2018 (5) TMI 743 - AT - Income Tax

Disallowance being interest claimed u/s 36(1)(iii) - AO was of the view that the loan taken from Allahabad Bank was diverted for making investment by way of share application money and as such investment is not related in any way to the business activity of the assessee company - Held that - The assessee has acquired these shares to gain controlling interest in a competitor company. It is of the considered opinion that the disallowance made is bad in law. Accordingly delete the disallowance made by the Assessing Officer as affirmed by the ld. CIT(A) and direct the Assessing Officer to allow the claim of the assessee u/s 36(1)(iii) of the Act. See Caldern Pharmaceuticals Ltd. vs. CIT 2003 (9) TMI 53 - CALCUTTA High Court . - Decided in favour of assessee.

Summary

Issues:
1. Disallowance of interest claimed under section 36(1)(iii) of the Income Tax Act, 1961.

Analysis:
The appeal was filed by the assessee against the order of the Commissioner of Income Tax (Appeals) concerning the disallowance of interest claimed under section 36(1)(iii) of the Income Tax Act for Assessment Year 2012-13. The assessee, a Private Limited Company engaged in cold storage and trading in potatoes, had taken a loan from Allahabad Bank and invested in another company, M/s. Bhaktimoyee Cold Storage Pvt. Ltd. The Assessing Officer disallowed the interest amount of ?5,64,480, stating that the investment was unrelated to the assessee's business activity. The Commissioner upheld this decision, citing the proviso to Section 36(1)(iii) introduced by the Finance Act, 2003. The Commissioner noted the lack of financial details and specific benefits accruing to the assessee from the investment.

Before the Appellate Tribunal, the assessee argued that the investment was strategic due to the proximity of M/s. Bhaktimoyee Cold Storage Pvt. Ltd. to their business and the intention to acquire controlling interest. The Tribunal observed that the investment was made for business purposes, as highlighted by the proviso to Section 36(1)(iii) of the Act. The Tribunal referenced precedents such as the case of M/s. Eicher Motors Ltd. vs. DCIT and the judgment of the Delhi High Court in CIT vs. Tulip Star Hotels Ltd., emphasizing that interest expenditure for acquiring controlling interest in companies is allowable as a business deduction. The Tribunal ruled in favor of the assessee, stating that the disallowance made by the Assessing Officer and upheld by the Commissioner was legally unfounded. Consequently, the Tribunal directed the Assessing Officer to allow the claim of the assessee under section 36(1)(iii) of the Act.

In conclusion, the Tribunal allowed the appeal of the assessee, overturning the disallowance of interest claimed under section 36(1)(iii) of the Income Tax Act for the relevant assessment year. The decision was based on the understanding that the investment in shares was made for business purposes, specifically to gain controlling interest in a competitor company, aligning with legal precedents and the provisions of the Act.

Kolkata, 4th May 2018.