IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH “E”, MUMBAI BEFORE SHRI AMARJIT SINGH, ACCOUNTANT MEMBER AND SHRI ANIKESH BANERJEE, JUDICIAL MEMBER Assessment Year 2017-18 DCIT (CC)-7(3, Mumbai Macrotech Developers Limited AAyakar Bhavan, 412, Floor-4, 17G Vardhaman Mumbai-400020. Vs. Chamber, Cawasji Patel Road, Horniman Circle, Fort Mumbai-400001, Maharashtra PAN: AAACL 1490 J (Appellant) (Respondent)

Present for:

Assessee by : Shri Niraj Sheth Revenue by : Shri Hemanshu Joshi, Sr. DR Date of Hearing : 06.12.2024 Date of Pronouncement : 03.03.2025 O R D E R PER AMARJIT SINGH, ACCOUNTANT MEMBER:

The appeal of the Revenue for the assessment year 2017-18 is directed against the order dated 15.11.2023 passed by the ld. Commissioner of Income Tax, Appeal [CIT(A)] – 49, Mumbai. The solitary issue in the appeal filed is the disallowance of interest expenses amounting to Rs. 5,56,27,303/- for not utilising the funds for the purpose of business.

2. Fact in brief is that return of income declaring loss of Rs. 9,65,778/- and book profit u/s 115B at Rs. (-) Rs. 9,65,778/- was filed on 31.10.2017. The case was subject to scrutiny assessment and notice u/s 143(2) of the Act was issued on 09.08.2018. During the course of assessment, the assessing officer noticed that assessee has debited interest expenses of Rs. 3951.64 lakhs in the P&L A/c. The assessing officer observed that borrowed funds have been utilized for the purpose of investment. On query, the assessee submitted that it had acquired Compulsory Convertible Debentures (CCD) of Shreeniwas Cotton Mills Ltd. of Rs. 1005.20 crores which was interest bearing @ 14.75%. After verification of the detailed filed, the assessing officer noticed that no interest has been received on the amount of Rs. 504,97,49,410/-. The assessing officer was of the view that interest bearing funds have been utilized for investment of Rs. 504,97,49,410/- in the compulsory convertible debentures of Shreeniwas Cotton Mills Ltd. of which no interest has been received during the year under consideration. Therefore, an amount of Rs. 5,56,27,303/- being the interest expenses u/s 36(1)(iii) of the Act was disallowed.

3. The assessing officer filed appeal before the ld. CIT(A). The ld. CIT(A) has allowed the appeal of the assessee. The extract of the decision of ld. CIT(A) is reproduced as under:

“9. During the course of assessment proceedings, the AO noticed that the appellant company had debited interest expenses of Rs.3951.64 Lakhs in the Profit & Loss Account. It appeared from the Balance Sheet of the appellant that the borrowed funds had been utilized for the purpose of making investments. Therefore, the AO required the appellant to explain why interest cost pertaining to investment should not be disallowed. In reply, the appellant submitted before the AO that during the year, the company had acquired CCD of SNCML of Rs.1005.20 Cr., which was interest bearing @ 14.75% and the said investment was made out of OCD of Rs.450 Cr. issued to M/s. Jawala Real Estate Pvt. Ltd. and loan of Rs.555 Cr. from Lodha Developers. The appellant further submitted that it had earned interest of Rs.37 Cr. on the face value of the CCD (approx. Rs.500 Cr.) @ 14.75% and had offered the same to tax. The company had not incurred any interest expenditure on the investments and the entire interest expenditure of Rs.39.51 Cr. had been incurrd on unsecured borrowings. Therefore, even if it is presumed that the appellant company had interest-free investment of Rs.505.32 Cr. (purchase consideration of Rs.1005.20 Cr. less face value of investment Rs.499.88 Cr.), the same should be presumed to be funded out of non-interest bearing funds of OCD of Rs.450 Cr. issued to M/s. Jawala Real Estate Pvt. Ltd. and other opening interest-free balances. On this basis, the appellant contended before the AO that no disallowance of interest on account of investment in CCD was warranted.

10. The AO observed that as per the Balance Sheet of the appellant company,