Income Tax Appellate Tribunal - Mumbai
Dcit, Cc-4(1), Mumbai, Mumbai vs Kanakia Spaces Pvt Ltd, Mumbai on 17 March, 2026
IN THE INCOME-TAX APPELLATE TRIBUNAL"E" BENCH, MUMBAI BEFORE SHRI NARENDER KUMAR CHOUDHRY, JUDICIALMEMBER & SHRI PRABHASH SHANKAR, ACCOUNTANT MEMBER ITA No.3494/MUM/2025 (A.Y. 2013-14) & ITA No.3495/MUM/2025 (A.Y. 2014-15) Deputy Commissioner of v/s. Kanakia Spaces Pvt . Ltd.
Income Tax, Central Circle बनाम 215, Atrium, 10 t h Floor, Near 4(1), Room No. 420, Kautilya Marriot Courtyard Hotel, Bhawan, BKC, Bandra East, Andheri Kurla Road, Andheri Mumbai - 400 051, East, Mumbai - 400 059, Maharashtra Maharashtra
स्थायी ले खा सं ./जीआइआर सं ./ PAN/GIR No: AAACK2629J Appellant/अपीलाथी .. Respondent/प्रतिवादी Assessee by : Shri Tarang Mehta,AR Revenue by : Shri Hemanshu Joshi,(Sr. DR) Date of Hearing 12.01.2026 Date of Pronouncement 17.03.2026 आदे श / O R D E R PER PRABHASH SHANKAR [A.M.] :-
The above captioned appeals have been preferred by the Revenue against the orders of even date passed by the Learned Commissioner of Income-tax, Appeal, CIT(A) 52, Mumbai [hereinafter referred to as "CIT(A)"] pertaining to the order passed u/s. 143(3) r.w.s. 254 of the Income-tax Act, 1961 [hereinafter referred to as "Act"] for the Assessment Years [A.Y.] 2013-14 and 2014-15. Since the issue involved is common, these appeals are being taken up together for adjudication vide this composite Page |2 ITA No. 3494 &3495/Mum/2025 A.Y. 2013-14& 2014-15 Kanakia Spaces Private Limited order for the sake of brevity. ITA No.3494/Mum/2025 for AY 2013-14 is taken up as the 'Lead case'. Decision herein would apply mutatis mutandis to the other appeal.
2. The grounds of appeal are as under:-
ITA No.3494/MUM/2025 (AY 2013-14)
1. "On the facts and in the circumstances of the case and in law, Ld.CIT(A) erred in directing the AO to delete the addition made u/s 36(1) (iii) of Rs.2,23,93,835/-without properly appreciating the facts that assessee company failed to prove that interest expenses claimed have been utilized wholly and exclusively for its business purpose?
2. "On the facts and in the circumstance of the case and in law the Ld. CIT(A) erred in relying the order of AO for the A.Y.2012-13, without appreciating the facts that every assessment year is different assessment year and Principle of res-judicata is not applicable in income tax proceedings?"
3. It may be stated here at the outset that the instant appeal is the second round of litigation before ITAT. The assessee filed its return of incomedeclaring total income at Rs. 14,99,63,000/- for the relevant year.
The assessment was completed u/s. 143(3) of the Act and the income was determined at Rs. 18,33,68,530/- wherein a disallowance of interest of Rs. 2,23,93,835/- u/s. 36(1)(iii) of the Act was made on account of interest-free loans advanced to various parties. In the appellate proceeding during 1st round of litigation, the assessee had preferred an appeal before the CIT(A) who held that during the year consideration, the assessee was having sufficient own funds in order to advance friendly loans to various parties. After relying on the decision of the Hon'ble Bombay High Court in the case Page |3 ITA No. 3494 &3495/Mum/2025 A.Y. 2013-14& 2014-15 Kanakia Spaces Private Limited of CIT Vs Reliance Utilities and Power Ltd. (313 ITR 340), the said disallowance was deleted. Aggrieved by the order of the ld.CIT(A), the Revenue preferred an appeal before the Tribunal which set aside the appellate order and remitted the matter back to the file of the AO to verify the facts and pass the assessment order in accordance with the directions given by the Hon'ble Tribunal in assessee's own case for A.Y. 2012-13 in ITA No. 6686/Mum/2016 dated 31.10.2018 wherein identical issue of disallowance u/s. 36(1)(iii) of the Act was involved.In the said set aside proceedings, the AO held that all the interest-free loans were advanced in the earlier years and since no disallowance was made in the earlier years, no disallowance could be made in the year under consideration.However,in the instantyear the AO proceeded to disallow the interest again on the ground that addition of Rs. 2,23,93,835/- was sustainable as one-to-one nexus of interest-free friendly fund advanced and availability of own funds was not provided by the assessee.
4. Aggrieved by the order, an appeal was preferred by the assessee before the ld.CIT(A) who after analysing the facts of the case for the year underconsideration and that of the earlier year (i.e. A.Y. 2012-13) found that there was no reason to deviate from the view adopted by the AO in the case of the assessee for A.Y. 2012-13. Accordingly, he deleted the disallowance made by the A.O. u/s. 36(1)(iii) of the Act.
Page |4 ITA No. 3494 &3495/Mum/2025 A.Y. 2013-14& 2014-15 Kanakia Spaces Private Limited
5. Before us, the ld.DR has contested the appellate order claiming that the assessee failed to prove the required nexus between the interest free loan and availability of surplus fund. Therefore, it could not establish that the interest was paid wholly and exclusively for the purposes of its business.
6. Per contra the assessee claimed that no disallowance could be made on the facts and the circumstances of the case. It is argued that interest free loans and advances had been made from the own surplus interest free funds available to the assessee. It is submitted that the Hon'ble Tribunal vide ITA No. 209/Mum/2018 vide order dt. 23.04.2019noted that a similar issue in appeal for AY 2012-13 was restored to the file of the AO. The ITAT reproduced the findings of AY 2012-13 in the appellant's own case decided vide ITA No. 6686/Mum/2016 dt. 31.10.2018, which is as follows:-
"12. We have heard the rival submissions and perused the relevant materials on record. The reasons for our decision are given below. In the case of Reliance Utilities & Power Ltd. (supra), the assessee claimed deduction of interest on borrowed capital. The AO recorded a finding that thesum of Rs.213 crores was invested out of its own funds and Rs. 147 crores was invested out of borrowed funds. Accordingly, he disallowed interest amounting to Rs.4.40 crores calculated at 12% per annum for three months from January 2000 to March 2000. The Commissioner (Appeals) found that the assessee had enough interest free funds at its disposal for investment and accordingly deleted the addition of Rs.4.40 crores made by the AO and directed him to allow the deduction u/s 36(1)(iii). The order of the Commissioner (Appeals) was upheld by the Tribunal. On further appeal, the Hon'ble Bombay High Court held that if there were funds available both interest- free and overdraft and/or loans taken, then a presumption would arise that investments would be out of the interest-free funds generated or available with the company, if the interest-free funds were sufficient to meet the investments. In this case, this presumption was established considering the finding of fact both by the CIT(A) and the Tribunal. Therefore, interest was deductible. In the case of Madhav Prasad Jatia v. CIT (1979) 118 ITR 200 (SC).it has been held by the Hon'ble Page |5 ITA No. 3494 &3495/Mum/2025 A.Y. 2013-14& 2014-15 Kanakia Spaces Private Limited Supreme Court that for claiming deductions u/s 36(1)(iii), the basic requirements are: (a) the money i.e. (capital) must have been borrowed by the assessee; (b) it must have been borrowed by the assessee for his business, profession or vocation; and(c) the assessee must have paid interest on the amount and claimed it as an allowance. We have admitted the additional evidence filed by the assessee. But we keep in mind that where an additional evidence has been allowed to be adduced, the interests of justice demand that the other side must be given an opportunity to explain or rebut such additional evidence as clarified in the decision in Smt. Urmila Ratilal v. CIT (1982) 136 ITR 797, 799 (Guj); Hiralal Devdutt Jagadhri v. Addl. CIT (1980) 18 CTR (Punj) 96, 98. In view of the above facts and position of law, we set aside the order of the Ld. CIT(A) and remit the matter relating to the 3rd and 4th ground of appeal to the file of the AO to make a de novo order as per the ratio laid down in Madhav Prasad Jatia (supra) and Reliance Utilities & Power Ltd. (supra), after giving reasonable opportunity of being heard to the assessee. We direct the assessee to file the relevant documents/evidence before the AO. Thus the 3rd and 4th grounds of appeal are allowed for statistical purposes."
Thereafter, the Hon'ble ITAT proceeded to decide as under:-
"16. Considering the decision of Tribunal in assessee's own case for earlier year and the facts that the Ld CIT(A) has nor recorded its satisfaction that that he has examined the facts and the books of accounts of the assessee if the assertion of the assessee that out of Rs.151.06 Crore a sum of Rs. 50.74 Crore was business advances, Rs 80.78 Crore was advanced to subsidiary and Rs. 6.37 to associate concerns or when the interest free loans of Rs. 86.95 Crore was received by the assessee. Therefore, the grounds of appeal raised by the revenue are also restored back to the file of assessing officer to verify the facts and pass the order in accordance with law and as per the directions of the order dated 31.10.2018 in ITA No. 6686/Mum/2016. In the result, the grounds of appeal raised by the revenue are allowed for statistical purpose. In the result, appeal of revenue is allowed for statistical purpose."
6.1 It is submitted by the ld.AR that the issue was restored to the file of the AO. Pursuant to the same, he passed assessment order dt. 20.04.2021 and reiterated the addition. As far as AY 2012-13 is concerned, the AO completed the assessment u/s 143(3) r.w.s. 254 dt. 05.07.2019 with the following findings:-
Page |6 ITA No. 3494 &3495/Mum/2025 A.Y. 2013-14& 2014-15 Kanakia Spaces Private Limited "4. During the course of assessment proceedings, assessee was asked to furnish justification for the allowability of proportionate interest in response to the same.
Assessee submitted details vide letter dated 29.03.2019 whereinnote on non- disallowance of proportionate interest has been submitted. The submissions of the assessee have been considered and found the same to be acceptable. In this regard, it is to mention here that assessee's own funds and non-interest bearing loans are sum of Rs.185.84 crores against which noninterest bearing advances given are of Rs.159.22 crores. Out of sum of Rs.159.22 crores, assessee had made advances of Rs. 42.67 crores towards land / advances to creditors and assessee being in the business of real estatedevelopment, land being stock-in-trade the said advances are in the nature of trade advances and being incurred for the business purposes. For the remaining interest free loan of Rs.116.55 crores given, assessee had given interest free loan of Rs.89.92 crores to wholly owned subsidiaries. Rs.10.98 crores to associate concerns and balance of Rs.15.65 crores was given as interest free friendly loans. Further, it is to mention here that all these loans are old and assessee has accordingly furnished the paper book submitted before the Hon'ble ITAT through letter on 03.08.2018 supported by balance sheet of previous assessment years i.e. 31.03.2005, 31.03.2007. 31.03.2009 and 31.03.2010 In this regard, assessee has explained that reserves& surplus, shore capital and non-interest bearing funds were more when compared to nor-interest bearing funds i.e. friendly loans. Also, the case of assessee was that interest was not disallowed in the abovementioned assessment years and hence interest cannot be disallowed u/s 36(1)(iii). Hence, the case of the assessee was covered as per the ratio laid down by the Hon'ble Apex Court in the case of CIT vs. Reliance Utilities & Power Ltd. 313 ITR 34. Furthermore, the proceedings in respect of earlier years are completed u/s 245D(4) of the IT Act, 1961 by the Hon'ble Income Tax Settlement Commission wherein there was no addition / disallowance with regard to interest u/s 36(1)(iii) of the Act. Looking into the scenario, the case of the assessee was covered by the abovementioned two Apex Court pronouncements, the case of assessee was squarely covered and hence, there will be no disallowance of interest u/s 36(1)(iii) of the IT Act, 1961."
6.2 However, during the year, the AO did not follow the decision of his predecessor in AY 2012-13 and again made the disallowance on the ground that the assessee could not prove one to one nexus between the loans advanced and surplus fund in hand as claimed. The ld.CIT(A) deleted the disallowance by analysing the availability of fund on the basis of the Page |7 ITA No. 3494 &3495/Mum/2025 A.Y. 2013-14& 2014-15 Kanakia Spaces Private Limited financials of the assessee. It was concluded that the assessee was having sufficient non-interest bearing surplus fund in the form of Share capital and Reserves and Surplus qua friendly loan made. Thus, the availability of non- interest bearing funds was more than non-interest bearing deployment of funds. The Hon'ble ITAT had already laid down the proposition that if there were funds available both interest-free and overdraft and/or loans taken, then a presumption would arise that investments would be out of the interest-free funds generated or available with the company, if the interest- free funds were sufficient to meet the investments. In view of the above decision of the Hon'ble Tribunal in the appellant's own case and also that similar computation had been adopted by the AO for AY 2012-13, the ld.CIT(A) deleted the disallowance of Rs. 2,23,93,835/- made by the AO u/s 36(1)(iii) of the Act.
6.3 The ld.AR has made detailed oral and written submissions to substantiate the conclusion drawn by the ld.CIT(A).It is submitted the entire amount of Rs. 13.17 cr. had been advanced to various parties in earlier years and there was no fresh lending during the year under consideration.In the immediately preceding year i.e. A.Y. 2012-13, the disallowance of interest was made by the AO on same advances and was upheld by the CIT(A). On further appeal, the Tribunal had set aside the matter back to the file of the A.O. Thereafter, the A.O. had passed an order u/s. 143(3) r.w.s. 254 of the Page |8 ITA No. 3494 &3495/Mum/2025 A.Y. 2013-14& 2014-15 Kanakia Spaces Private Limited Act in which assessee's contentions were accepted and the disallowance was deleted by the A.O. himself vide order dated 05.07.2019.In this view of the matter, the issue is fully covered by the said order.
6.4 It is further submitted that interest-free advances were given in last several years. It is argued that in each of the years during which the advances were made, the assessee had sufficient own funds. A chart showing year-wise position of own funds available and interest-free advance given along with relevant pages of Balance sheets as at 31.03.2005, 31.03.2007, 31.03.2009 and 31.03.2010 was submitted. These documents had been duly noted and considered by the Hon'ble Tribunal in their order for A.Y. 2012- 13 as well as by the Assessing Officer while granting the relief to the assessee for A.Υ. 2012-13.
6.5 The ld.AR relied upon certain judicial decisions wherein it has been held that if no disallowance has been made in earlier year/(s), the disallowance of interest cannot be made in the year under consideration if the same advances are carried forward to the current year.has been placed on CIT vs Sridev Enterprises 192 ITR 165(Kar) and Arvind Investment Sp.Ltd in ITA No.962/Kol/2016 dated 7.2.2018.In these decisions it was held that when the borrowings were made in the earlier years, department could not take a different stand during the year when they accepted the borrowings being used for business purposes in the earlier years. It is Page |9 ITA No. 3494 &3495/Mum/2025 A.Y. 2013-14& 2014-15 Kanakia Spaces Private Limited further contended that following the decision of the Hon'ble Bombay High Court in the case of CIT v. Reliance Utilities P. Ltd. (313 ITR 340) and also decision of the Hon'ble Supreme Court in the case of CIT v. Reliance Industries Ltd. (410 ITR 466), it can be said that no disallowance of interest can be made. In fact, the Assessing Officer himself has taken this view in A.Y. 2012-13. It is submitted that the assessee has sufficient own fund (opening as well as closing) during the year under consideration to cover the advances of Rs. 13.17 cr. Following details of own fund could be ascertained from the financials as on 31.03.2013;
S.No. Nature of fund Amount as on Amount as on
01.04.2012 31.03.2013
(Rs. in cr.) (Rs. in cr.)
1 Share capital 12.59 12.59
2 General reserves 9.73 9.73
3 Surplus in statement of profit & loss 117.78 136.15
4 Non-interest-bearing fund (short-term 45.74 86.95
borrowing)
5 Total 185.84 245.42
6.6 It is claimed that none of the interest-free advances of Rs. 13.17 cr. were granted during the year and, hence, availability of own fund during the year, and for that matter one-to-one nexus during the year, is not relevant and purely academic. In any case, it is an admitted position before the A.O. that the interest-free advances of Rs. 13.17 cr. were made in the earlier years and, hence, there was no allegation of diversion of the borrowed fund in the current year. In any case, the assessee has got mixed P a g e | 10 ITA No. 3494 &3495/Mum/2025 A.Y. 2013-14& 2014-15 Kanakia Spaces Private Limited funds and, hence, it is impossible to ascertain one-to-one nexus. The assessee has receipts from business income, rental income, interest income, interest-free loans received and payments on account of business expenditure, business advances, interest bearing loans given, interest-free advances given etc. Further, the transactions are voluminous and very frequent. Further, the assessee is not having bank statements or ledger accounts for the years during which loans were granted as the period is more than 15 years old. It would also be relevant to note that in the current year the interest-bearing loans received have reduced as compared to last year, which is evident from the following.
S. Nature of borrowing Amount as on Amount as on
No. 31.03.2012 (Rs. in 31.03.2013 (Rs. in
crores) crores)
1 Long-term borrowing 477.93 259.97
2 Current maturity of long-term 2.71 5.80
borrowing
3 Interest-bearing fund (short-term 124.00 224.28
borrowing)
Total 604.64 490.05
7. We have carefully considered the above facts and find no infirmity in the appellate order. The ld.CIT(A) has duly analysed the Balance Sheet to demonstrate that the assessee was having more than enough surplus fund available for advancing such interest free loans which were quite negligible qua the availability of non-interest bearing surplus funds in the form of Share capital and Reserves and Surplus. In the case of Reliance Utilities & Power Ltd. (2009) 313 ITR 340 (Bom), it was held by the hon'ble P a g e | 11 ITA No. 3494 &3495/Mum/2025 A.Y. 2013-14& 2014-15 Kanakia Spaces Private Limited Court held that if there are fund available both interest free and interest bearing, then a presumption arise that investment were out of interest free funds generated or available with the assessee. If the interest free funds were sufficient to meet the investment no disallowance of interest paid on borrowed funds would be necessary. Once such presumption is established claim of interest was allowable.We further find that, the assessee has paid the above advance out of mixed funds, being share capital and reserves and also borrowed funds. It is a well-established principle of law by the decision of the Hon'ble Supreme Court in the case of CIT v. Reliance Industries Ltd. (2019) 410 ITR 466 (SC) wherein it has been clearly held that, if the advances were given out of mixed funds, then the presumption is that the advances were given out of own funds and the question of disallowance of interest under Section 36(1)(iii) of the Act does not arise. A similar view has been taken in Sri Rama Agri Genetics (India) Private Limited by the ITAT, Chennai Bench in the case of M/s. Thiruvalluvar Textiles Pvt. Ltd. Vs. ACIT. (ITA No.1734/Chny/2025 dt. 04.11.2025). Since the assessee has advanced the amounts in the ordinary course of business and further proved that the said advances have been paid out of mixed funds, in our considered view, the question of disallowance of interest on the said advances does not arise.
P a g e | 12 ITA No. 3494 &3495/Mum/2025 A.Y. 2013-14& 2014-15 Kanakia Spaces Private Limited 7.1 Moreover, we also concur with the contentions of the ld.AR that the issue is already been decided in favour of the assessee by the AO in AY 2012-13 while giving effect to the direction given by the ITAT on similar facts and circumstances of the case. The contentions that all such loans were advanced in the previous assessment years wherein no disallowance has been made has not been controverted by the Revenue. Considering all such facts on record, we uphold the decision of the ld.CIT(A) and dismiss the grounds of appeal of the Revenue.
8. In the result, appeal of the Revenue is dismissed.
9. ITA No.3495/MUM/2025 (AY 2014-15)
10. Grounds of appeal are as under:-
1. "On the facts and in the circumstances of the case and in law, Ld.CIT(A) erred in directing the AO to delete the addition made u/s 36(1)(iii) of Rs.2,23,67,733/-
without properly appreciating the facts that assessee company failed to prove that interest expenses claimed have been utilized wholly and exclusively for its business purpose?
2. "On the facts and in the circumstance of the case and in law the Ld. CIT(A) erred in relying the order of AO for the A.Y.2012-13, without appreciating the facts that every assessment year is different assessment year and Principle of res-judicata is not applicable in income tax proceedings?"
11. Facts of the case are that the present appeal has been filed by the Revenue against the order passed by CIT(A) wherein, the disallowance of Rs. 2,23,93,835/- made by the AO u/s 36(1)(iii) of the Act has been deleted.
The assessee filed its return of income on 27.11.2014 declaring total income P a g e | 13 ITA No. 3494 &3495/Mum/2025 A.Y. 2013-14& 2014-15 Kanakia Spaces Private Limited at Rs. 7,84,22,310/-. Thereafter, assessment was completed u/s. 143(3) of the Act and the income was determined at Rs. 10,37,12,640/- wherein a disallowance of interest of Rs. 2,23,67,733/- u/s. 36(1) (iii) of the Act was made on account of interest-free loans advanced to various parties Aggrieved by the assessment order, the assessee had preferred an appeal before the CIT(A) who held that during the year consideration, the assessee was having sufficient own funds in order to advance friendly loans to various parties. After relying on the decision of the Hon'ble Bombay High Court in the case of CTT Vs Reliance Utilities and Power Ltd. (313 ITR 340) (PBP 109-114) the said disallowance was deleted.
12. We find that all the grounds are similar on identical facts as in the appeal for YA 2014-15 barring figurative difference. Here also the ld.CIT(A) deleted the addition in the light of the decision of the AO in AY 2012-13 while giving effect to the appellate order passed by the ITAT. He analysed the Balance Sheet figures to conclude that the assessee had sufficient surplus fund. Moreover, the impugned loans were advanced in the previous assessment years wherein no disallowance was made. The facts are identical as also the contentions of the Revenue and the ld.AR as made in the appeal in ITA No.3494/Mum/2025.
P a g e | 14 ITA No. 3494 &3495/Mum/2025 A.Y. 2013-14& 2014-15 Kanakia Spaces Private Limited 12.1 Considering all such facts on record, as the decision rendered by us in the above appeal as per para 7.1 above apply mutatis mutandis to the instant appeal as well ,we uphold the decision of the ld.CIT(A) and dismiss the grounds of appeal of the Revenue.
13. In the result, appeal of the Revenue is dismissed.
14. In the result, both the aforesaid appeals of the Revenue are dismissed.
Order pronounced in the open court on 17/03/2026.
Sd/- Sd/- NARENDER KUMAR CHOUDHRY PRABHASH SHANKAR (न्यातयक सदस्य /JUDICIAL MEMBER) (ले खाकार सदस्य /ACCOUNTANT MEMBER) Place: मुं बई/Mumbai दिनाुं क /Date 17.03.2026 Lubhna Shaikh / Steno
आदे श की प्रतितलतप अग्रे तिि/Copy of the Order forwarded to :
1. अपीलार्थी / The Appellant
2. प्रत्यर्थी / The Respondent.
3. आयकर आयक्त / CIT
4. दिभागीय प्रदिदनदि, आयकर अपीलीय अदिकरण DR, ITAT, Mumbai
5. गार्ड फाईल / Guard file.
सत्यादपि प्रदि //True Copy// आदे शानु सार/ BY ORDER, उप/सहायक पं जीकार (Dy./Asstt. Registrar) आयकर अपीलीय अतिकरण/ ITAT, Bench, Mumbai.