,32,000/- was already forming part of the income by virtue of

the disallowance of the net debit. Adding it again is contrary to the basic

principles of income tax assessment. He also submitted that the practice of

netting interest receipts against interest payments, particularly in the context of

intra-group commercial transactions, is well-recognised in accounting and

accepted in law. The Ld. AR also submitted that the Hon’ble Supreme Court and

Bombay High Court have consistently upheld that income already accounted for

and reflected in the books cannot be added again to the total income. The Ld. AR

also submitted that the CIT(A) erred in confirming both additions without

addressing this fundamental inconsistency.

6.1 On the other hand, the Ld. CIT DR supported the order of lower authorities.

appellant has submitted that the gross interest expenses was Rs.6,09,77,833/.

The appellant has reduced from the above expenses the interest income of

Rs.2,99,33,255/- received from group concerns and debited the net figure of

Rs.3,10,44,578/- (Rs.6,09,77,833 – Rs.2,99,33,255) to the profit and loss account.

It is, therefore, clear that instead of offering the interest income separately and claiming the gross interest expenditure, the appellant has claimed only the net

interest expense in its profit and loss account. Therefore, adding the interest

income, which was netted off from the interest expenses, would amount to

double addition of the same income, which is not permissible. However, the AO

has not examined this issue while completing the assessment order. Therefore,

the order of CIT(A) is set aside and the matter is remanded back to the file of AO

for the limited purpose of verification as to whether, the interest income was

actually reduced from the gross interest expense and only the balance amount

was claimed in the profit and loss account. If the answer is affirmative, the AO

shall delete the addition. The ground is allowed for statistical purpose.

of Rs.3,10,44,578/-. In this regard the Ld. AR, has submitted that the appellant

had substantial interest-free funds available throughout the year from its own

reserves and surplus. He submitted that the amounts given to associate concerns

were out of interest-free funds and not out of borrowed funds. The funds

available to the assessee-company from sources other than bank loans during the

year was Rs.64,30,92,769/-. Further, funds available under banking facility during

the year was Rs.91,22,99,041/-. Thus, total fund available with the company was

Rs.155,53,91,810/-. As against the above funds, the funds advanced by the

company was Rs.33,10,37,817/-. He submitted that the major advances were against supplies to M/s Maharashtra Power Transmission Structures Pvt. Ltd. and

M/s Maharashtra Steels Pvt. Ltd., which are subsidiary companies of the

appellant and the company was required to provide financial support to the

subsidiary company as and when required by them. He also submitted that the

appellant had the substantial turnover of Rs.168.87 Cr. and had regular trading

transaction also with M/s Maharashtra Power Transmission Structures Pvt. Ltd.

and M/s Maharashtra Steels Pvt. Ltd. and more than 50% of the transactions were

carried out with the related parties and the balances lying with them were not

given as loans but were remaining outstanding in the normal course of business.

However, company has charged interest on all outstanding and has accounted for

the same.

8.1 Regarding the disallowance of interest of Rs.3,10,44,578/-, the Ld. AR

submitted that section 36(1)(iii) of the Act allows deduction of interest on capital

borrowed for the purposes of the business or profession. The law is well-settled

that for a disallowance to be made under this provision, the AO must affirmatively

establish, on the basis of cogent material and definitive findings, that borrowed

funds were actually diverted for non-business purposes. A mere presumption,

suspicion, or possibility of diversion is insufficient. The onus to establish diversion

is entirely on the Revenue. In this regard, the Ld. AR submitted as under:

B. Packing Credit Interest: Inextricably Business-Linked A significant portion of the interest expenditure relates to packing credit facilities of Rs.51.64 crores (Bank of Baroda: Rs.41 18 crores + Bank of India Rs.10.46 crores). Packing credit is a pre-despatch finance facility granted by banks under the Foreign Trade Policy / RBI guidelines, sanctioned exclusively against

(•) Confirmed export/domestic orders or Letters of Credit from buyers

(•) For the specific purpose of purchasing raw materials, processing, and manufacturing goods to fulfil those orders.

Banks sanction packing credit only after verifying the business purpose, and release funds in tranches tied to the production cycle. The Appellant furnished detailed utilization charts and ledger accounts confirming that every rupee of packing credit was deployed towards raw material procurement and manufacturing operations. It is impossible in law and on facts to characterize packing credit as having been 'diverted for non-business purposes. The very structure of the facility precludes any such diversion.

C. Discounting Charges on Bills Paid to Bank The discounting charges paid to the bank are in the nature of finance charges incurred wholly and exclusively for the purpose of business. The assessee discounts its trade bills with the bank to realise sale proceeds earlier and to meet working capital requirements. Such charges are directly linked with business operations, sales realisation and cash-flow management, and do not represent interest on funds diverted for non-business purposes. Therefore, bill discounting charges paid to the bank are allowable as business expenditure under section 37(1), or alternatively as finance cost under section 36(1)(iii), as they are incurred in the ordinary course of business. D. No Diversion of Any Borrowed Funds Even beyond the packing credit, the Appellant submits that no portion of its term loans or other borrowings was diverted for non-business purposes. The Assessing Officer's finding of diversion is based on a presumptive inference drawn from the existence of advances to associate concerns, without establishing any actual nexus between specific borrowed funds and specific advances. This is legally impermissible. E. Transactions with Associate Concerns Commercial Reality The advances and balances shown against associate concerns are not standalone loans but reflect commercial trade transactions

Maharashtra Power Transmission Structures Pvt. Ltd.- The Appellant's primary customer purchased over 50% of the Appellant's output (steel angles), being the principal raw material for manufacture of galvanised tower parts Sales to this entity in A.Y. 2008-09 exceeded Rs 97 crores. The balance represents trade receivables and commercial advances in the ordinary course of an ongoing buyer-seller relationship.

Maharashtra Steels Pvt. Ltd. An entity from which the Appellant sourced finished products on job-work basis, ensuring supply continuity Balances reflect trade transactions.

Eagle Steels- Another group entity with ongoing purchase-sale transactions These are legitimate business-to-business commercial dealings, not diversions of borrowed funds. The Appellant's entire business model was built around this integrated supply and sale chain with these entities.

8.2 The Ld. AR relied upon the following decisions (i) CIT v. Reliance Industries

Ltd. (2019) 410 ITR 466, (ii) Pr. CIT v. Shapoorji Pallonji & Co. Ltd. (2020) 423 ITR

220 [SLP dismissed: (2022) 288 Taxman 661 (SC)], (iii) Pr. CIT v. Malhotra Book

Depot (2020) 416 ITR 221 and (iv) CIT v. Premier Auto Finance Pvt. Ltd. 128 ITR

540 and submitted that when the surplus funds exceed borrowed funds, no

presumptive disallowance is needed u/s 36(1)(iii) of the Act.

also deliberated on the decisions relied upon by the Ld. AR. The AO has disallowed

the entire interest of Rs.3,10,54,578/- u/s 36(1)(iii) of the Act in respect of interest

paid on packaging facilities, LC charges, bills discounting, term loan and cash

credit interest paid to Bank of Baroda, Bank of India and others. The Ld. AR

submitted that all these borrowings are inherently and inextricably linked to the

business of the assessee. As per the provisions of section 36(1)(iii) of the Act, the

amount of interest paid in respect of capital borrowed for the purposes of business of profession is allowed as a deduction in computing the profits and gains of business u/s 28 of the Act. The Hon’ble Supreme Court in case of Madhav

Prasad Jatia vs. CIT 118 ITR 200 (SC) held that u/s 36(1) (iii) of the Act, three

conditions are required to be satisfied in order to enable the assessee to claim a deduction in respect of interest on borrowed capital, namely, (a) that money

(capital) must have been borrowed by the assessee, (b) that it must have been

borrowed for the purpose of business, and (c) that the assessee must have paid interest on the said amount and claimed it as a deduction. The expression "for

the purpose of business" occurring in section 36(1)(iii) and also in section 37 of

the Act, is wider in scope than the expression "for the purpose of earning income, profits or gains" occurring in section 57(iii) of the Act and, therefore, the scope

for allowing a deduction u/s 36(1)(iii) or 37 of the Act would be much wider than

the one available u/s 57(iii) of the Act. It is seen from the details given by the appellant that the interest bearing fund of the appellant was for packaging credit,

discounting charges on bills paid to the bank and transaction with associate concerns for commercial consideration. Therefore, the interest is liable to be

allowed as deduction u/s 36(1)(iii) of the Act.

9.1 The ld. AR has also submitted that the appellant’s own funds far exceeded the borrowed funds advanced during the year. Hence, no presumptive

disallowance is called for u/s 36(1)(iii) of the Act. The Hon’ble Supreme Court in

case of Reliance Industries Ltd. (supra) held that where the Tribunal had found that the interest-free funds available to the assessee were sufficient to meet its investment, it could be presumed that the investments were made from the

interest-free funds available with the assessee and interest referable to funds

given to subsidiaries was allowable as deduction u/s 36(1)(iii) of the Act. The

assessee is liable to succeed on this account also. However, we find that the lower

authorities have not examined the impugned disallowance in the light of the

decisions cited supra. Therefore, we deem it proper to set aside the order of

CIT(A) on this ground and remand back the matter to the file of AO for verification

and decision in the light of the decisions of the Hon’ble Supreme Court discussed

above. The ground is allowed for statistical purpose.

Order is pronounced on 14.08.2026.

Sd/- Sd/- (SANDEEP GOASAIN) (BIJYANANDA PRUSETH) JUDICIAL MEMBER ACCOUNTANT MEMBER *Aniket Chand; Sr. PS MUMBAI Date: 14.08.2026 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