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Facts
The appellant is aggrieved by the disallowance of interest expenditure and professional fees, amounting to Rs. 16,80,298. The AO disallowed these claims, stating that interest-free investments were made from borrowed funds and that the expenditure was not exclusively for business purposes. This was confirmed by the CIT(A).
Held
The Tribunal held that the appellant did not have borrowed funds and that investments were made from capital accounts. Since the appellant had sufficient interest-free funds, disallowance under Section 36(1)(iii) was not warranted. Section 37(1) was also not attracted.
Key Issues
Whether interest expenditure and professional fees are allowable as a deduction when investments are made from interest-free funds and not from borrowed funds, even if the investments are not generating income.
Sections Cited
36(1)(iii), 37(1)
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Income Tax Appellate Tribunal, Mumbai “B” Bench, Mumbai.
Before: Shri Narender Kumar Choudhry (JM) & Shri Omkareshwar Chidara (AM)
2. The Hon CIT(A) erred in upholding the alternative argument of the Id AO to support the addition of Rs. 16,80,298/-, by relying upon the provisions of section 37(1) of the IT Act, 1961, disallowing interest expenditure incurred on borrowed loans as well as professional fees, without appreciating the fact that the entire expenditure was revenue in nature and incurred wholly and exclusively for the purposes of business and therefore fully allowable as revenue expenditure and hence the disallowance was not justified and bears to be deleted.”
2 Niket Ramesh Shah 2. The Ld. AR of the appellant has submitted that an interest expenditure of Rs. 16,72,798/- and professional fees of Rs. 7,500/- totaling to Rs. 16,80,298/- was disallowed by Ld. AO as the appellant diverted business funds towards non-interest bearing loans given to family members. The Ld. AR of the appellant claims that the appellant has got sufficient interest free funds to give interest free loans and Ld. AO/Ld. CIT(A) cannot disallow the interest claimed because the investments in partnership firms are not generating income. Alternatively, Ld. AO held that the deduction cannot be available under section 37(1) of the I.T. Act also. For this alternative argument, the Ld. AR of appellant says that to come under the ambit of section 37(1) of the Act, the following requirements are to be satisfied :- 3.1 The Id.AO has further made alternative argument that deduction of interest expenditure/prof. fees would also not be available to the appellant as per section 37(1) of the IT Act, 1961. Deduction u/s 37(1) of the IT Act, 1961 requires the following conditions to be fulfilled. (i) Expenditure is not of the nature as described in sections 30 to 36 of the Act; (ii) Expenditure is of revenue in nature not of capital in nature; (iii) Expenditure is not personal expense of the assessee; (iv) Expenditure has been laid down or expended wholly and exclusively for the purposes of business or profession of the assessee; (v) Expenditure has not been incurred for any purpose which is an offence or which is prohibited by law.
The Ld. AR of the appellant also relied on several decisions including the decision of Hon'ble Supreme Court in the case of CIT Vs. Reliance Industries Ltd. 410 ITR 466 (SC) and CIT Vs. Reliance Utilities & Power Ltd. 313 ITR 340 (Bom) and also on the same issue Hon'ble Bombay ITAT in the case of • Ramesh Velji Shah Vs. ACIT (ITA No. 4959/Mum/2024 dated 5.6.2025 • Mansukh Velji Shah Vs. ACIT (ITA No. 4960/Mum/2024 dated 5.6.2025 • Jenish Mansukh Shah Vs. ACIT (ITA No. 4961/Mum/2024 dated 1.1.2025 • Sachin Chandru Mirani Vs. ACIT (ITA No. 5014/Mum/2024 dated 21.11.2024
3 Niket Ramesh Shah 4. As the similar issue was already held in favour of the appellant in his family member cases by the ITAT Mumbai, it was submitted that the Coordinate bench decisions may be followed.
Per contra, Ld. DR argued that each case has to be seen in its facts. He relied on the orders of Ld. AO and Ld. CIT(A).
Heard both sides. From the balance sheet filed by Ld. AR of appellant, it is observed that the appellant does not have borrowed funds and all advances/investments are made out of capital accounts. As the appellant has got sufficient interest free funds available to support investments, even though they are not generating income, disallowance under section 36(1)(iii) of the Act cannot be made. Similarly, section 37(1) is not attracted because the conditions mentioned under that section are not satisfied for disallowance. In view of several decisions relied on by Ld. AR of the appellant and also as the issue is already covered in the cases of appellant’s family members, respectfully following the same, the appeal of appellant is allowed.
The appeal of appellant is allowed. Order pronounced in the open Court on 31/07/2025.