2020 (7) TMI 303 - AT - Income Tax

Disallowance of interest u/s 36(1)(iii) - Investment in the share capital of subsidiary company - HELD THAT - The undisputed fact is that this is not the first year of business of the assessee. It is also not in dispute that the subsidiary companies of the assessee are also engaged in the same business of production, generation, transmission and distribution and supply of electricity. The facts of the case in hand are on stronger footing in as much as in the case in hand, the appellant did not advance any loan to its subsidiaries but has invested in the shares of subsidiary companies. As mentioned elsewhere, subsidiary companies of the appellant are engaged in the same business as that of the assessee which is also evident from the main object clause in the Memorandum of Association. See SA BUILDERS LTD. 2006 (12) TMI 82 - SUPREME COURT Adverting to the facts of the case in hand, the assessee has successfully demonstrated that the investment in shares to subsidiary company was in furtherance of main objects of its business and, therefore, in our considered view, the assessee is very much entitled for claim of interest paid on borrowed capital. We, accordingly, set aside the findings of the CIT(A) and direct the Assessing Officer to delete the addition. - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of interest under Section 36(1)(iii) of the Income Tax Act, 1961.
2. Justification of expenses claimed by the assessee.
3. Utilization of borrowed funds for business purposes.

Issue-Wise Detailed Analysis:

1. Disallowance of Interest under Section 36(1)(iii):

The primary issue in this appeal concerns the disallowance of interest amounting to ?82,51,230/- under Section 36(1)(iii) of the Income Tax Act, 1961. The assessee contends that the interest paid on borrowed capital should be allowed as a deduction since the borrowings were used for business purposes. The assessee argued that the borrowed funds were invested in the share capital of subsidiary companies, which aligns with the business objectives outlined in the Memorandum of Association (MOA). The assessee relied on the Supreme Court judgment in the case of SA Builders vs CIT, which held that interest on borrowed funds used for business purposes, including investments in subsidiaries, is allowable as a deduction.

2. Justification of Expenses Claimed by the Assessee:

The assessee provided a detailed explanation justifying the claim of interest under Section 36(1)(iii). The explanation included the nature of the business, the objectives of the company, and the utilization of funds. The assessee emphasized that the investments in subsidiaries were made to fulfill the business objectives, as stated in the MOA. The assessee also presented a chart showing the inflow and outflow of funds, demonstrating that the borrowed funds were indeed invested in subsidiaries and group companies, and not diverted for non-business purposes.

3. Utilization of Borrowed Funds for Business Purposes:

The Assessing Officer (AO) observed that the borrowings were invested in the share capital of subsidiary companies and concluded that the funds were utilized for non-business purposes. Consequently, the AO disallowed the interest claim under Section 36(1)(iii) and also justified the disallowance under Section 37(1). However, the assessee argued that the investments were made in furtherance of the main business objectives, and thus, the interest should be considered a business expense. The Tribunal noted that the subsidiary companies were engaged in the same business as the assessee and that the investments were made to further the business objectives.

Tribunal's Findings:

The Tribunal considered the arguments and evidence presented by both parties. It observed that the case of SA Builders vs CIT was applicable, as the assessee had a deep interest in its subsidiaries, and the investments were made for business purposes. The Tribunal distinguished the present case from other judicial decisions cited by the Department Representative (DR), noting that those cases involved different facts, such as advances or loans, rather than investments in subsidiaries.

The Tribunal concluded that the assessee had successfully demonstrated that the investments in subsidiary companies were in line with the business objectives. Therefore, the interest paid on borrowed capital was allowable as a deduction under Section 36(1)(iii). The Tribunal set aside the findings of the CIT(A) and directed the AO to delete the addition of ?82,51,230/-.

Conclusion:

The appeal of the assessee was allowed, and the Tribunal directed the deletion of the disallowance of interest under Section 36(1)(iii). The order was pronounced in the open court on 30.06.2020.