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Facts
The Revenue appealed against the CIT(A)'s order deleting the disallowance of Rs. 6,63,41,550/- made by the Assessing Officer (AO) under Section 36(1)(iii) of the Income Tax Act, 1961. The AO disallowed the interest expenditure incurred on borrowed funds, which were allegedly diverted as interest-free loans to subsidiary companies for land acquisition. The assessee claimed these advances were for business purposes and had a direct nexus to their core business.
Held
The Tribunal noted that the CIT(A) had provided findings that the subsidiaries invested the borrowed amount for land banks, which had a direct nexus to the assessee's business. The Tribunal also observed that the AO did not examine documentary evidence supporting the disallowance. Relying on the Supreme Court's decision in SA Builders Ltd., the Tribunal found that if advances are for commercial expediency, the interest on borrowed funds is deductible. However, the basis for the lower authorities' decisions was unclear, necessitating further factual examination.
Key Issues
Whether the interest expenditure incurred on borrowed funds advanced as interest-free loans to subsidiary companies for land acquisition for business purposes is admissible as a deduction under Section 36(1)(iii) of the Income Tax Act.
Sections Cited
36(1)(iii), 40(a)(ia), 250
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, ‘C’ BENCH: CHENNAI
Before: SHRI ABY T. VARKEY & MS. PADMAVATHY.S
PER PADMAVATHY.S, A.M: This appeal by the Revenue is against the order of the Commissioner of Income Tax (Appeals)/National Faceless Appeal Centre (NFAC), Delhi, (in short "CIT(A)") passed u/s. 250 of the Income Tax Act, 1961 (in short "the Act") dated 11.08.2025 for Assessment Year (AY) 2023-24. The Revenue raised the following ground of appeal:
1. 1. 1. The Order of the Ld. CIT(A) is contrary to law, facts and circumstances of the case and hence not sustainable.
1. 2. Whether in facts and circumstances of the case, the Ld. CIT(A) has erred in law in deleting the disallowance of Rs.6,63,41,550/- made by the Assessing Officer u/s 36(1)(iii) of the Income Tax Act, 1961, on account of interest expenditure incurred on borrowed funds which were diverted as interest-free loans and advances to subsidiary companies.
3. Whether in facts and circumstances of the case, the Ld. CIT(A) has erred in law in failing to appreciate that the assessee had not established any commercial expediency or business necessity for advancing such huge interestfree loans to subsidiaries, particularly when the assessee itself had borrowed funds on which interest was paid.
4. Whether in facts and circumstances of the case, the Ld. CIT(A) has erred in law in relying on judicial precedents such as S. A. Builders Ltd. and Munjal Sales Corp. without appreciating that the factual matrix of the assessee’s case is distinct, as no demonstrable nexus was established between the borrowed funds and any business purpose.
5. Whether in facts and circumstances of the case, the Ld. CIT(A) has erred in law in failing to consider that the funds borrowed at high interest rates were utilized for advancing interest-free loans, thereby resulting in diversion of borrowed funds for non-business purposes, as held in Hero Cycles (P) Ltd. vs. CIT (2015) 379 ITR 347 (SC) and CIT vs. Abhishek Industries Ltd. (2006) 286 ITR 1 (P&H).
6. Whether in facts and circumstances of the case, the Ld. CIT(A) has erred in law in not appreciating that the assessee was facing a cash flow crunch and had to borrow funds to meet business requirements, indicating that the interestfree advances were not for business purposes.
Whether in facts and circumstances of the case, the Ld. CIT(A) has erred in law in failing to appreciate that the increase in unsecured loans and debentures during the year was approximately equivalent to the increase in loans and advances to subsidiaries, establishing a clear nexus between the borrowed funds and the interest-free advances.
For these and other grounds that may be adduced at the time of hearing, it is prayed that the order of the learned CIT(A) may be set aside and that of the Assessing Officer restored.”
2. The assessee is a company engaged in the business of construction and sale of warehouses. The assessee filed a return of income for AY 2023-24 on 29.10.2023 declaring total income of Rs. 12,67,36,600/-. The case was selected for scrutiny and the statutory notices were duly served on the assessee. The A.O called on the assessee to furnish various details and after considering the submissions of the assessee, the A.O concluded the assessment by disallowing the following:
The CIT(A) deleted the disallowance made towards interest by holding that: “The grounds of appeal are inter-related and have been raised against and addition of Rs. 6,63,41,550/- to the income of assessee by the Ld. AO u/s 36(1)(iii) of the Act. During the course of assessment proceedings, the Ld. AO observed that the assessee had shown loans and advances given at Rs. 120,10,97,298/-, as on 31.03.2023. It was further observed from the details of loans and advances given, furnished by the assessee that the assessee had forwarded interest free loan amounting to Rs. 106,67,68,656/- to its subsidiary companies for land acquisition. The Ld. AO postulated that the assessee had diverted interest bearing funds as loan and advances to related parties for acquisition of land and paid significant interest expenses on such loans. Due to forwarding of interest free loans to subsidiary companies in huge amount, there was crunch of cash flow with the assessee and the assessee had to secure funds through loans and debentures at higher-than-normal interest rates. In view of the above, the Ld. AO was of the view that the interest expenses incurred by the assessee on debentures as well as unsecured loans were required to be disallowed u/s 36(1)(iii) of the Act amounting to Rs. 6,63,41,550/-. During the course of appellate proceeding the appellant has made various submissions. It has been submitted that borrowed funds from various persons during the A.Y. under consideration were taken to the tune of Rs. 26.65 crores, the appellant had utilized a sum of Rs. 16.14 crores for working capital purposes and the remaining sum of Rs. 10.51 crores were given to subsidiary companies. The appellant has produced the details of borrowings and interest paid amounting to Rs. 6,89,48,897/- out of which the Ld. AO disallowed a sum of Rs. 6,63,41,550/-. It is seen that the amounts given to the various subsidiaries are actual investment on the land banks created by subsidiary companies for the exclusive use and purpose of the appellant’s own core business of planning approved layout, complete development of lands with infrastructure like roads, under ground drainage system and Rain water and storm water canals electricity supply with fully closed proper compound wall and security gates and carry on construction of large scale warehouses Cum Logistics parks. Therefore, such interest free advances made to wholly owned subsidiary companies to create largest land bank for the exclusive use and purpose of the facilitating appellant holding Avigna Pvt. Ltd. :- 4 -: company’s core business activity is an admissible deduction under section 36(1)(iii) of the Income Tax Act. Once the interest fee advances given to subsidiary for the purpose of appellant business out of borrowed funds, the interest on borrowals is an admissible deduction as the borrowed funds for used for the purpose of core business activities of the appellant. Reliance is placed on the decisions of Hon’ble Supreme Court in the cases of S.A. Builders Vs. CIT (Appeals), Chandigarh (2007) 288 ITR 1(SC) and Munjal Sales Corpn. Vs. CIT (2008) 298 ITR 298 (SC). In view of the facts and circumstances as stated above, the impugned addition of Rs. 6,63,41,550/- made by the Ld. AO is here by directed to deleted. The grounds of appeal 2 to 31 are allowed”
4. With regard to expenses disallowance u/s. 40(a)(ia) of the Act by CIT(A) gave partial relief to the assessee. The revenue is in appeal against the deletion of disallowance of interest by the CIT(A).
The Ld. Departmental Representative (DR) submitted that the findings of the CIT(A) with regard to the utilization of the loans extended by the assessee by the subsidiaries is without any substantiation by the assessee. The Ld. DR further submitted that the basis on which the CIT(A) has made observations regarding the utilization of the amount advanced towards purchase of land banks is not clear since as per the records the assessee has not submitted any documentary evidences in this regard. The Ld. DR accordingly argued that the reliance placed by the CIT(A) on the decision of the Hon'ble Supreme Court in the case of SA Builders vs. CIT [2007] 288 ITR 1 (SC) is misplaced.
The Ld. AR at the outset drew our attention to the total amount of disallowance made u/s. 36(1)(iii) of the Act the breakup of which is tabulated below:
The Ld. AR submitted that the disallowance made by the A.O includes interest on working capital loan taken by the assessee which is an allowable deduction u/s. 36(1)(iii) of the Act. Accordingly, it is prayed that the disallowance to the tune of Rs. 41,79,037/- be deleted. The Ld. AR further submitted that out of the total loan outstanding the assessee had borrowed only Rs. 10 Crores during the year under consideration and therefore the Ld. AR submitted that the entire interest cannot be disallowed. The ld AR also submitted that the CIT(A) has deleted the disallowance after considering the submissions of the assessee with regard to utilisation of funds by the subsidiaries and therefore there is no infirmity in the order of the CIT(A).
We have heard the parties, and perused the material available on record. The assessee during the year under consideration has claimed interest Avigna Pvt. Ltd. :- 6 -: expenses to the tune of Rs. 6,89,48,897/-. The AO called on the assessee to show cause as to why the interest paid cannot be disallowed since the assessee has utilised interest paying funds towards interest free lending to its subsidiaries. The assessee submitted that the interest is paid towards loan taken from banks and the same is lent to subsidiary companies for acquisition of land which has a direct nexus to the business of the assessee. The assessee further submitted that no disallowance u/s. 36(1)(iii) is warranted since the assessee has utilized the funds towards business purposes by advancing the money to the subsidiaries. The A.O did not accept the submissions and proceeded to make a disallowance to the tune of Rs. 6,63,41,550/-. From the perusal of the breakup of interest disallowance by the A.O as tabulated in the earlier part of this order, we notice that interest to the tune of Rs. 41,79,037/- is paid by the assessee towards working capital loan taken from Adithya Birla Finance Ltd. and HDFC Bank Ltd. From the perusal of the findings of the A.O, we notice that the AO has considered the interest as towards amount advanced to subsidiaries and accordingly made a disallowance u/s. 36(1)(iii) of the Act. Considering that the above interest is paid towards capital borrow utilized towards the normal course of business, we are of the considered view that no disallowance to the tune of Rs. 41,79,037/- is warranted and to this extent we see no reason to interfere with the decision of the CIT(A) in deleting the disallowance.
With regard to balance interest we notice that the CIT(A) while deleting the disallowance has given certain findings that the subsidiaries have actually invested the amount borrowed from the assessee for the acquisition of land banks which has direct nexus to the business of the assessee. It is the contention of the revenue that the said findings of the CIT(A) is not based on Avigna Pvt. Ltd. :- 7 -:
any documentary evidences. We further notice that the A.O during the course of assessment has not examined any documentary evidences and has disallowed the interest stating that the motive behind formation of subsidiaries and extending interest free loans is to claim interest expenses u/s. 36(1)(ii) of the Act. From these facts, it is clear that the lower authorities have not called for and examined any documentary evidences in support of the claim of the assessee that the interest bearing funds have been invested in the subsidiaries which have a direct nexus to the business of the assessee. The Hon'ble Supreme Court in the case of SA Builders Ltd vs CIT (288 ITR 1) has laid down the ratio that if the amount advanced to the subsidiaries as a measure of commercial expediency then the interest on amount borrowed towards the said advance is to be considered as for the purpose of business and no disallowance is to be made u/s.36(1)(iii) of the Act. It is relevant to note here that the Hon'ble Supreme Court in the said has clearly held that the allowability of the interest has to be decided based on facts and circumstances of each case. As already stated it is not clearly coming out from the orders of the lower authorities the basis on which the disallowance was made / deleted. Accordingly, in our considered view the impugned issue of disallowance u/s. 36(1)(iii) of the Act needs factual examination and therefore we are remitting the issue back to the Jurisdictional A.O (JAO). The JAO is directed to verify the specific findings of the CIT(A) based on which the disallowance was deleted by calling for the required details and allow the claim in accordance with law. The assessee is directed to submit the documentary evidences with regard to the utilization of the amount advanced to the subsidiaries and establish the claim that there is a commercial expediency having direct nexus to the business of the assessee while advancing the money to the subsidiaries. It is ordered accordingly.
In the result, the appeal of the revenue is allowed for statistical purposes.
Order pronounced on 13th day of February, 2026 at Chennai.