ACIT v. JM Financial Properties and Holdings Ltd.

Case snapshot

Sections / provisions: 36(1)(iii); 37(1)

Questions before the Court / Tribunal

• Interest on borrowing used for interest-free office security deposit: The reported order accepts the business-purpose nexus of borrowing used to fund an interest-free security deposit for office premises and allows the associated interest deduction.

Material facts and background

The relevant facts in brief are that the Assessee, a company engaged in the business of acquiring, developing, leasing etc. of moveable/immovable property, filed return of income for the Assessment

INR.2,74,57,590/- as per the normal provisions of the Act which was picked up for regular scrutiny. During the assessment proceedings, the Assessing Officer noted that the Assessee had taken

Mumbai, [hereinafter referred to as ‘the Premises’] on leave and license basis from Sheth Developers Pvt. Ltd. [for short ‘SDPL’] and thereafter, given the same on leave and license

ITA No.1389 & 1396/Mum/2025 Assessment Year 2013-14 & 2014-15

basis to its own group companies. Assessing Officer noted that for taking the premises on lease the Assessee gave interest free security deposit of INR.170 Crore to SDPL which was 5.78 times the deposits received by the Assessee from group concerns. In response to query raised by the Assessing Officer in relation to the source of funds utilised to give security deposit to SDPL, the Assessee explained that the security deposit was funded partly from share capital and partly from the Inter Corporate Deposits (ICDs) take by the Assessee for its business. The Assessing Officer noted that the Assessee had claimed deduction of INR, 3,83,55,493/- in respect of interest on ICDs. Since the ICDs were utilised for granting interest free security deposit, the Assessing

invoking the provisions contained in Section 36(1)(iii) of the Act. The aforesaid disallowance was deleted by the CIT(A), leading to the filing of the present appeal by the Revenue on the grounds reproduced in paragraph 2 above. 5.

We have heard both the sides, perused the material on record and given thoughtful consideration to the submission advanced.

Appellant / assessee submissions

xx xx xx xx In response to this, the assessee submitted its reply vide letter dated 18.02.2016, which is placed on record. The reply submitted perused carefully but found not to be acceptable. Assessee itself admitted that the Market price of the property was Rs.200 Crore against which assessee paid interest free refundable security deposit of Rs.170 crore which itself depicts unreasonable transaction. Also it is pertinent to note that in order to finance this transaction assessee obtained Inter Corporate Deposit bearing interest cost and thereby reducing profit by artificially creating non genuine transaction by suppressing facts and to disturb financial position of the assessee company. It is also noted that the security Deposit given to Sheth Developers Pvt Ltd is 5.78 times the security deposit received from the related parties. Also it is hard to believe that person of normal prudence would pay the interest free security deposit of Rs.170 crores for a property worth Rs.200 crores and also pays the Rent, when he can easily purchase the said property and own the property and would have saved the amount spent on rent. From the above facts and detailed discussion, it is...

Revenue / respondent submissions

The judgment copy does not separately set out this component in a distinct section; refer to the full order and the reasoning section below.

Court / Tribunal analysis and reasoning

xx xx xx xx In response to this, the assessee submitted its reply vide letter dated 18.02.2016, which is placed on record. The reply submitted perused carefully but found not to be acceptable. Assessee itself admitted that the Market price of the property was Rs.200 Crore against which assessee paid interest free refundable security deposit of Rs.170 crore which itself depicts unreasonable transaction. Also it is pertinent to note that in order to finance this transaction assessee obtained Inter Corporate Deposit bearing interest cost and thereby reducing profit by artificially creating non genuine transaction by suppressing facts and to disturb financial position of the assessee company. It is also noted that the security Deposit given to Sheth Developers Pvt Ltd is 5.78 times the security deposit received from the related parties. Also it is hard to believe that person of normal prudence would pay the interest free security deposit of Rs.170 crores for a property worth Rs.200 crores and also pays the Rent, when he can easily purchase the said property and own the property and would have saved the amount spent on rent. From the above facts and detailed discussion, it is...

“I have gone through the submission and same has been perused carefully. It is pertinent to note that the appellant furnished the details of security deposit given and security deposit taken and also the details of rent received and rent paid along with notional interest on security deposit. It is also noted that the Appellant Company had given interest free security deposit to M/s Sheth Developers Pvt. Ltd. amounting to Rs.170 crores for taking commercial premises on rent. In order to fund this security deposit, the Appellant Company had borrowed funds and paid interest on the same. Further, the Appellant Company had received interest free security deposit of Rs.30.01 crores from its group companies for sub-letting the said commercial premises taken on rent from Sheth Developers Pvt. Ltd. As the security deposit given to M/s Sheth Developers Pvt. Ltd. was not only out of borrowed funds but also out of its own share capital, for calculating notional interest, appellant had only considered borrowed funds. In view of the above circumstances, it is noted that the Assessing officer could not decide how the appellant carried on its business or how much deposit or rent should have been...

proceedings before the Tribunal the Revenue failed to point out any perversity in the findings returned by the CIT(A). We find that the Assessee had placed before the CIT(A) following details and documents in support of its contentions:

genuineness of the transaction. We note that the Assessee had explained that the higher amount of security deposit ensured comparatively lower rental expenses. Further, the Assessee was also able to secure a pre-emptive right to purchase the Premises [refer to Clause 4(e) of the leave and license agreement at page 51, 71, 89 & 127 of the paper-book]. The Assessee is stated to have

Operative decision and relief

During the course of hearing both the sides had agreed that our findings/adjudication in relation to appeal for the Assessment Year 2013-2014 shall apply mutatis mutandis to the appeal for the Assessment Year 2014-2015. Accordingly, keeping in view identical facts and circumstances, and adopting the reasoning given while adjudicating the appeal preferred by the Revenue for the Assessment Year 2013-2004, Ground No. 1 to 2 raised by the Revenue are dismissed.

In conclusion, both the appeals preferred by the Revenue are dismissed. Order pronounced on 28.05.2025.

आदे शकी ितिलिपअ े िषत/Copy of the Order forwarded to : 1. अपीलाथ / The Appellant 2. थ / The Respondent. 3. आयकरआयु / The CIT 4. धान आयकर आयु / Pr.CIT 5. िवभागीय ितिनिध, आयकरअपीलीयअिधकरण, मुंबई/ DR, ITAT, Mumbai 6. गाडफाईल / Guard file. आदे शानु सार/ BY ORDER, स ािपत ित //True Copy//

Authorities and precedents appearing in the judgment

• No reliable precedent list was extracted automatically; use the full judgment for the citation chain.

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Ratio and legal principle

The decision turns on Interest on borrowing used for interest-free office security deposit. The operative result is classified as Operative order controls. Read the rule only with the statutory version, factual findings and precedent chain recorded in the full judgment.

Why this judgment matters

The case is relevant to taxpayers, advisers and litigators dealing with Interest on borrowing used for interest-free office security deposit. Its practical value lies in the interaction between the statutory text, the evidentiary record and the procedural route followed in this case.

Practitioner action points

• Use the judgment as a fact-specific precedent: match the statutory version, assessment period, procedural stage and evidentiary record before relying on the result.
• Check whether a later High Court/Supreme Court order has affirmed, reversed, distinguished or rendered the decision academic.
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