2016 (2) TMI 401 - AT - Income Tax

Addition on account of interest - capital expenditure or revenue expenditure - Held that - We are in agreement with the ld. CIT (A) that the expenditure is to be treated as revenue in nature because the assessee is an investment company. We take note that assessee-company is a joint venture entity between AXA India Holdings and Bharti Enterprises (Holdings) Pvt. Ltd. and the business of the assessee company is to make strategic investments in the business entities. We find that during the year under consideration, the assessee has invested a sum of ₹ 57,80,03,400/- for subscribing the equity shares of Bharti AXA Life and this fact was duly reported in the Audited Financial Statement of the assessee company at Schedule-S in the balance sheet. By doing this activity, it has commenced its business activities and has made investments during the period, therefore, the findings of the Assessing Officer that assessee has not commenced its business activities is erroneous and not based on proper appreciation of facts as held by ld. CIT (A). We further find that the amount of interest claimed by the assessee is in respect of capital borrowed for the purpose of business or profession carried out by the assessee company during the year, therefore, the interest paid on the capital borrowed for business purposes has to be an allowable business expenditure and the same cannot be denied. We also find that it is very specifically mentioned in the objects of the MOU that assessee company is to make strategic investment in the business entities and accordingly, it has made strategic investment in Bharti AXA Insurance Co. Ltd. Therefore, we find that the interest expenditure incurred by the assessee is for business purposes. And also, this fact is acknowledged by the AO himself in the assessment order wherein he has stated that assessee has parked its investible funds in the equity shares of a closely associated concern . Hence, we find that there was no basis for treating the interest expenditure claimed by the assessee as capital expenditure. - Decided against revenue

Summary

Issues Involved:
1. Deletion of addition on account of interest paid on capital expenses.
2. Allowability of expenses when no business activity was carried out during the year.

Issue-Wise Detailed Analysis:

1. Deletion of Addition on Account of Interest Paid on Capital Expenses:

The revenue appealed against the deletion of Rs. 1,64,53,604/- added by the Assessing Officer (AO) as interest paid on capital expenses. The AO argued that the interest on unsecured loans used for investing in shares of a jointly controlled entity for management control was a capital expenditure. The AO deemed the interest expenses as capital in nature due to the strategic control and close nexus between the assessee and the investee concern, which was not a trade investment for business purposes. The AO completed the assessment under section 143(3) of the Income-tax Act, 1961, and allowed only the audit fee as a mandatory expense.

The Commissioner of Income-tax (Appeals) [CIT(A)] held that the interest expenses were revenue in nature. The CIT(A) noted that the assessee, a joint venture entity, had commenced its business activities by making strategic investments, and the interest on borrowed capital for business purposes should be allowed under section 36(1)(iii) of the Act. The CIT(A) relied on judicial pronouncements, including the case of Commissioner of Income-tax, Panaji Goa v. Phil Corpn. Ltd., which held that interest on borrowed capital for acquiring control over a company is deductible under section 36(1)(iii).

The Tribunal agreed with the CIT(A), stating that the assessee's business was to make strategic investments, and the interest paid on borrowed capital for such investments was a business expenditure. The Tribunal upheld the CIT(A)'s decision, finding no basis for treating the interest expenditure as capital expenditure.

2. Allowability of Expenses When No Business Activity Was Carried Out During the Year:

The AO argued that the assessee had not carried out any business activity during the year except for parking its investible funds in equity shares of a closely associated concern. The AO allowed only the audit fee as a mandatory expense, disallowing other expenses.

The CIT(A) disagreed, stating that the assessee had commenced its business activities by making strategic investments, which was its primary business objective. The CIT(A) held that the interest expenses were for business purposes and should be allowed as revenue expenditure.

The Tribunal supported the CIT(A)'s view, noting that the assessee's business was to make strategic investments, and the interest paid on borrowed capital for such investments was a business expenditure. The Tribunal found that the AO's conclusion that the assessee had not commenced its business activities was erroneous and not based on proper appreciation of facts.

Conclusion:

The Tribunal dismissed the revenue's appeal, upholding the CIT(A)'s decision that the interest expenses were revenue in nature and allowable under section 36(1)(iii) of the Income-tax Act, 1961. The Tribunal found that the assessee had commenced its business activities by making strategic investments, and the interest paid on borrowed capital for such investments was a business expenditure. The Tribunal rejected the AO's view that the interest expenses were capital in nature and that the assessee had not carried out any business activity during the year.