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2019 (7) TMI 741 - AT - Income TaxAllowability of interest on borrowed funds - loan taken for acquisition of share of company having similar business - proof of commercial expediency behind such loan - HELD THAT - In the present case, we find that the assessee acquired shares of DPSC Ltd which is in the similar business to control stake is a commencement of business. Therefore in our opinion, the ratio laid down by in the case of Rajeeva Lochan Kanoria 1994 (2) TMI 42 - CALCUTTA HIGH COURT is applicable to the facts on hand and the assessee is entitled to claim deduction of interest paid on borrowed funds. Further in the case of Divakar Solar System Ltd. 2016 (12) TMI 1079 - ITAT KOLKATA the Coordinate Bench of Calcutta Tribunal held that the interest paid on borrowed capital needs to be allowed as deduction u/s 36(1)(iii) as it is a commercial expediency with a view to expand business and acquiring, controlling interest in subsidiary companies. Allowability of payment of Processing fee for availing loan - the said payment of processing fee is an incidental expenses on obtaining borrowed fund which is a revenue expenditure allowable u/s 37(1) - HELD THAT - Payment of interest on borrowed fund is allowable as deduction u/s 36(1)(iii) and the CIT(A) has rightly held, the payment of processing fee to obtain such loan is an incidental expenses, since we have allowed the payment of interest as an allowable deduction, the processing fee paid on the said loan is also an allowable expenditure u/s 37(1) - Ground No.2 raised by the Revenue is dismissed.
Issues Involved:
1. Deletion of additions made by the Assessing Officer on account of payment of interest on borrowed funds. 2. Deletion of processing fee paid on availing loan. Issue-wise Detailed Analysis: 1. Deletion of Additions Made by the Assessing Officer on Account of Payment of Interest on Borrowed Funds: The primary issue raised by the Revenue was the deletion by the CIT(A) of the additions made by the Assessing Officer (AO) concerning the payment of interest on borrowed funds. The AO had disallowed the interest on the grounds that the assessee did not earn any income during the relevant year and had not started any business activities as of 31.03.2010. The AO argued that the interest paid on the borrowed loans, used to acquire shares of DPSC Ltd., was not related to any business activity and was capital in nature. The AO also questioned the validity of the share purchase agreement and the absence of business activities by the assessee during the relevant year. In contrast, the CIT(A) allowed the deduction, holding that the Memorandum of Association permitted the assessee to acquire shares of other companies in a similar line of business. The CIT(A) relied on several judicial precedents, including the Hon’ble High Court of Calcutta in the case of CIT vs. Rajeeva Lochan Kanoria, which established that making strategic investments is a commercial transaction amounting to the commencement of business. The CIT(A) concluded that the interest on borrowed funds utilized for purchasing shares of a subsidiary company is allowable as a deduction under section 36(1)(iii) of the Income Tax Act. Upon appeal, the Tribunal upheld the CIT(A)’s decision, agreeing that the assessee’s acquisition of shares in DPSC Ltd., a company engaged in similar business activities, amounted to the commencement of business. The Tribunal found that the CIT(A) correctly applied the legal principles and judicial precedents, thereby justifying the allowance of the interest deduction. 2. Deletion of Processing Fee Paid on Availing Loan: The second issue was the deletion of the processing fee paid on availing the loan. The AO had disallowed the processing fee, arguing it was not related to any business activity. However, the CIT(A) allowed the deduction, stating that the processing fee is a revenue expenditure allowable under section 37(1) of the Income Tax Act. The CIT(A) reasoned that since the loan was utilized for purchasing shares of a subsidiary company engaged in a similar line of business, the incidental expenses on the loan are revenue expenditures. The Tribunal upheld the CIT(A)’s decision, agreeing that the processing fee paid on the loan is an incidental expense and allowable as a deduction under section 37(1) of the Act. The Tribunal found no infirmity in the CIT(A)’s order and justified the allowance of the processing fee as a deduction. Conclusion: The Tribunal dismissed the Revenue’s appeal, affirming the CIT(A)’s decision to allow the deductions for the interest on borrowed funds and the processing fee paid on availing the loan. The Tribunal agreed with the CIT(A)’s interpretation of the legal provisions and judicial precedents, thereby supporting the view that the assessee’s actions amounted to the commencement of business and the related expenses were allowable as deductions.
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