GAYATRI ENERGY VENTURES PRIVATE LIMITED,HYDERABAD vs. ACIT., CIRCLE-2(1), HYDERABAD

4 ITA.No.467/Hyd./2025 Therefore, while condoning the delay, the courts must have a liberal approach or lenient approach considering the reasons given by the petitioners or appellants. Therefore, going by the principles laid down by the Hon’ble Supreme Court in the case of MST Katiji (supra) and also considering the reasons explained by the assessee in his affidavit, we condone the delay of 321 days in filing the appeal before the Tribunal and admit the appeal for adjudication.

5 ITA.No.467/Hyd./2025 proceedings, the Assessing Officer called-upon the assessee to file relevant information including financial statements and details of loans and advances etc. In response, the assessee has filed details as called for by the Assessing Officer. The Assessing Officer on the basis of details submitted by the assessee company observed that, the assessee-company is engaged in the business of development, construction and operation of power generation projects with a combined capacity of about 5280MW, one of the largest portfolio of private based thermal power generation plants. The assessee-company is currently developing 2 large and medium sized power projects through it’s subsidiaries and associates. The Assessing Officer further noted that, the assessee-company has paid interest on various loans including No Convertible Debentures [in short “NCDs”], Compulsory Convertible Debentures [in short “CCDs”] and Optionally Fully Convertible Debentures [in short “OFCDs”]. However, the loans borrowed from various banks and financial institutions have been diverted to subsidiaries and 6 ITA.No.467/Hyd./2025 associates for non-business purposes. Therefore, the Assessing Officer called-upon the assessee to explain as to why interest paid on borrowed loans shall not be disallowed u/sec.36(1)(iii) of the Act.

7 ITA.No.467/Hyd./2025 payment on loans borrowed through NCDs, CCDs and OFCDs amounting to Rs.26,03,01,812/-. The relevant observations of the Assessing Officer are as under :

“4.1. A reply dated 30.04. 1.04.2021 is received from assessee company which is considered with replies dated 23.01.2020 23.01 & 27.01.2021 and found to be not acceptable for the following facts and reasons: i) As seen from the 10th OME Annual Report 2017-18 of the company, the As seen from the 10th main object of the assessee are development, Construction and operation of power generation but not to do money lending activity. It is pertinent here to reproduce the assessee's submission on the nature of its business activity as follows: "The company is engaged in the business to development, Construction and operation of power." From the above, it is clear that lending of money to its subsidiaries is not the business activity of the assessee. ii) In view of the above discussion, it is evident that the capital/loan advanced by the assessee is not for the purpose of its own business. Instead the assessee borrowed the capital for the benefit of its subsidiaries. Hence the financial expenses incurred by the assessee on such borrowed capital is not allowable as deduction u/s. 36(1) (iii) of the Act. It is pertinent here to reproduce the provisions of u/s. 36(1) (iii) of the Act as follows: "the amount of the interest paid in respect of capital borrowed for the purpose of the business or profession...."

8 ITA.No.467/Hyd./2025 From the above, it is clear that the finance cost would be allowable u/s.36(1)(iii) of the Act, only if the said expenditure is incurred for the business of the assessee. Hence the financial charges claimed by the assessee is not allowable u/s.36(1) (iii) of the Act.

(iii) In the current FY the company has borrowed money from various companies and paid interest thereon as following: - Sr. Particulars Rate of Amount paid Nature of Debt no. interest 1. Edelweiss Commodities Services Limited & ECL Finance Ltd 20,46,24,979/- No convertible debentures 16% (NCD)

2. IFCI Ltd NCC Infrastructure Holding Ltd. 15.6% 4 67,44,333/- Compulsorily Convertible debentures (CCD) 3. Capital Fortunes Ventures P Ltd Capital Fortunes Pvt Ltd D.V. 9% 89,32,500/- Optionally Fully Convertible Chalam debentures (OFCD)

Total 26,03,01,812/- All the loans are stated to be in the nature of debenture only and the company has paid interest to the debenture holders as per the coupon rate of the instrument. During the year, the company has made investment of Rs.153,86,65,722/- which is utilized for the subsidiary namely Sembcorp Energy India Limited (Formerly Thermal Powertech Corporation India Limited) and on which the interest of Rs.26,03,01,812/- has been paid. iv. There is no distinction in section 36(1)(iii) between 'capital borrowed for revenue purpose' and 'capital borrowed for capital purpose' and the assessee entitled to claim interest paid on borrowed capital provided that capital is used for business purpose in irrespective of what may be result of using such borrowed capital. In the assessee's case the loan has been taken on interest but utilized for subsidiary namely Sembcorp Energy India Limited.

9 ITA.No.467/Hyd./2025 v. On perusal of P& L account for the year, it is noted that the assessee has shown to earned only interest income of Rs.13,82,819/- against which the assessee has claimed interest of Rs.26,03,01,812/- on debenture issued by the assessee company. There is no income credited to P&L account other than the above mentioned interest income of Rs.13,82,819/-. Further, on perusal of standalone balance as on 31.03.2018 of the assessee company, it is noted that the assessee has enhanced its borrowings from Rs.9,92,50,000/-to Rs.340,59,39,977/- and the assessee has incurred interest expenditure of Rs.26,03,01,812/- during the year and the same has been debited to P&L account for the year. In the course of the assessment proceedings, the assesses was asked to justify its claim of expenditure of interest especially having regard to the fact that there is no income credited to P&L account for the year other than the interest income of Rs.13,82,819/-. In response, the assessee has contended inter-alia that during the year, the assessee has borrowed funds in the form of debenture from different entity totalling of Rs.240,23,53,224/- on which the assessee has shown to have incurred interest expenditure aggregating to Rs.26.03.01.812/-, which is claimed to have been incurred in the normal course of its business.

The submission of the assessee but the same is found to be not acceptable in view of the fact that the said borrowed funds of Rs.240,23,53,224/- on which interest of Rs.26,03,01,812/- is claimed to have been incurred, have been diverted towards financial assets, which have increased from Rs.700,67,51,696/- (as on 31.03.2017) to Rs.1012,00,47,226/- (as on 31.03.2018). Further, in its submission, the assessee has admitted that the proceeds of Rs.220 Crs of debenture are primarily used for 10 ITA.No.467/Hyd./2025 closing the earlier loan of Rs.198.49 Crs and the remaining amount has been used for other purposes and that the amount of Rs.7,41,33,668/- was diverted towards loans given to Gayatri Hotels and Theatres Pvt Ltd. From the submission of the assessee, it is not exactly clear as to how the interest expenditure of Rs.26,03,01,812/- has been incurred by the assessee in its normal course of business. vi. In view of the above discussion, interest expenditure related to debentures amounting to Rs.26,03,01,812/- is disallowed u/s.36(1)(iii) of the Act and added back to the income of the assessee. The assessee company borrowing funds by issuing debentures and transferring the same funds by way of loans/advances to sister concerns/subsidiary without charging any interest. The basic principle of computation of income and expenditure is, there should always be a nexus to the income earned u/s 28 and expenditure incurred u/s 36 of I.T. Act. The explanation on diversion of funds cannot be accepted. Hence, it is proposed to consider the expenditure on the interest it to be treated as disallowance from. Therefore, the interest expenses of Rs.26,03,01,812/-is disallowed and added to the income of the assessee. After perusal of the order and the nature of addition it is found to be a fit case for initiation of proceedings u/s.270A for under-reporting of income. [Addition: Rs.26,03,01,812/-]”

6. On being aggrieved by the assessment order passed by the Assessing Officer, the assessee preferred an appeal before the learned CIT(A). Before the learned CIT(A), the case was listed for three occasions i.e., on 07.09.2023, 10.01.2024 and 23.01.2024. There was no response from 11 ITA.No.467/Hyd./2025 the assessee. Therefore, the learned CIT(A) disposed-off the appeal filed by the assessee on the basis of material available on record and discussed the issue of disallowance of interest paid on loans u/sec.36(1)(iii) of the Act. The learned CIT(A) discussed the issue in light of relevant facts brought on record by the Assessing Officer and the grounds of appeal

of the assessee and held that, the assessee failed to discharge it’s initial burden to prove that, the interest paid on borrowed funds which were used for business purpose. Though the facts show that the borrowed funds were used for the purpose of increasing financial assets, despite the appellant-company was engaged in the business of development, construction and operation of power. Therefore, from the facts, it is clear that, the assessee has borrowed loans from various financial institutions in the form of NCDs, CCDs and OFCDs and diverted the said funds for non-business purposes to it’s subsidiaries/ associates and also for repayment of existing loans and, therefore, it cannot be said that, the assessee has used the borrowed funds for the purpose of it’s business in order to 12. ITA.No.467/Hyd./2025 claim interest deduction u/sec.36(1)(iii) of the Act. Therefore, rejected the arguments of the assessee and sustained the addition made by the Assessing Officer towards disallowance of interest u/sec.36(1)(iii) of the of the Income Tax Act, 1961. The relevant observations of the learned CIT(A) are as under :

“8.2. I have perused the assessment order, grounds of appeal and other materials available on record.

8.3 As regards of the above, the appellant has not submitted any written submission supported by documentary evidence. On perusal of assessment order, it is observed that the AO has noted in the order that a reply dated 30.04.2021 was received from assessee company which is considered with replies dated 23.01.2020 & 27.01.2021 and found to be not acceptable for the following facts and reasons : (i) As seen from the 10th Annual Report 2017-18 of the company, the main object of the assessee are development, Construction, and operation of power generation but not to do money lending activity. It is pertinent here to reproduce the assessee's submission on the nature of its business activity as follows : "The company is engaged in the business to development, Construction and operation of power." From the above, it is clear that lending of money to its subsidiaries is not the business activity of the assessee.

13 ITA.No.467/Hyd./2025 (ii) In view of the above discussion, it is evident that the capital/loan advanced by the assessee is not for the purpose of its own business. Instead, the assessee borrowed the capital for the benefit of its subsidiaries. Hence, the financial expenses incurred by the assessee on such borrowed capital is not allowable as deduction u/s.36(1)(ii) of the Act. It is pertinent here to reproduce the provisions of u/s.36(1)(iii) of the Act as follows :

"the amount of the interest paid in respect of capital borrowed for the purpose of the business or profession...." From the above, it is clear that the finance cost would be allowable u/s.36(1)(ii) of the Act, only if the said expenditure is incurred for the business of the assessee. Hence the financial charges claimed by the assessee is not allowable u/s.36(1)(iii) of the Act.

(iii) In the current FY the company has borrowed money from various companies and paid interest thereon as following :-

Sr. Particulars Rate of Amount paid Nature of Debt no. interest 1. Edelweiss Commodities Services Limited & ECL Finance Ltd 20,46,24,979/- No convertible debentures 16% (NCD)

Total 26,03,01,812/- All the loans are of the nature of debenture only and the company has paid interest to the debenture holders as per the coupon rate of the instrument. During the year, the company has made investment of Rs.1,53,86,65,722/- which was utilized for the subsidiary namely Sembcorp Energy India Limited (Formerly

14 ITA.No.467/Hyd./2025 Thermal Power Tech Corporation India Limited) and on which the interest of Rs.26,03,01,812/- has been paid.

(iv) There is no distinction in section 36(1)(iii) between 'capital borrowed for revenue purpose' and 'capital borrowed for capital purpose' and the assessee entitled to claim interest paid on borrowed capital provided that the capital is used for business purpose irrespective of what may be the result of using such borrowed capital. In the assessee's case the loan has been taken on interest but utilized for subsidiary namely Sembcorp Energy India Limited. (v) On perusal of P& L account for the year, it is noted that the assessee has shown to have earned interest income of Rs.13,82,819/- only against which the assessee has claimed Interest payment of Rs.26,03,01,812/- on debenture issued by the assessee company. There is no income credited to P&L account other than the above-mentioned interest income of Rs.13,82,819/-. Further, on perusal of standalone balance as on 31.03.2018 of the assessee company, it is noted that the assessee has enhanced its borrowings from Rs.9,92,50,000/- to Rs.340,59,39,977/- and the assessee has incurred interest expenditure of Rs.26,03,01,812/- during the year and the same has been debited to P&L account for the year. During the assessment proceedings, the assessee was asked to justify its claim of expenditure of interest especially having regard to the fact that there is no income credited to P&L account for the year other than the interest income of Rs.13,82,819/-, In response, the assessee has contended inter-alia, that during the year, the assessee has borrowed funds in the form of debenture from different entities totalling Rs.2,40,23,53,224/- on which the assessee has shown to have incurred interest aggregating to 15 ITA.No.467/Hyd./2025 Rs.26,03,01,812/-, which is claimed to have been incurred in the normal course of its business.

The submission of the assessee is considered but the same is found to be not acceptable in view of the fact that the said borrowed funds of Rs.2,40,23,53,224/- on which interest of Rs.26,03,01,812/- is claimed to have been incurred, have been diverted towards financial assets, which have increased from Rs.7,00,67,51,696/ (as on 31.03.2017) to Rs.10,12,00,47,226/- (as on 31.03.2018). Further, in its submission, the assessee has admitted that the proceeds of Rs.220 Crores of debenture are primarily used for closing the earlier loan of Rs.198.49 Crores and the remaining amount has been used for other purposes and that the amount of Rs.7,41,33,668/- was diverted towards loans given to Gayatri Hotels and Theatres Pvt Ltd. From the submission of the assessee, it is not exactly clear as to how the interest expenditure of Rs.26,03,01,812/- has been incurred by the assessee in its normal course of business.

(vi) In view of the above discussion, interest expenditure related to debentures amounting to Rs.26,03,01,812/- is disallowed u/s.36(1)(iii) of the Act and added back to the income of the assessee. The assessee company borrowing funds by issuing debentures and transferring the same funds by way of loans/advances to sister concerns/subsidiary without charging any interest. The basic principle of computation of income and expenditure is, there should always be a nexus to the income earned u/s 28 and expenditure incurred u/s 36 of I.T. Act. The explanation on diversion of funds cannot be accepted. Hence, it is proposed to consider the expenditure on the interest it to be treated as disallowance from. Therefore, the interest expenses of 16 ITA.No.467/Hyd./2025 Rs.26,03,01,812/-is disallowed and added to the income of the assessee.

8.4. On plain reading of the above observation of the AO, it is seen that the appellant had borrowed funds of Rs.2,40,23,53,224/- on which interest of Rs.26,03,01,812/- was claimed to have been incurred. The said funds have been diverted towards financial assets, which have increased from Rs.7,00,67,51,696/- (as on 31.03.2017) to Rs.10,12,00,47,226/- (as on 31.03.2018). It is also notable that the appellant in his submission, at the time of assessment proceedings, has admitted that the proceeds of Rs.220 Crores of debenture are primarily used for closing the earlier loan of Rs.198.49 Crores and the remaining amount has been used for other purposes and that the amount of Rs.7,41,33,668/- was diverted towards loans given to Gayatri Hotels and Theatres Pvt Ltd. Now coming to the sole point, whether the appellant is eligible to get benefit of deduction in respect of interest on borrowed funds which were used for increasing financial assets despite the appellant company was engaged in the business to development, Construction and operation of power. The bare reading of Section 36(1)(ii) is as follows : "36(1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in Section 28 – (1) and (ii) ******

(iii) the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession :

Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset for extension of 17 ITA.No.467/Hyd./2025 existing business or profession (whether capitalized in the books of account or not); for any period beginining from the date on which the capital was borrowed for acquisition of the asset fill the date on which such asset was first put to use, shall not be allowed as deduction. Explanation. - Recurring subscriptions paid periodically by shareholders, or subscribers in Mutual Benefit Societies which fulfill such conditions as may be prescribed, shall be deemed to be capital borrowed within the meaning of this clause." 8.5. The sub section has three important words or phrases that are core to understanding of this Section i.e. (i) Interest, (ii) Borrowed and, (iii) For the purpose of business or profession.

(i) Meaning of "Interest" The definition of "interest" in Section 2(28A) means "interest payable in any manner in respect of any moneys borrowed or debt incurred". But for Section 36(1)(ii), "interest" is restricted to that on money borrowed and not on debt incurred. In simple words, the essence of interest is that it is a payment which becomes due because the creditor has not had his money at his disposal. It may be regarded either as representing the profit he might have made if he had had the use of his money, or conversely, the loss he suffered because he had not that use. The general idea is that he is entitled to compensation for the deprivation.

(ii) Concept of "borrowed" - Provisions of Section 36(1)(iii) concern capital borrowed and not other debts or liability. A loan of money undoubtedly results in a debt, but every debt does not involve a loan. Liability to pay a debt may arise from diverse sources and a loan is one of such sources. The legislature has, under this clause, permitted as an allowance interest paid on capital

18 ITA.No.467/Hyd./2025 borrowed for the purposes of the business; and the capital, in this context, means money and not any other asset purchased on credit [Bombay Steam Navigation Co. Pr. Ltd. v. CIT, 56 ITR 52 (SC)].

(iii) The phrase "for the purpose of business" The expression "for the purpose of business" occurs in Section 36(1)(iii) and also in Section 37(1). A similar expression with different wording also occurs in Section 57(iii) which reads as "for the purpose of making or earning income". This issue came up for consideration before the Supreme Court and the Hon'ble Supreme Court while giving judgment in the case of Madhav Prasad Jatia V. CIT. (SC) 118 ITR 200 has established that the expression occurring in Section 36(1)(iii) is wider in scope than the expression occurring in Section 57(iii). Thus, meaning thereby that the scope for allowing a deduction under Section 36(1)(iii) would be much wider than the one available under Section 57(iii). This phrase, as held by many legal pronouncements, is the most important yardstick for the allowability of deduction Under Section 36(1) (ii) of Income Tax Act, 1961. While explaining the meaning of this phrase the Hon'ble Supreme Court in the case of S. A. Builders Ltd. Vs. CIT(A), Chandigarh reported in 288 ITR 1 has used the word "commercial expediency". By using this phrase Hon'ble Supreme Court has given a new dimension and clarified the concept further. In the judgment the Supreme Court has defined commercial expediency as "an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure, if it was incurred on grounds of commercial expediency. Further, following this judgment the High Court of Delhi, in the case of Punjab Stainless Steel Ind. vs. CIT 324 ITR

19 ITA.No.467/Hyd./2025 396, has further elaborated "The commercial expediency would include such purpose as is expected by the assessee to advance its business interest and may include measures taken for preservation, protection, or advancement of its business interests, which has to be distinguished from the personal interest of its directors or partners, as the case may be. In other words, there has to be a nexus between the advancing of funds and business interest of the assessee-firm. The appropriate test in such a case would be as to whether a reasonable person stepping into the shoes of the directors/partners of the assessee-firm and working solely in the interest of the assessee-firm/company, would have extended such interest free advances. Some business objective should be sought to have been achieved by extending such interest free advances when the assessee-firm/company itself is borrowing funds for running its business". 8.6 Thus, for allowance of a claim for deduction of interest under this provision following three conditions are there: (i) The money, that is capital, must have been borrowed by the assessee (ii) It must have been borrowed for the purpose of business. (iii) The assessee must have paid interest on the borrowed amount i.e. he has shown the same as an item of expenditure. The above mentioned three conditions have been established legally by Supreme Court judgment in the case of Madhav Prasad Jatia Vs. CIT. (1979) 118 ITR 200 (SC). The burden of proving that the moneys borrowed has not been utilized for non business purpose and the investment on shares beyond track of business activities has all ingredients of "commercial expediency", is on the appellant. There are various case laws which supports this contention viz. CIT Vs. Coimbatore Salem Transport P. Ltd.61 ITR 480 (Mad), Indian Metals & Ferro Alloys Ltd. Vs. CIT,193 ITR 344 (Ori), CIT Vs Abhishek Ind (P&H) 286

20 ITA.No.467/Hyd./2025 ITR1. In the case of R. Dalmia Vs. CIT 133 ITR 169 (Del.) the Hon'ble High Court decided that "Where the interest paid concerns the borrowed money for business as well as non business purposes, the claim may be disallowed in its entirety if no adequate material is adduced by the assessee to determine that portion of interest which pertains to business purposes. This observation of the Hon'ble High Court is squarely covered in the case of appellant as the appellant has failed to substantiate his claim before AO and has failed to disapprove the findings of AO before this appellate authority by producing written submission supported by documentary evidences.

8.7 It is well settled law that the burden lies over the appellant to prove the facts by submitting written submission supported by documentary evidences. But it is evident from record that the appellant has totally failed to substantiate his claim before AO. Even at the time of appellate proceeding getting second chance, the appellant did not try to disapprove the findings of the AO. Hence, it seems that the appellant has nothing to offer before this appellate authority to substantiate his claim or disprove the findings of the assessing officer. If he had anything to produce in support of his claim, he would have produced the same before this appellate authority during appellate proceedings. In the absence of proof in this regard and in terms of the provisions of section 101 and 106 of the Indian Evidence Act, 1872 which casts the onus of proof on the person who asserts something, the contentions of the appellant taken in the above grounds of appeal are rejected. 8.8. In view of the above discussion brought on arrived at the considered decision that the appellant failed to discharge its initial burden to prove that the interest on borrowed funds

21 ITA.No.467/Hyd./2025 which were used for commercial expediency. Though the facts show that the borrowed funds were used purpose of increasing financial assets despite the appellant company was engaged in the business to development, Construction and operation of power, was for. In view of the ratio laid down in the above judicial pronouncements, I am of the considered opinion that the interest paid to the tune of Rs. 26,03,01,812/- to three entities as mentioned in para 4.1 (iii) of order is not deductible within the provision of section 36(1)(iii) of the Act. Ground nos. 1 to 5, are dismissed.

23 ITA.No.467/Hyd./2025 obtained from the holding company and said loan was utilized for development of power project. Since the entire amount of loan has been utilized for the purpose of business of the appellant-company, the question of disallowance of interest on said loans does not arise.

7.1. Learned Counsel for the Assessee further, referring to the observations of the Assessing Officer in respect of income credited to P & L A/c and corresponding interest expenditure submitted that, no doubt, there is no income from operation in the year under consideration, but, it does not mean that, expenditure incurred for the purpose of business cannot be allowed. If any, expenditure is incurred for the purpose of business, then, the same needs to be allowed, even though, there is no revenue from the operations. Therefore, the reasons given by the Assessing Officer to disallow interest on loans is devoid of merit and cannot be accepted. In this regard, he relied upon the decisions of (i) Madhav Prasad Jatia vs., CIT [1979] 10 CTR 375 (SC); (ii) S.A. Builders Ltd., vs., CIT [2007] 288 ITR 1 (SC); (iii) Hero Cycles (P) Ltd., vs., CIT [2015] 379 ITR 347

24 ITA.No.467/Hyd./2025 (SC) and (iv) CIT vs., Tulip Star Hotels Ltd., [2011] 338 ITR 482 (Del.) (HC).

26 ITA.No.467/Hyd./2025 has been invested in Thermal Power Tech Corporation of India Limited. The above borrowings were utilized for making investment in Sembcorp Energy India Limited which is also in the business of development of power projects. The appellant-company has borrowed one more loan of Rs.9.92 crores by issuing OFCDs to Capital Fortunes Pvt. Ltd., and the said loan proceeds has been utilized for re-payment of advance taken from Gayatri Hotels and Theatres Pvt. Ltd., for working capital purpose. From the details filed by the appellant-company, it is undisputedly clear that, all the loans taken by the assessee in the form of NCDs, CCDs and OFCDs is for the purpose of development of power projects on it’s own or through it’s subsidiaries/ associates. Although, the Assessing Officer accepted the fact that, appellant-company was developing power projects through its’ subsidiaries/associates, but, ignored the explanation of the assessee and made additions towards interest paid on said loans only on the ground that, a small portion of loan proceeds has been used for giving advance to Gayatri Hotels and Theatres Private Limited which is also in the similar

27 ITA.No.467/Hyd./2025 line of business of that of the appellant-company and, therefore, in our considered view, the said loan is in the ordinary course of business of the appellant-company and there is a commercial expediency in advancing loan to subsidiary company. Therefore, in our considered view, the Assessing Officer having noticed the fact that, loan borrowed from various financial institutions has been utilized for the purpose of business of the appellant- company, erred in disallowing interest paid on said loan u/sec.36(1)(iii) of the of the Income Tax Act, 1961, on the ground that, the appellant-company has diverted borrowed funds for the purpose of non-business purposes of the appellant-company.

29 ITA.No.467/Hyd./2025 considering the deduction for interest u/sec.36(1)(iii) of the Act. As per the ratio laid down by the Hon’ble Supreme Court, in order to claim deduction for interest u/sec.36(1)(iii) of the Act, three conditions must be satisfied i.e., (i) the assessee must have paid interest on the borrowed amount. (ii) It must have been borrowed for the purpose of business and (iii) The assessee must have paid interest on the borrowed amount i.e., he has shown the same as an item of expenditure. In otherwords, in order to claim deduction u/sec.36(1)(iii) of the Act, the assessee must prove that borrowed capital has been used for the purpose of business of the assessee. When it comes to business, whether the business carried-on by the assessee on it’s own alone is to be considered or the business carried-on through it’s subsidiaries/associates is to be considered is the question of fact ? The assessee may carry-on the business on it’s own or through it’s subsidiaries or associates, but, as long as the assessee carry-on it’s business in accordance with it’s main objects, then, whether such business is carried-on it’s own or through subsidiary/associates does

30 ITA.No.467/Hyd./2025 not matter when it comes to allowance for deduction of any expenditure. Even u/sec.36(1)(iii) of the Act, there is no restriction as to deduction towards interest paid on borrowed capital only in the case of assessee who utilized such funds on it’s own. The only requirement is that, borrowed capital must be utilized for the purpose of business of the assessee on it’s own or through it’s subsidiaries/associates. As long as the money is utilized for the purpose of business, then, interest paid on said loans should be allowed as deduction u/sec.36(i)(iii) of the Income Tax Act, 1961. This legal position is further supported by the decision of Hon’ble Supreme Court in the case of Hero Cycles Pvt. Ltd., vs., CIT (supra) and Judgment of Hon’ble Delhi High Court in the case of CIT vs., Tulip Star Hotels Ltd., (supra). The sum and substance of the ratio laid down by various courts is that, in order to claim deduction for interest paid on borrowed capital, the borrowed capital must be utilized for the purpose of business of the assessee.

31 ITA.No.467/Hyd./2025 the borrowed capital from various financial institutions in the form of NCDs, CCDs and OFCDs for the purpose of it’s business either on it’s own or through subsidiaries/ associates. Therefore, in our considered view, the assessee is eligible for deduction towards interest paid on loans u/sec.36(1)(iii) of the Income Tax Act, 1961.

32 ITA.No.467/Hyd./2025 then, the said expenditure needs to be allowed, even if, there is no revenue from operations for the year under consideration. The only requirement is to claim deduction for any expenditure is that, such expenditure must be incurred ‘wholly and exclusively for the purpose of business of assessee’. In the present case, there is no dispute with regard to the fact that, the appellant-company has incurred interest expenditure on loan borrowed for the purpose of it’s business and, therefore, in our considered view, the appellant-company is entitled for deduction towards interest paid on borrowed loans u/sec.36(1)(iii) of the Income Tax Act, 1961.

33 ITA.No.467/Hyd./2025 part deals with interest paid on borrowed capital in light of provisions of sec.36(1)(iii) of the Income Tax Act, 1961 and the Tribunal after considering relevant facts held that, where assessee company raised loan for business purposes and advanced loan to it’s sister concern and since the advance to sister concern is in fact investment, but, not loan, interest on said loan, should be allowed u/sec.36(1)(iii) of the Act. The second part of the order deals with disallowance of interest u/sec.36(1)(iii) of the Act and the Tribunal after considering relevant facts held that, if the assessee failed to discharge the onus of proving commercial expediency, then, interest paid on borrowed capital diverted for non-business purposes, cannot be allowed u/sec.36(1)(iii) of the Income Tax Act, 1961. The Learned DR referred to second part of the order of the Tribunal and argued that, if assessee failed to discharge onus by filing relevant evidences to prove ‘commercial expediency’, then, interest paid on loan cannot be allowed u/sec.36(1)(iii) of the Income Tax Act, 1961. In our considered view, the decision relied upon by the Learned DR in the above case

34 ITA.No.467/Hyd./2025 does not apply to the facts and circumstances of the present case because, the assessee has conclusively proved the ‘commercial expediency’ or business exigency in advancing loan to subsidiary/associates by filing relevant evidences. Therefore, in our considered view, the above case law is not applicable to the facts of the present case and thus, rejected.

35 ITA.No.467/Hyd./2025 15. In the result, appeal of the Assessee is allowed.

Order pronounced in the open Court on 07.07.2025.