Section 36(1)(iii) Interest on Slump Sale Borrowings Allowable | Ahmedabad ITAT

The Income Tax Appellate Tribunal (Ahmedabad Bench) has delivered a significant ruling affirming the allowability of interest expenditure on borrowings acquired as part of a slump sale transaction, holding that such interest is deductible under Section 36(1)(iii) of the Income-tax Act, 1961. The Tribunal rejected the Revenue's contention that the transactions amounted to a colourable device to avoid tax, and upheld the principle of consistency in tax treatment across assessment years.

Background & Facts

The Genesis of the Transaction

The assessee, Jio Platforms Limited, acquired two business undertakings from group companies - Reliance Projects and Property Management Services Ltd. (RPPMSL) and Reliance Payment Solutions Limited (RPSL) - through slump sale agreements effective from 16.03.2020 and 19.03.2020, respectively. The transactions were part of a corporate restructuring within the Reliance Industries Limited (RIL) group, where digital platform assets were consolidated under a single entity.

The assets and liabilities transferred included intangible assets valued at Rs. 1,29,92,97,04,630 and borrowings of Rs. 13,915 crores (Rs. 13,031 crores from RPPMSL and Rs. 1,043 crores from RPSL). The assessee paid a nominal net consideration of Rs. 45 crores and Rs. 70 crores to RPPMSL and RPSL, respectively, as the liabilities assumed far exceeded the asset values.

Key Facts

• The slump sale transactions were examined and accepted by the Assessing Officer (AO) in Assessment Year (AY) 2020-21, where the assessee claimed depreciation of Rs. 16,24,12,13,078 on intangible assets, which was allowed after scrutiny.
• The assessee claimed interest expenditure of Rs. 2,82,95,09,446 for AY 2021-22, primarily comprising Rs. 2,80,10,41,096 paid to RIL, the holding company, on borrowings acquired in the slump sale.
• The AO disallowed the interest expenditure in AY 2021-22, treating it as a colourable device to avoid tax, and relying on Section 40A(2)(b) to suggest excessive or unreasonable expenditure.
• The Commissioner of Income-tax (Appeals) [CIT(A)] upheld the disallowance, stating that the assessee failed to prove the specific use of the loan for asset development or the linkage between the borrowings and the intangible assets under development (IAUD).

Procedural History

• AY 2020-21: The assessee filed its return claiming depreciation on intangible assets acquired via slump sale. The case was selected for scrutiny, and the AO completed the assessment under Section 143(3), accepting the assessee's claim after detailed examination.
• AY 2021-22: The assessee claimed interest expenditure on the same borrowings. The AO disallowed the claim, leading to an appeal before the CIT(A).
• CIT(A) Order (16.08.2024): The CIT(A) upheld the disallowance, prompting the assessee to file an appeal before the Ahmedabad ITAT.
• ITAT Order (22.07.2026): The Tribunal allowed the assessee's appeal, setting aside the disallowance and holding that the interest expenditure is deductible under Section 36(1)(iii).

Relief Sought

The assessee sought allowance of the interest expenditure of Rs. 2,82,95,09,446, contending that the borrowings were acquired as part of the slump sale and were used for the business operations of the acquired undertakings. The Revenue sought to uphold the disallowance, arguing that the transactions lacked commercial substance and were designed to claim excessive deductions.

The Legal Issue

The central question was whether Section 36(1)(iii) of the Income-tax Act permits the deduction of interest expenditure on borrowings acquired as part of a slump sale transaction, where the borrowings were assumed as part of the liabilities of the acquired undertaking and used for its business operations. The Tribunal also examined whether the principle of res judicata applies to tax matters, given that the AO had accepted the slump sale transactions and the corresponding borrowings in the preceding assessment year.

Arguments Presented

For the Appellant (Jio Platforms Limited)

The assessee argued that:

• The borrowings were acquired as part of the slump sale and were used for the business operations of the acquired undertakings. The AO had accepted the slump sale transactions and the corresponding borrowings in AY 2020-21, and there was no change in facts or law in AY 2021-22.
• The interest expenditure was offered to tax by RIL, the recipient of the interest, and there was no tax arbitrage or loss to the Revenue.
• The AO's reliance on Section 40A(2)(b) was misplaced, as the section requires a finding of excessive or unreasonable expenditure, which the AO failed to establish.
• The CIT(A)'s finding that the assessee failed to prove the specific use of the loan for asset development was incorrect, as the borrowings were acquired as part of the undertaking and were inherently linked to its business operations.

The assessee relied on judicial precedents, including PCIT v. Zydus Wellness Ltd. [2017] 81 taxmann.com 159 (Gujarat) and Bodal Chemicals Ltd. v. ACIT [2019] 112 taxmann.com 217, to argue that the principle of consistency requires the Revenue to accept the assessee's claim in subsequent years if no change in facts or law is established.

For the Respondent (Revenue)

The Revenue argued that:

• The transactions were part of a colourable device to avoid tax, involving multiple layers of slump sales and revaluations to claim excessive depreciation and interest deductions.
• The assessee failed to prove the specific use of the loan for asset development or the linkage between the borrowings and the intangible assets.
• The principle of res judicata does not apply to tax matters, and the Revenue was justified in re-examining the claim in AY 2021-22.
• The AO's disallowance was justified under Section 36(1)(iii), as the borrowings were not used for the purpose of the business but were merely capitalized under IAUD.

The Court's Analysis

The Tribunal examined the allowability of the interest expenditure under Section 36(1)(iii), which permits the deduction of interest on borrowings used for the purpose of the business or profession. The Tribunal noted that the borrowings were acquired as part of the slump sale and were used for the business operations of the acquired undertakings. The AO had accepted the slump sale transactions and the corresponding borrowings in AY 2020-21, and there was no change in facts or law in AY 2021-22.

"The Assessing Officer himself had allowed the claim of revenue deduction in respect of the interest expenditure u/s 36(1)(iii) on the aforesaid borrowings in AY 2020-21 after examining the relevant facts and material placed on record. Therefore, once the borrowings and the corresponding interest expenditure have been accepted in the year in which the transaction originated, the same cannot be selectively re-examined or disturbed in the subsequent year in the absence of any change in facts or law."

The Tribunal rejected the Revenue's contention that the transactions amounted to a colourable device, stating that the AO had accepted the transactions in the preceding assessment year and there was no evidence to suggest manipulation or alteration in the current year. The Tribunal also held that the principle of res judicata does not apply to tax matters, but consistency in tax treatment is required where no change in facts or law is established.

"In view of the detailed factual submissions of the learned counsel, we agree with the contention of the Assessee as far as this issue is concerned. In view of the above, no disallowance u/s 36(1)(iii) is called for and thus, the order of CIT(A) is set aside on this issue."

The Tribunal further held that the AO's reliance on Section 40A(2)(b) was misplaced, as the section requires a finding of excessive or unreasonable expenditure, which the AO failed to establish. The Tribunal also noted that the interest expenditure was offered to tax by RIL, and there was no tax arbitrage or loss to the Revenue.

The Verdict

The Ahmedabad ITAT allowed the assessee's appeal in part. The Tribunal set aside the CIT(A)'s order disallowing the interest expenditure of Rs. 2,82,95,09,446 and held that the interest expenditure is deductible under Section 36(1)(iii) of the Income-tax Act, 1961. The Tribunal directed the AO to allow the assessee's claim of interest expenditure for AY 2021-22. The Revenue's appeal was dismissed, and the assessee's appeal was allowed.

What This Means For Similar Cases

Consistency in Tax Treatment Across Assessment Years

• Taxpayers can rely on the principle of consistency where no change in facts or law is established, even though res judicata does not apply to tax matters.
• The Revenue cannot selectively re-examine or disturb a claim accepted in a preceding assessment year without evidence of a change in facts or law.

Allowability of Interest on Borrowings Acquired in Slump Sale

• Interest on borrowings acquired as part of a slump sale is deductible under Section 36(1)(iii) if the borrowings are used for the purpose of the business or profession.
• The AO cannot disallow such interest solely on the ground that the transactions were part of a corporate restructuring or involved related parties, unless excessive or unreasonable expenditure is established under Section 40A(2)(b).

Documentation and Linkage Between Borrowings and Assets

• Taxpayers must maintain documentation to establish the linkage between borrowings and the assets or business operations for which the borrowings were used.
• The AO's disallowance cannot be sustained if the taxpayer demonstrates that the borrowings were acquired as part of the slump sale and were used for the business operations of the acquired undertaking.