ACIT Vs J M Financial Properties and Holdings Limited (ITAT Mumbai)
The Income Tax Appellate Tribunal (ITAT) Mumbai has dismissed appeals filed by the Assistant Commissioner of Income Tax (ACIT) against JM Financial Properties and Holdings Limited, affirming the deletion of interest expense disallowances for Assessment Years 2013-14 and 2014-15. The ruling, issued on May 28, 2025, upholds the decision of the National Faceless Appeal Centre (NFAC), Delhi, which had sided with the assessee.
The core of the dispute revolved around the disallowance of interest expenditure claimed by JM Financial Properties and Holdings Limited. The company, engaged in property acquisition, development, and leasing, had filed returns declaring losses for the relevant assessment years. During scrutiny, the Assessing Officer (AO) identified that the assessee had taken office premises in Mumbai on a leave and license basis from Sheth Developers Pvt. Ltd. (SDPL) and subsequently sub-let them to its own group companies.
A key element of the transaction with SDPL was an interest-free security deposit of INR 170 crore paid by JM Financial Properties and Holdings Limited. The AO noted that this deposit was significantly higher than the deposits received by the assessee from its group concerns (5.78 times). The assessee explained that the security deposit was funded partly by share capital and partly by Inter Corporate Deposits (ICDs), on which it claimed an interest deduction of INR 3,83,55,493 for AY 2013-14 and INR 8,90,54,214 for AY 2014-15.
The AO disallowed these interest expenses, invoking Section 36(1)(iii) of the Income Tax Act, 1961. The AO’s reasoning was that the transaction appeared “artificial” and “unreasonable.” The AO questioned the commercial prudence of paying an interest-free security deposit of INR 170 crore for a property valued at INR 200 crore, especially when the assessee was also paying rent and could have opted to purchase the property. The AO concluded that the transaction was designed to “avoid tax liability to claim unreasonable interest cost” and “artificially creating non genuine transaction by suppressing facts.”
JM Financial Properties and Holdings Limited challenged this disallowance before the CIT(A). The assessee argued that the interest-bearing ICDs were indeed utilized for business purposes – specifically, for funding the security deposit to acquire the premises for sub-letting and earning rental income. It was emphasized that the net rental income was offered to tax and accepted by the AO. Crucially, SDPL was an unrelated party, suggesting an arms-length transaction. The assessee further explained that the substantial interest-free security deposit was given to secure lower rental payments and to obtain a pre-emptive right to purchase the premises.
The CIT(A) found merit in the assessee’s arguments and deleted the disallowance. The CIT(A) held that the AO’s role was to determine if expenses were for business purposes, not to dictate how a business should be run or whether a property should be rented or bought. Since the AO had not found the entire transaction dubious or not for business purposes, and given that SDPL was an unrelated party, the CIT(A) concluded that the borrowed funds were for business purposes. The fact that interest-free advances were given was deemed not a disqualification, as it facilitated the rental arrangement from which the assessee earned net rent.
