ET OnlineLady took loan to invest in venture capital funds (VCF) and claimed Rs 1.49 crore as interest deduction on this loan; tax dept denied this claim; she wins case in ITAT Mumbai for this reason (AI generated representative image)
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A lady from Juhu, Mumbai, submitted her income tax return (ITR) and claimed an interest deduction of Rs 1.49 crore after taking out a loan from Deutsche Bank.
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She said this loan was used by her for investing in Venture Capital Funds (VCFs). She also claimed that the income from these investments in VCFs were reported in her ITR under the head “Income from other sources”. This is where the tax dispute began between her and the assessing officer.
The Assessing Officer (AO) rejected the deduction on the ground that she failed to establish a direct nexus between the borrowed funds and the investments yielding taxable income. This rejection was later upheld by the Commissioner of Income-tax (Appeals) [CIT(A)], leading her to file an appeal with the Income Tax Appellate Tribunal (ITAT) Mumbai.
On March 18, 2026, ITAT Mumbai allowed her appeal on the ground that interest paid on loan for the purpose of earning income is allowable as tax deduction under Section 57.
Summary of the judgement
Chartered Accountant Suresh Surana says that the present case pertains to Assessment Year 2020–21, focusing mainly on whether the interest expenses claimed under Section 57 of the Income-tax Act, 1961.
The Income Tax Appellate Tribunal (ITAT), Mumbai examined the facts, including financial statements and past assessment records.
The tribunal observed that the loan had been availed by her in earlier years (FY 2016–17), specifically for investment purposes, and the corresponding interest expenditure had been allowed as a deduction in those years under scrutiny assessments.
The ITAT Mumbai further noted that similar claims of interest deduction had consistently been accepted by the tax department in subsequent assessment years as well, without any variation in facts or circumstances.
Additionally, the ITAT Mumbai took cognisance of the increase in her investments during the relevant period, which exceeded the quantum of the loan, thereby substantiating the utilisation of borrowed funds for investment purposes.
The tribunal held that once the interest expenditure had been accepted as allowable in earlier years on identical facts, the tax department could not take a contrary position in the year under consideration without any change in circumstances.
Relying on the well-established principle of consistency, as upheld in judicial precedents, the ITAT Mumbai concluded that the rejection was not justified. Further, it turned down the Income Tax Department‘s contention regarding lack of nexus by observing that the overall investment pattern sufficiently demonstrated the linkage between the borrowed funds and income-generating investments.
Accordingly, the ITAT Mumbai allowed her appeal and directed deletion of the disallowance, holding that the interest expenditure was incurred wholly and exclusively for the purpose of earning income chargeable under the head “Income from other sources” and was thus allowable under Section 57.
The tribunal also allowed the deduction of forecasting expenses, treating them as business related and not personal in nature.
Surana says that she won the case primarily due to substantiation of the purpose of borrowing, consistent acceptance of similar claims in earlier years, and application of the principle of consistency, which prevented the tax department from taking a divergent stand in the absence of any change in facts.
What was the primary reason for her success in this case?
S. Vasudevan, Executive Partner, Lakshmikumaran and Sridharan attorneys, explained to ET Wealth Online as to why she won the case:
In this case, she had obtained a loan for investing in VCFs which had resulted in income from other sources chargeable to tax under Section 56 of the Income Tax Act. The interest payable on such loans was claimed as a deduction under Section 57.
However, the said interest expenditure was disallowed by the assessing officer on the ground of absence of nexus of the aforementioned loan with the investments made by the Assessee. The said disallowance was upheld by the Commissioner of Income-tax (Appeals).
It is pertinent to note that income arising from investments in VCF typically accrues in the form of capital gains or dividend income. In the present case, while income was offered to tax by the Assessee under the head “Income from Other Sources”, the precise nature of the income derived by the Assessee from VCFs has not been specifically particularised in the facts of the case.
Accordingly, it is reasonable to proceed on the basis that such income was in the nature of dividend income earned by the Assessee since it was offered to tax under Section 56 of the Act.
Consequently, the interest expenditure incurred in relation thereto was duly claimed as a deduction under Section 57.
The Income Tax Appellate Tribunal, Mumbai allowed the Assessee’s appeal primarily on the ground that the incremental increase in the investments made by the Assessee during the relevant financial year exceeded the quantum of the loan obtained during such financial year which substantiated that the loan proceeds were utilised for the purpose of making such investments. Thus, interest deduction under section 57 for earning income from the investments in VCFs was permissible.
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