Interest can’t be disallowed if investment is made from mixed funds (presuming sufficient own funds) – Bom HC

CIT v M/s Mahanagar Gas Limited [Income Tax Appeal No. 1978 of 2011] Dated : June 10, 2013 – Bombay High Court


Assessee filed its return of income for assessment year 2004-05 declaring a total income of Rs.100.76 crores. The Assessing officer noticed that the assessee had borrowed a sum of Rs.30 crores during the year and had paid total interest of Rs.613.26 lacs on the same. During the year, the assessee had invested an amount of Rs.4147 lacs in mutual funds. The Assessing Officer held that the borrowed funds were utilised for the purpose of investment in mutual funds and disallowed expenditure on account of interest under Section 36(1) (iii) on the ground that the above interest was not attributable to business carried on by the assessee.

In appeal, the CIT (Appeals) found that the assessee had invested its own funds for investment in mutual funds and not from the External Commercial Borrowings (ECB). The loan of Rs.30 crores taken as ECB was utilized to repay a loan taken from Indian Oil Board of Rs.30 crores so as to take advantage of lesser rate of interest on ECB.

Tribunal’s findings:

The Tribunal upheld that finding of fact arrived at by the CIT (Appeals) and held that no part of the borrowed funds of Rs.30 crores was utilized to make the investment in mutual funds. Further reliance was placed upon the decision of this Court in the matter of CIT vs. Reliance Utility and Powers Limited reported in 313 ITR 340 wherein it has been held that where interest free funds were available with the assessee, the presumption has to be that investments have been made out of such interest free funds and not out of borrowed funds. In the above view, the appeal of the revenue was dismissed.

High Court’s order:

  • Both CIT (Appeals) and the Tribunal have arrived at a concurrent finding of fact that the investment in mutual funds was made by the assessee out of its own funds and not out of interest bearing borrowed funds.
  • The same is also covered by the decision of this Court in the matter of Reliance Utility (supra) in favour of the assessee.

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