Interest on Borrowings for Capital Reduction Held Deductible under Section 36(1)(iii): ITAT Mumbai

 

N.V. Projects Pvt. Ltd. v. DCIT (ITA No. 1418/Mum/2025)

Facts:

1.  The assessee operates and maintains an IT Park. Pursuant to the Bombay High Court’s approval, it reduced share capital by cancelling 1,65,433 redeemable optionally convertible preference shares of ₹100 each and paid ₹67.00 crore to shareholders at ₹4,050 per share.

2.  The payment was made partly out of borrowed funds; interest thereon of ₹11.56 crore was claimed as deduction u/s 36(1)(iii).

3.  AO held that interest on borrowings used to repay shareholders (owners’ funds) is not for business purpose, and disallowed it. CIT(A) confirmed the disallowance.

ITAT Mumbai held as below:

1.  Section 36(1)(iii) is a self-contained code — if money is borrowed for the purpose of business and interest is paid, deduction cannot be denied merely because the borrowing was used for a capital transaction.

2.  The capital reduction was a legitimate commercial act, approved by the High Court and authorized by the company’s Articles.

3.  Following Core Healthcare Ltd. (251 ITR 61, Guj.) affirmed in 298 ITR 194 (SC) and Eastern Investments Ltd. (20 ITR 1, SC), interest on such borrowings is allowable as business expenditure if the transaction is carried out on grounds of commercial expediency

4.  Disallowance of interest u/s 36(1)(iii) is hereby deleted.

The copy of the order is as under:

1758272429-YEjY5B-1-TO