2011 (6) TMI 912 - HC - Income Tax

Deduction u/s 36(1)(iii) - Interest on Loan taken for Investment - The assessee took a loan and invested it in subsidiary company, undisputedly, as an investment - Assessee claimed a deduction u/s 36(1)(iii) in respect of the interest payable by it to the bank - AO held that since the investment is out of borrowed funds for business, the proportionate interest is to be disallowed. HELD THAT - ITAT found that the assessee had invested the amount in question in subsidiary company, for the acquisition of its shares i.e. to have a control over majority shares but not to earn dividend on interest. Before ITAT, it was not disputed that such an investment is an integral part of the business. In these circumstances, ITAT, therefore, came to the conclusion that the assessee is entitled to the amount as deduction under Section 36(1)(iii). Assessee's submission that amount paid to subsidiary company must be treated as loan is not acceptable since the assessee has nowhere stated that the amount has been paid to subsidiary company must be treated as loan neither there is anything to support the contention that the assessee is now claiming that the amount be added as an interest receivable on bad debts. We find that the reasoning of the ITAT that the overdraft was not operated only for investing in the shares of subsidiary company and the fact that it was also used for investment in the shares of the subsidiary company to have control over that company and, therefore, the element of interest paid on the overdraft was not susceptible of bifurcation and therefore, the assessee is entitled to the deduction under Section 36(1)(iii) is correct and deserves to be accepted. In this result, we hold that ITAT was right in deleting the addition, thus the question is answered in favour of the assessee.

Summary

Issues:
1. Deduction under Section 80IA without deducting depreciation under Section 32
2. Deletion of interest addition related to borrowings for investment in a sister-concern
3. Allowance of bad debts written off without verifying conditions under Section 36

Issue 1: Deduction under Section 80IA without deducting depreciation under Section 32:
The High Court admitted the appeal based on the question of whether the ITAT was correct in directing the Assessing Officer to allow a deduction under Section 80IA without deducting depreciation under Section 32 of the Income Tax Act. The Court noted that this question had been decided against the assessee in a previous judgment. Additionally, the Court remanded the matter to the Assessing Officer to verify if the amount claimed as bad debts fulfilled the conditions under Section 36(1)(vii) of the Income-tax Act.

Issue 2: Deletion of interest addition related to borrowings for investment in a sister-concern:
The main issue revolved around the deletion of an addition of interest amounting to &8377; 19,73,333 related to borrowings for investing in a sister-concern. The assessee had invested borrowed funds into a subsidiary company, Phil Photo Ltd., without receiving any dividends. The Assessing Officer disallowed the interest amount, treating it as an investment in the sister-concern. However, the ITAT found that the investment was an integral part of the business, allowing the deduction under Section 36(1)(iii) of the Income-tax Act. The Court upheld the ITAT's decision, stating that the interest paid on borrowings utilized for purchasing shares for business purposes was allowable as a deduction.

Issue 3: Allowance of bad debts written off without verifying conditions under Section 36:
The Court examined whether the ITAT was justified in allowing the claim of bad debts written off without verifying if they fulfilled the conditions under Section 36(1)(vii) of the Income-tax Act. The Commissioner and the Commissioner of Income Tax (Appeals) had confirmed the disallowance of the claim. However, the ITAT found that the investment in the subsidiary company was an integral part of the business, leading to the allowance of the deduction under Section 36(1)(iii). The Court agreed with the ITAT's decision and held in favor of the assessee, deleting the addition of &8377; 19,73,333.

In conclusion, the High Court upheld the ITAT's decision to delete the interest addition related to borrowings for investment in the sister-concern, ruling in favor of the assessee and against the Revenue.