2019 (1) TMI 41 - HC - Income Tax

Addition u/s 14A or 37 - strategic investments made by the respondent company in its subsidiary companies - Held that - We notice that the assessee had made investments in its subsidiary companies and associated companies which were specially constituted as special purpose vehicle to execute the projects awarded by the local authorities. AO was of the opinion that the interest on the funds borrowed for making such investments would not be an allowable expenditure. The Tribunal relied upon and referred to the judgment of CIT Vs. Spencer & Co. Ltd. 2014 (2) TMI 237 - MADRAS HIGH COURT and held that the interest on the borrowed capital were investments in shares utilizing borrowed capital for strategic business purpose, was an allowable expenditure. Without so stating, the Tribunal was essentially applying the principles laid down by the Supreme Court in case of S.A. Builders Ltd. Vs. CIT 2006 (12) TMI 82 - SUPREME COURT

Summary

Issues:
1. Whether investments made by the respondent company in its subsidiary companies are disallowable under Section 14A or 37 of the Act?
2. Applicability of Section 14A and Section 37 in cases of capital investments.

Analysis:

Issue 1:
The primary issue in this case revolved around the disallowance of strategic investments made by the respondent company in its subsidiary companies under Section 14A or 37 of the Act. The Assessing Officer contended that the interest on funds borrowed for these investments should not be considered as an allowable expenditure. However, the Tribunal, drawing reference from the judgment of the Madras High Court in CIT Vs. Spencer & Co. Ltd., held that interest on borrowed capital used for strategic business purposes, such as investments in shares, could be considered as an allowable expenditure. The Tribunal's decision was based on the principles established by the Supreme Court in the case of S.A. Builders Ltd. Vs. CIT, thus concluding that no question of law arose in this regard. As a result, the appeal was narrowed down to focus on a single question.

Issue 2:
Additionally, the Revenue raised a question regarding the applicability of Section 14A and Section 37 in cases involving capital investments. The Tribunal's decision was based on the premise that the provisions of Section 14A and Section 37 may not be directly applicable when capital investments are made. The controversy surrounding this issue was not accurately reflected in the framed question. Upon reviewing the orders and arguments presented by the learned Counsel for the parties, it was established that the investments made by the assessee in subsidiary and associated companies, acting as special purpose vehicles for projects awarded by local authorities, were crucial for strategic business purposes. Consequently, the Tribunal's interpretation aligned with the principles laid down by the Supreme Court in S.A. Builders Ltd. Vs. CIT, leading to the conclusion that the provisions of Section 14A and Section 37 did not directly apply in cases involving capital investments.

In summary, the judgment clarified the treatment of investments made by the respondent company in its subsidiary companies, emphasizing the strategic nature of these investments and their alignment with business objectives. The Tribunal's decision, rooted in established legal principles, upheld the allowability of interest on borrowed capital used for such investments, while also highlighting the nuanced application of tax provisions concerning capital investments.