DCIT Vs Pronomz Ventures LLP (ITAT Bangalore)
Borrowed for Control, Deducted by Law: ITAT Shields Strategic-Investment Interest u/s 36(1)(iii)
Summary:
Relevant Facts
In DCIT v. Pronomz Ventures LLP, the Bangalore ITAT considered the Revenue’s appeal for AY 2020–21 against deletion of an interest disallowance of ₹10,46,22,906. The LLP carried on financial consultancy, investment solutions, fund syndication & capital-market advisory services. Following a search u/s 132 in the Skanray Technologies group, assessment was completed u/s 143(3).
The AO noticed short-term borrowings of ₹319.05 crore, loans & advances of ₹204.84 crore, investments exceeding ₹411.70 crore & finance cost of ₹10.46 crore. According to the AO, borrowed money funded interest-free advances or shares of group entities without a business nexus. The assessee earned business receipts of only ₹4.95 lakh but dividend exceeding ₹21 crore. Investments were recorded as current or non-current investments rather than stock-in-trade. The AO treated them as capital assets & disallowed the interest.
The CIT(A) accepted the assessee’s case that strategic investments formed part of its business, that sufficient interest-free funds were available & that the statutory requirements of section 36(1)(iii) stood satisfied. It accordingly deleted the disallowance, leading to the Revenue’s appeal.
Core Issue
The question was whether interest on capital borrowed for strategic & controlling interests in group companies was deductible u/s 36(1)(iii), though the holdings did not directly produce business receipts & were not stock-in-trade. A connected question concerned sufficient own, non-interest-bearing funds.
Revenue’s Contentions
The Revenue argued that classification could not substitute for a direct nexus between borrowings & business income. Funds went into equity or interest-free loans to related concerns, while the assessee was neither a venture-capital entity nor share trader. Strategic control did not automatically transform capital investment into business use. Core Healthcare Ltd. was distinguishable because it concerned assets employed in business. The CIT(A) had accepted assertions without properly testing the funds. Revenue sought restoration of the disallowance.
Assessee’s Submissions
The assessee maintained that its objects, accounts, conduct & regulatory disclosures established a business of strategic promoter investments. Major holdings in Strides Pharma, Sequent Scientific & Solar Active Pharma Sciences acquired or preserved controlling interests. Its promoter-group status was disclosed to stock exchanges under SEBI regulations.
It submitted that section 36(1)(iii) requires borrowing for the purposes of business, not immediate generation of profit. Commercial expediency therefore governed deductibility. Reliance was placed on S.A. Builders, Sharp Business Systems, L.K. Trust, Malayalam Plantations, Peninsular Investments & Srishti Securities. Alternatively, the assessee argued that adequate partners’ capital & other interest-free resources existed, attracting the presumption recognised in Reliance Industries & South Indian Bank that investments came from interest-free funds. It also invoked consistency because similar expenditure had been accepted in other years & group cases.
Tribunal’s Findings & Legal Reasoning
The ITAT identified three requirements u/s 36(1)(iii): an accrued liability to pay interest, capital actually borrowed & use of that capital for business or profession. The first two were undisputed. The controversy was confined to business purpose.
Relying on Malayalam Plantations, the Tribunal stressed that “for the purposes of business” is wider than “for earning profits”. It includes measures protecting, preserving or advancing the business, provided expenditure is incurred in the assessee’s business capacity. Here, the LLP agreement, accounts, magnitude & pattern of investments, promoter-group disclosures & strategic holdings collectively demonstrated that acquiring or maintaining corporate control was an integral business activity. Dividend being assessed u/s 56 did not erase the commercial character of the underlying investments.
The Tribunal applied Sharp Business Systems, S.A. Builders & L.K. Trust. Interest on borrowings used for controlling stakes or routed through group entities remains deductible where supported by commercial expediency; immediate profit is unnecessary. The AO wrongly equated business purpose with production of business income. Substantial dividend receipts reinforced the economic reality.
Independently, the assessee also succeeded on the interest-free funds presumption. As sufficient non-interest-bearing funds were available & Revenue did not dispute their quantum, Reliance Industries permitted a presumption that relevant investments or advances were sourced from those funds. The principle in South Indian Bank, though arising u/s 14A, was equally relevant to interest deductibility u/s 36(1)(iii).
However, the ITAT rejected the assessee’s broad plea of consistency. Every assessment year is a separate unit; allowance in another year or a group concern cannot legally prevent scrutiny for the year in question. Thus, the claim succeeded on substantive law & evidence, not procedural repetition. The CIT(A)’s deletion was upheld & the Revenue’s appeal was dismissed.
Practical Implications
The ruling confirms that financing a strategic or controlling investment can satisfy section 36(1)(iii), even where shares appear as investments & corresponding income falls under another head. Taxpayers should nevertheless preserve LLP deeds, board records, fund-flow statements, promoter disclosures & commercial rationale establishing that control serves business objectives. Adequate documentation of own funds provides a powerful alternative defence. Equally, past acceptance alone offers no immunity: each year must independently demonstrate commercial expediency, business purpose & fund availability. The decision therefore protects legitimate promoter financing while leaving room for Revenue to challenge unsupported or merely personal diversion of borrowed money.
Cases Discussed
- CIT v. Malayalam Plantations Ltd.
- S.A. Builders Ltd. v. CIT
- Sharp Business Systems v. CIT
- L.K. Trust v. CIT
- CIT v. Reliance Industries Ltd.
- South Indian Bank Ltd. v. CIT
- Core Healthcare Ltd.
- CIT v. Peninsular Investments Ltd.
- CIT v. Srishti Securities Pvt. Ltd.
- CIT v. Distributors (Baroda) Pvt. Ltd.
- CIT v. Rajeeva Lochan Kanoria
- CIT v. Phil Corporation Ltd.
- Radhasoami Satsang v. CIT
- CIT v. Neo Poly Pack Pvt. Ltd.
- CIT v. Sridev Enterprises
- ACIT v. Agnus Holdings Pvt. Ltd.
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT, BANGALORE BENCH
01. This appeal has been filed by the Deputy Commissioner of Income Tax, Central Circle– 2(3), Bangalore (“the learned Assessing Officer”), against the appellate order passed by the Commissioner of Income Tax (Appeals)–15, Bangalore (“the learned CIT(A)”) for Assessment Year 2020 –21. In that order, the learned CIT(A) allowed the assessee’s appeal against the assessment order dated 30 March 2022 passed under section 143(3) of the Income Tax Act, 1961, [the Act] and deleted the disallowance of interest expenditure of ₹104,622,906 made by the learned Assessing Officer. Aggrieved by this deletion, the learned Assessing Officer is in appeal before us.
02. The learned assessing officer has raised the following grounds of appeal: –
I. On the facts and circumstances of the case and in law, the learned CIT(A) erred in deleting the disallowance of interest expenditure of ₹104,622,906 without properly appreciating that the assessee had failed to establish a direct nexus between the borrowed funds and the income earned from business or profession.
II. The learned CIT(A) grossly erred in accepting the assessee’s mere classification of the use of borrowed funds as being for business purposes, without independently verifying or examining whether the investments were genuinely connected with the assessee’s business operations.
III. The learned CIT(A) failed to consider that the borrowed funds were either advanced as interest-free loans or used to invest in equity shares of group companies, which did not generate any business income and were not integrated with the assessee’s business operations. Accordingly, the interest expenditure incurred on such funds was not allowable as a deduction under the Income Tax Act, 1961.
IV. The learned CIT(A) erred in law and on facts in relying on the decision of the Hon’ble Supreme Court in Core Healthcare Ltd. (2008) 298 ITR 194 (SC), which is clearly distinguishable. In that case, the borrowings were used to acquire capital or revenue assets employed in the business, whereas in the present case, the investments were made in group companies without any demonstrable nexus to the assessee’s business activities.
03. Briefly stated, the assessee, a limited liability partnership firm, filed its return of income on 9 January 2021 declaring income of ₹211,620,620 and claiming a business loss of ₹255,800,691. A search under section 132 of the Income Tax Act, 1961, was conducted on 6 November 2019 in the case of Skanray Technologies Private Limited and others, during which the assessee was also covered. The assessee’s case was thereafter selected for scrutiny and notice under section 143(2) of the Act was issued on 28 January 2021.
04. The issue before us concerns the disallowance of interest expenditure. On examining the audited financial statements, the learned Assessing Officer noted that the assessee had disclosed short-term borrowings of ₹3,190,512,862, advanced loans of ₹2,048,423,826 to various persons, and made investments of ₹4,117,000,055 in shares, mutual funds, partnership firms, limited liability partnerships, and other assets. The assessee claimed finance cost of ₹104,622,906 on the borrowed funds, and the allowability of this amount was examined. The learned Assessing Officer also tabulated the source and application of funds, noting partners’ capital of ₹2,911,938,300 and short-term borrowings of ₹3,190,512,862, aggregating to total sources of ₹6,109,551,162. Against this, current investments of ₹4,069,184,124 and loans and advances of ₹2,048,423,826 were shown as total application of funds of ₹6,117,607,950. The Assessing Officer observed that the assessee had not charged interest on the loans, advances, or investments made from borrowed funds and had not produced documentary evidence to show that the borrowings were wholly and exclusively used for business purposes. According to him, the borrowed funds were not used in any business activity but were either advanced as interest-free loans or invested in shares. He therefore held that the finance cost was not allowable as a business expenditure. He further observed that allowing the interest claim would distort the accounting outcome by reducing the assessee’s profits while correspondingly benefiting related parties. The Assessing Officer also referred to several judicial precedents. He noted that the assessee’s business receipts were only ₹494,872, whereas dividend income from investments was ₹213,137,384 and interest expenditure claimed was ₹104,622,906. On this basis, he concluded that the financial statements and notes to accounts clearly showed that the assessee had borrowed funds and either invested them in shares or advanced interest-free loans to related parties or partnership concerns. He further held that investment activity could not be treated as business income, since the assessee was neither a venture capital entity nor engaged in the business of investing in shares. If investment in shares was its business, such investments ought to have been classified as stock-in-trade rather than as current or non-current investments or capital assets. In his view, the assessee’s accounting treatment showed that the investments were capital assets and, therefore, could not be regarded as part of its business activity.
05. Before the learned Assessing Officer, the assessee contended that the loans were advanced from interest-free funds and that it was engaged in the business of making investments and acquiring controlling interests in companies. Since such activities constituted its business and the resulting income was taxable, the assessee submitted that the interest incurred on capital borrowed for these purposes was deductible as business expenditure.
06. The learned Assessing Officer rejected the assessee’s contention and disallowed ₹104,622,906. The assessment order was passed under section 143(3) of the Act on 30 March 2022, determining the assessee’s total income at ₹211,620,620.
07. Aggrieved by the assessment order, the assessee preferred an appeal before the learned CIT(A). The assessee’s principal submissions before the learned CIT(A) were as follows:
(i) The assessee was engaged in the business of investments, financial consultancy, and advisory services relating to financial solutions.
(ii) The assessee had invested in shares of various group concerns as a promoter entity to acquire and maintain strategic control. It had also advanced loans to parties. The assessee submitted that these investments and loans were funded from its own capital as well as borrowed funds, and therefore the interest paid on such borrowings was deductible under section 36(1)(iii) of the Act.
(iii) The assessee submitted that it had sufficient own capital, part of which was used for advancing loans, while the investments were made partly from borrowed funds and partly from its own capital.
(iv) The assessee argued that the purpose of the borrowings and its accounting policies clearly showed that it was engaged in the business of investing in shares of entities in which it acted as a promoter. Since these investments were held for strategic business purposes, the related interest expenditure was incurred during business and was therefore allowable.
(v) The assessee relied on the decision of the Hon’ble Andhra Pradesh High Court in CIT v. Peninsular Investments Ltd., 29 taxmann.com 422, where it was held that investment in shares could constitute the assessee’s business. The assessee contended that where shares are held in group companies to enable the group to exercise control through combined holdings, interest on borrowings used for such investments is allowable under section 36(1)(iii) of the Act.
(vi) The assessee also relied on the decision of the Hon’ble Bombay High Court in CIT v. Srishti Securities Pvt. Ltd., 183 Taxman 159, where it was held that interest paid on funds borrowed for investment in shares and securities—whether held as investments or stock-in-trade for acquiring controlling interest in other concerns—is deductible under section 36 of the Act.
(vii)The assessee further submitted that it satisfied all conditions under section 36(1)(iii), as the interest was paid on capital borrowed for business purposes.
(viii) The assessee also submitted that the loans were advanced out of its own capital, as reflected in the financial statements and fund-flow statement. It pointed out that loans and advances were about ₹204 crore, while partners’ capital was also approximately ₹204 crore, demonstrating the availability of sufficient own and interest-free funds. Accordingly, the assessee contended that the advances and investments should be presumed to have been made from such interest-free funds. Reliance was placed on the decision of the Hon’ble Karnataka High Court in Coffee Day Global Ltd. v. ACIT, 33 ITR 321.
(ix) The assessee further submitted that similar interest expenditure had been allowed in scrutiny assessment proceedings for Assessment Year 2016–17. The issue had been specifically examined, and the deduction was allowed in the order passed under section 143(3) on 30 November 2018. The assessee contended that, in the absence of any fresh facts, the same issue could not be repeatedly revisited to take a contrary view. Reliance was also placed on CIT v. Dalmia Cement Co. Ltd., 77 ITR 410, the decision of the Hon’ble Delhi High Court in CIT v. Neo Poly Pack Pvt. Ltd., 245 ITR 492, and other judicial precedents.
(x) The assessee also stated that, in the case of a group entity, a proposed disallowance of interest expenditure of ₹128,705,772 had been considered on similar facts. After examining the explanation, the Revenue accepted that the interest was paid for business purposes. The assessee therefore submitted that the same contention had already been accepted by the Revenue in the case of the group concern.
08. After examining section 36(1)(iii) of the Act and relying on the decisions of the Hon’ble Supreme Court in Core Healthcare Ltd. and S.A. Builders Ltd. v. CIT (supra), the learned CIT(A) held that the disallowance of ₹104,622,906 made by the learned Assessing Officer was unsustainable and accordingly deleted it. The learned CIT(A) noted that the assessee had claimed commercial expediency in advancing loans to its group entities, stating that the advances were made to acquire or maintain control through shareholding. The assessee also asserted that investment for obtaining a controlling stake formed part of its business, a position supported by the decision of the Hon’ble Bombay High Court reported in 183 Taxman 159. The learned CIT(A), after referring to several judicial precedents, further observed that where both interest-free and interest-bearing funds are available, investments in shares and securities are presumed to have been made from interest-free funds. Since the assessee had interest-free funds far exceeding the interest-free advances, interest on borrowed capital could not be disallowed, as held by the Hon’ble Supreme Court in CIT v. Reliance Industries Ltd., 410 ITR 466.
09. The learned Assessing Officer is aggrieved by the deletion of the disallowance of interest expenditure. The learned Departmental Representative filed written submissions and advanced oral arguments contending that the learned CIT(A) erred in deleting the disallowance. According to him, interest expenditure is allowable only where the borrowed capital continues to be used for the purposes of the business and cannot be allowed where funds are diverted as interest-free loans to relatives, associates, or related parties. He submitted that, in the present case, the assessee’s claim that advances were made from its own interest-free capital is not tenable. He pointed out that the assessee had entered into a loan agreement with an individual for borrowing ₹120 crore at 9.5% per annum specifically to meet business requirements, whereas the memoranda of understanding with related parties showed that these borrowed funds were extended as interest-free facilities. In his submission, no prudent businessman would borrow funds at 9.5% interest and lend the same funds without charging any interest. He further argued that the learned CIT(A) accepted the assessee’s classification without independently verifying whether the specific borrowed funds were directly linked to the assessee’s business operations, thereby validating an accounting arrangement under which the assessee’s profits were reduced while related parties benefited. His second submission was that the advances lacked commercial expediency. He noted that the assessee’s profit and loss account showed revenue from operations of only ₹4.94 lakh as against interest expenditure exceeding ₹10 crore, which demonstrated that the borrowings were not used for any revenue-generating business activity. Referring to the assessee’s reliance on the profit-share and redemption-premium clauses in the memoranda of understanding, he submitted that clause 3.1 provided for a repayment period of 15 years, while clause 4.4 expressly stated that no premium would be payable if the borrower’s investment resulted in a loss. He further submitted that the reliance placed by the learned CIT(A) on the decision of the Hon’ble Supreme Court in Core Healthcare Ltd. (supra) was misplaced and that the decision was clearly distinguishable on facts. In that case, the borrowings were used to acquire capital or revenue assets deployed in the business, whereas in the present case, the assessee made strategic investments in group companies without any demonstrable nexus to its financial advisory or consultancy business. The learned CIT-DR strongly contended that the order of the learned CIT(A) was erroneous both in law and on facts, as the learned CIT(A) failed to consider the reasons recorded by the learned Assessing Officer. He submitted that the assessee had failed to establish a clear and direct nexus between the borrowed capital and the generation of taxable business income. Accordingly, the interest expenditure was not allowable under section 36(1)(iii) of the Act. He therefore prayed that the order of the learned CIT(A) be set aside and that the disallowance made by the learned Assessing Officer be restored.
10. The learned Departmental Representative also filed a paper book containing the assessee’s annual accounts and copies of its return of income.
11. The learned Authorised Representative, a Chartered Accountant, strongly supported the order of the learned CIT(A). He filed a 434-page paper book containing factual material, a compilation of case law, and other documents, including the assessee’s partnership deed. He also referred to a second compilation of judicial precedents placed at pages 596 to 663, along with a chart, as summarized below:
a. The learned Authorised Representative first referred to page 155 of the factual paper books to explain the assessee’s business. He submitted that the assessee was engaged in several business verticals, including financial consultancy, advisory services, financial and investment solutions, fund syndication, and capital-market advisory services. He further stated that the assessee also promoted business ventures, both on its own account and as a private equity investor. According to him, the assessee had borrowed funds in earlier years and used them to set up special purpose vehicles and to invest in partnership firms, limited liability partnerships, and other securities as part of its business ventures. He submitted that, as promoter of several companies and firms, the assessee had earned substantial returns on its investments over the years and had consistently redeployed surplus funds into new ventures by supporting newly formed entities in select sectors promoted by new-generation entrepreneurs. This support included financial, managerial, and investment assistance. He also explained that these activities involved creating investment vehicles, either through limited liability partnerships or intermediary holding companies, in collaboration with business associates through which the investments were made. He submitted that the assessee’s business model involved nurturing such entities over several years, exiting some ventures at substantial gains over the original investment, and redeploying those gains into new ventures. On this basis, he contended that the assessee carried on the business of a strategic investor, promoter, and controlling stakeholder in various businesses and companies.
b. He next referred to page 567 of the paper book, being the assessee’s limited liability partnership agreement, to show that its objects included financial consultancy and advisory services, financial and investment solutions, fund syndication, and capital-market advisory services. He further submitted that the assessee had earned dividend income of ₹21 crore. Although, under the Act, such dividend is taxable under the head “Income from Other Sources” by virtue of section 56, he contended that, in substance, it arose from the assessee’s aforesaid business activities.
c. He further referred to page 134 of the paper book, which contained the assessment order for the relevant assessment year. He submitted that the learned Assessing Officer himself had assessed the assessee as having a business loss of ₹22,685,971, thereby accepting that the assessee was carrying on business. In support, he also relied on page 434 of the paper book, being the order giving effect dated 23 July 2025, in which the assessee’s revised business loss was determined at ₹255,800,691. He therefore contended that the Assessing Officer had himself accepted the assessee’s business activity.
d. He further reiterated the submissions made before the learned CIT(A), stating that the identical issue had arisen in the assessee’s group companies and had been accepted by the learned Assessing Officer without making any interest disallowance. He also submitted that, although a similar disallowance was made in the assessee’s case for the year under consideration, no such disallowance of interest expenditure had been made in the earlier or subsequent assessment years.
e. He further referred to page 395 of the paper book, containing the appellate order of the learned CIT(A), where the assessee had explained the applicability of the business-purpose test to the present facts. He submitted that the assessee had pointed to its object clause and accounting policy, which showed that it was engaged in the business of investing in shares of entities in which it acted as a promoter. Since these investments were held for strategic business purposes, the related interest expenditure was incurred during the assessee’s business.
f. He therefore contended that the assessee had paid interest on capital borrowed for the purposes of its business and that such interest expenditure was allowable under section 36(1)(iii) of the Act.
g. He further submitted that where sufficient interest-free funds are available to meet the investment requirements, a presumption arises that the investments were made from such interest-free funds. In support of this proposition, he relied on the decisions of the Hon’ble Supreme Court in CIT v. Reliance Industries Ltd. (2019) 410 ITR 466 (SC) and South Indian Bank Ltd. v. CIT, 438 ITR 1 (SC).
h. He further submitted that the expression “for the purposes of business” is of wide import. Relying on the decision of the Hon’ble Supreme Court in CIT v. Malayalam Plantations Ltd., 53 ITR 140, he submitted that the expression is broader than “for the purpose of earning profits” and covers not only the day-to-day running of business but also measures for rationalising administration, modernising machinery, preserving the business, and protecting its assets and properties. He therefore contended that the lower authorities’ emphasis on the assessee having earned business income of only ₹4.94 lakh was misplaced, particularly when the assessee had earned dividend income of ₹21 crore from the same investments. Accordingly, the expression “for the purposes of business” in section 36(1)(iii) must be construed broadly. He also submitted that, for allowability of interest, no distinction can be drawn between capital borrowed for a capital purpose and capital borrowed for a revenue purpose. In support, he relied on the decision of the Hon’ble Supreme Court in PCIT v. Core Healthcare Ltd., 298 ITR 194, to submit that section 36(1)(iii) does not distinguish between borrowings used for acquiring capital assets and those used for revenue purposes.
i. He also referred to the decision of the Hon’ble Supreme Court in CIT v. Distributors (Baroda) Pvt. Ltd., 83 ITR 377, to submit that holding investments may itself constitute a business activity. Since the assessee was engaged in similar activities, it could not be said that it was not carrying on business.
j. To support the contention that interest incurred for acquiring securities is also allowable as a deduction, he relied on the decisions in CIT v. Rajeeva Lochan Kanoria (1994) 208 ITR 616 (Cal), CIT v. Srishti Securities Pvt. Ltd. (2010) 321 ITR 498 (Bom), and CIT v. Phil Corporation Ltd. (2011) 244 CTR 226 (Bom), along with several decisions of coordinate benches.
k. He further submitted that once the borrowings were for the assessee’s finance and investment business, the nature of the assets in which the borrowed funds were invested was immaterial for allowing the interest deduction. He also contended that the head under which income is taxed does not determine its true character.
l. He further relied on the principle of consistency laid down by the Hon’ble Supreme Court in Radhasoami Satsang v. CIT (1992) 193 ITR 321 (SC). He submitted that, when no similar disallowance had been made in the earlier or subsequent assessment years, the learned Assessing Officer could not take a diametrically opposite view in the year under appeal by disallowing the interest expenditure. On this basis, he contended that the disallowance was unsustainable.
m. He further submitted that the issue is now squarely covered in favour of the assessee by the decision of the Hon’ble Supreme Court in L.K. Trust v. CIT (2026) 186 Taxman 594, rendered on 7 May 2026, whereby the decision of the Hon’ble Karnataka High Court in IT Appeal No. 175 of 2001 dated 1 March 2010 was reversed. He stated that the Hon’ble Supreme Court followed its earlier decisions in Sharp Business Systems v. CIT (2026) 181 taxmann.com 657; 484 ITR 509 and S.A. Builders Ltd. v. CIT, 288 ITR 1. He acknowledged that, before the Supreme Court’s decision in L.K. Trust, the issue may have been covered against the assessee by the Karnataka High Court decision. However, that position no longer survives after its reversal by the Supreme Court. Referring to the facts, he submitted that where an assessee borrows funds to acquire a controlling interest in a company through a group concern and claims deduction of interest under section 36(1)(iii), the allowability of such interest must be examined from the standpoint of commercial expediency, and not merely on whether the transaction directly generated profits. Since the borrowing was for business purposes, the interest paid thereon was allowable notwithstanding the routing of funds through a group entity. He therefore contended that the Supreme Court’s decision squarely covers the present issue in favour of the assessee, as the facts are identical.
n. He further relied on the decision of the Hon’ble Supreme Court in Sharp Business Systems v. CIT (2026) 484 ITR 509, which, according to him, dealt with a similar issue.
o. He concluded by relying on the decision of the coordinate bench in ACIT v. Agnus Holdings Pvt. Ltd., ITA No. 2518/Bangalore/2026, placed at page 632 of the paper book. He submitted that, by order dated 26 May 2026, the coordinate bench allowed the sister concern’s claim for deduction of interest expenditure. Accordingly, he contended that the deletion of the disallowance by the learned CIT(A) deserves to be upheld.
12. We have carefully considered the rival submissions and perused the orders of the lower authorities.
13. For the present issue, the relevant provision is section 36(1)(iii) of the Income Tax Act, which permits deduction of interest paid or payable on capital borrowed for the purposes of business or profession while computing income under section 28. Its proviso states that where capital is borrowed to acquire an asset, interest for the period from the date of borrowing until the asset is first put to use is not deductible and must be capitalised as part of the asset’s cost. That proviso, however, has no bearing on the present appeal. Accordingly, deduction under section 36(1)(iii) requires three conditions: the assessee must have incurred a liability to pay interest; the interest must be on borrowed capital; and the borrowing must be for the purposes of the assessee’s business or profession.
14. On the facts of the present case, it is undisputed that the assessee incurred interest liability on borrowed capital. The sole question is whether that capital was borrowed for the purposes of the assessee’s business or profession.
15. In CIT v. Malayalam Plantations Ltd. (1964) 53 ITR 140 (SC), decided on 10 April 1964, the Hon’ble Supreme Court examined the scope of the expression “for the purposes of business.” The Court held that the expression is wider than “for the purpose of earning profits” and covers not only day-to-day business operations but also steps taken to rationalise administration, modernise machinery, preserve the business, protect its assets and property against expropriation or hostile claims, and meet statutory dues or taxes imposed as a condition for carrying on business. At the same time, the Court clarified that the expression has limits: the expenditure must be incurred for carrying on the business and must arise in the assessee’s capacity as a businessperson. In essence, the expenditure must fall on the assessee as a person engaged in business and not in any other capacity.
16. Applying the above principles to the assessee’s business, it is evident that the assessee is a limited liability partnership engaged in financial consultancy and advisory services, including financial and investment solutions, fund syndication, and capital-market advisory services. The LLP was incorporated on 9 February 2011. Its investment schedule and notes to accounts show that investments in entities where the assessee acted as promoter, and investments held for strategic purposes, were classified as non-current investments, while other investments were classified as current investments. The assessee reported business income of ₹494,872 and dividend income of ₹212,620,680, disclosed as income from other sources. Although dividend is statutorily taxable under that head by virtue of section 56(2)(i), the dividend was earned from strategic investments made by the assessee. The LLP agreement dated 18 February 2024, particularly clause 3.4, also records that the assessee’s objects include financial consultancy and advisory services, financial and investment solutions, fund syndication, and capital-market advisory services. The assessee’s conduct further supports this position. Its non-current investments included ₹1,234,077,600 in Strides Pharma , ₹1,219,751,361 in Sequent Scientific Ltd., and ₹400,304,163 in Solar Active Pharma Sciences Ltd., along with convertible warrants and redeemable preference shares of other entities amounting to ₹1,215,000,000. Reading the investment schedule with the notes to accounts makes it clear that the assessee was engaged in making investments to acquire or maintain controlling interests in companies. The total investment of ₹4,069,184,124 was made for that purpose. In addition, the assessee was disclosed as part of the promoter and promoter group before the stock exchanges in respect of the above investments under the relevant Securities and Exchange Board of India regulations. Thus, based on the evidence produced, the assessee’s conduct, and its regulatory disclosures, it is established that the assessee was also engaged in the business of making strategic investments.
17. The next question is whether holding investments can constitute a business activity. In Sharp Business Systems v. CIT (2025) 181 taxmann.com 657 (SC), decided on 19 December 2025, the Hon’ble Supreme Court considered the allowability of interest on borrowings used for investment in a subsidiary company and for advancing interest-free loans to sister concerns and directors. The Court noted, in paragraph 39, that the assessee had claimed deduction of interest on borrowed funds under section 36(1)(iii) of the Act, where such funds were used to acquire shares in an associate concern for obtaining controlling interest. The Court held that the investment was made on grounds of commercial expediency and that the assessee was entitled to deduction of interest on the funds invested in the sister concern for acquiring controlling interest. In doing so, the Supreme Court followed S.A. Builders Ltd. v. CIT, 288 ITR 1 (SC), where it was held that interest on borrowed funds is allowable when advances are made for commercial expediency. Applying these principles to the present case, the assessee had unsecured loans of ₹3,190,512,862 and partners’ capital of ₹2,226,460,404, which were applied, inter alia, towards non-current investments of ₹4,069,184,124. It is therefore evident that, in addition to its own funds, the assessee also used borrowed funds to acquire investments intended to secure controlling interests in group companies.
18. The decision of the Hon’ble Supreme Court in L.K. Trust v. CIT (2026) 186 taxmann.com 594 (SC) also supports this view. In that case, the assessee had borrowed funds to acquire a controlling interest in a company through a group concern and claimed deduction of the related interest under section 36(1)(iii) of the Act. The Supreme Court held that the allowability of such interest must be examined from the standpoint of commercial expediency and not merely by considering whether the transaction directly generated profits. Since the borrowing was for business purposes, the interest was allowable notwithstanding the routing of funds through a group entity. On the facts of that case, the Assessing Officer had noted that the assessee borrowed ₹380 lakh from Corporation Bank and paid interest of ₹2,174,234. The funds were routed to RIT Three Holdings Private Limited, a group company, through purchase of shares, and that company in turn transferred the amount to an individual for acquiring shares of Shaw Wallace & Co. Ltd. Thus, the funds were routed through two layers to acquire control over Shaw Wallace & Co. Ltd. Even in those circumstances, the Supreme Court held, in paragraph 16, that the expression “for the purposes of business” in section 36(1)(iii) is wider than the expression “for the purpose of making or earning income” used in section 57(iii). Relying on Madhav Prasad Jatia v. CIT, 118 ITR 200 (SC), the Court reiterated that section 36(1)(iii) has a broader scope than section 57(iii). This principle negates the Assessing Officer’s view that, because the assessee’s business income was low, the interest could not have been incurred for business purposes. The Assessing Officer effectively equated “for the purposes of business” with “for earning business profits,” a construction rejected by the Supreme Court. In any event, in the present case, the assessee earned dividend income of ₹21 crore, which substantially exceeded its reported business income.
19. There is one further aspect relevant to the facts before us. The assessee has contended before the lower authorities that, where sufficient interest-free funds are available to meet the investment requirement, a presumption arises that the investments were made from such interest-free funds. The learned Authorised Representative placed before us a chart showing that the investments were made out of non-interest-bearing funds available with the assessee. The learned CIT(A) accepted these facts. Before us, the learned CIT-DR did not dispute the availability of such funds, but submitted that the assessee had failed to establish a nexus between the non-interest-bearing funds and the non-interest-bearing advances or investments. The Hon’ble Supreme Court considered a similar issue in CIT v. Reliance Industries Ltd. (2019) 410 ITR 466 (SC), where it upheld the decision of the Hon’ble Bombay High Court in CIT v. Reliance Industries Ltd., 86 taxmann.com 24, holding that where interest-free funds available to the assessee are sufficient to cover the investments, it may be presumed that the investments were made from those funds. The facts before us are substantially similar. The same principle was reiterated by the Hon’ble Supreme Court in South Indian Bank Ltd. v. CIT (2021) 130 taxmann.com 178 (SC), while considering disallowance under section 14A of the Act. It was held that where interest-free funds available with assessee-banks exceeded their investments in tax-free securities, no disallowance of interest expenditure could be made under section 14A. Although that decision was rendered in the context of section 14A, the principle applies equally while considering allowance or disallowance of interest under section 36(1)(iii) of the Act. Therefore, on this ground also, the disallowance made by the learned Assessing Officer fails the test of law and is not sustainable.
20. However, we are unable to accept the learned Authorised Representative’s reliance on the principle of consistency, based on CIT v. Neo Poly Pack Pvt. Ltd., 245 ITR 492, CIT v. Sridev Enterprises, 192 ITR 165, and Radhasoami Satsang v. CIT, 193 ITR 321 (SC), to contend that the Assessing Officer is barred from examining and making a disallowance in the year under appeal merely because no such disallowance was made in earlier or subsequent years. The Hon’ble Supreme Court in Radhasoami Satsang itself clarified that its decision was confined to the facts of that case and should not be treated as laying down a general precedent. Each assessment year is a separate unit of assessment, and the law does not prevent the Assessing Officer from examining the claim independently for the relevant year. We also reject the contention that, because interest expenditure was allowed in group concerns, the Revenue is precluded from taking a different view in the assessee’s case. These contentions are therefore rejected at the outset.
21. In view of the above, we hold that the interest was paid on capital borrowed for the purposes of the assessee’s business. Therefore, the disallowance of ₹104,622,906 made by the learned Assessing Officer is unsustainable. Accordingly, the order of the learned CIT(A) is upheld.
22. In the result, all the grounds are dismissed and, consequently, the Assessing Officer’s appeal is dismissed.
Order pronounced in the open court on 31st August, 2026.
