The Bangalore Bench of the Income Tax Appellate Tribunal has upheld the deduction of interest expenditure claimed by Pronomz Ventures LLP under Section 36(1)(iii) of the Income Tax Act, 1961, holding that the borrowed capital was utilised for the purposes of the assessee’s business, including strategic investments made for acquiring or maintaining controlling interests in companies.
The dispute concerned an interest expenditure of ₹104,622,906 disallowed by the Assessing Officer. The Assessing Officer observed that the assessee had substantial short-term borrowings and had utilised funds for investments as well as loans and advances. According to the Assessing Officer, the assessee had failed to establish that the borrowed funds were wholly and exclusively used for business purposes, particularly when certain funds were deployed in investments and interest-free advances. The CIT(A), however, deleted the disallowance, leading to the Revenue’s appeal before the Tribunal.
The Tribunal noted that Section 36(1)(iii) requires that there must be a liability to pay interest, the interest must relate to borrowed capital, and such borrowing must be for the purposes of the business or profession. In the present case, the first two conditions were undisputed. The principal question was whether the borrowed capital had been employed for business purposes.
Examining the nature of the assessee’s activities, the Tribunal found that Pronomz Ventures LLP was engaged in financial consultancy and advisory services, financial and investment solutions, fund syndication and capital-market advisory services. Its investment schedule and regulatory disclosures demonstrated that investments were also made for strategic purposes and for acquiring or maintaining controlling interests. The Tribunal therefore concluded that making such strategic investments constituted part of the assessee’s business activities.
Commercial Expediency Is Wider Than Immediate Profit
A significant aspect of the ruling is the Tribunal’s application of the principle that the expression “for the purposes of business” is wider than “for the purpose of earning profits.” The Tribunal relied upon the principles recognised in CIT v. Malayalam Plantations Ltd., S.A. Builders Ltd. v. CIT, Sharp Business Systems v. CIT and L.K. Trust v. CIT.
The Tribunal held that borrowings employed for acquiring controlling interests through strategic investments could satisfy the test of commercial expediency. The deduction cannot be denied merely because the transaction does not immediately generate taxable business profits. The relevant enquiry is whether the expenditure was incurred from the standpoint of the assessee’s business and commercial requirements.
Availability of Interest-Free Funds
The Tribunal also considered the assessee’s contention that sufficient non-interest-bearing funds were available. Referring to the Supreme Court rulings in CIT v. Reliance Industries Ltd. and South Indian Bank Ltd. v. CIT, the Tribunal reiterated that where sufficient interest-free funds are available to cover the investments, a presumption may arise that such investments were made from those funds.
On the facts before it, the Revenue did not dispute the availability of the interest-free funds but questioned the absence of a specific nexus. The Tribunal held that the settled presumption regarding availability of sufficient interest-free funds also operated against the proposed interest disallowance.
Consistency Principle Not an Absolute Bar
Importantly, the Tribunal did not accept the assessee’s separate argument that the Assessing Officer was barred from examining the interest claim merely because similar expenditure had not been disallowed in earlier or subsequent years or in the cases of group concerns.
The Tribunal clarified that each assessment year is a separate unit of assessment, and the Assessing Officer is entitled to independently examine the claim for the relevant year. Thus, while the assessee succeeded on the merits of Section 36(1)(iii), its plea based purely on consistency was rejected.
ITAT’s Decision
The Tribunal ultimately held that the interest was paid on capital borrowed for the purposes of the assessee’s business. Consequently, the disallowance of ₹104,622,906 was held to be unsustainable and the order of the CIT(A) deleting the disallowance was upheld.
Accordingly, all grounds raised by the Assessing Officer were dismissed and the Revenue’s appeal was dismissed.
The ruling is significant in explaining the application of Section 36(1)(iii) where borrowed funds are deployed in strategic investments or for acquiring controlling interests. It reinforces that the business-purpose test must be examined from the perspective of commercial expediency rather than merely by comparing the expenditure with immediate revenue generation.
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