2020 (1) TMI 406 - HC - Income Tax

Claim of interest on borrowed funds utilised for investment in shares of CESC - expenditure incurred wholly and exclusively for the purpose of business - Treated as business expenditure on the ground that investment is one of the objectives of the assessee company - HELD THAT - As decided in Commissioner of Income Tax (Vs) R.P.G.Transmissions Limited (later on name changed to M/s.KEC International Ltd 2014 (2) TMI 238 - MADRAS HIGH COURT tribunal for allowing the assessee s claim of interest paid on borrowed capital. The appellate authority and the Tribunal found that the investment made in shares by the assessee by utilising borrowed capital was for strategic business purposes because the companies were promoted as special purpose companies to strengthen and promote its existing business by combining different business segments and therefore the claim was fully allowable under Section 36(1)(iii). We also found that the Revenue did not adduce any material to show that the borrowed capital was utilised by the assessee for non-business purposes. The appellate authority in our considered view was correct in allowing the claim of the assessee and deleting the disallowance made by the assessing authority. We also find that the Tribunal in correct appreciation of the matter had in turn confirmed the finding of the appellate authority. - Decided in favour of the assessee

Summary

Issues:
1. Reopening of assessment legality
2. License fee as business expenditure
3. Interest on borrowed funds for investment in shares as business expenditure

Analysis:

Issue 1: Reopening of assessment legality
The Revenue filed an appeal against the order of the Income Tax Appellate Tribunal for the Assessment Year 2004-05. The substantial question of law raised was whether the Tribunal was correct in holding the reopening of the assessment as illegal. The respondent's counsel referred to a previous case involving the same assessee to support their argument. The judgment of the Coordinate Bench highlighted the permissible deductions under Section 57 and the nexus between the business of the assessee and investments made in shares. The Tribunal's decision was upheld based on the grounds that the investment was for strategic business purposes. The Court dismissed the appeal, stating that the controversy had already been settled in a previous judgment.

Issue 2: License fee as business expenditure
Another substantial question of law was whether the license fee paid by the assessee for specific years was a business expenditure. The Tribunal had allowed the claim of interest on borrowed funds utilized for investment in shares as a business expenditure. The judgment emphasized that the investment in shares was for strategic business purposes, strengthening and promoting existing business segments. The Court found no reason to interfere with the Tribunal's decision, ruling in favor of the assessee.

Issue 3: Interest on borrowed funds for investment in shares as business expenditure
The Tribunal's decision to allow the claim of interest on borrowed funds for investment in shares as a business expenditure was based on the strategic business purposes behind the investments. The Court concurred with this finding, stating that there was no fresh investment in the present assessment year. The judgment noted that the controversy had been previously settled by a judgment of the Coordinate Bench. Consequently, the Court dismissed the appeal, upholding the Tribunal's decision and ruling in favor of the assessee on all substantial questions of law.