2022 (2) TMI 338 - AT - Income Tax

Disallowance of interest expenses u/s.36(1)(iii) - whether the investment was made by the assessee to have controlling interest in the companies? - HELD THAT - Admittedly, the borrowed fund has been invested by the assessee by acquiring the shares of 5 different companies which are capable of generating only dividend income which is exempt from the tax. We note that the investments was made by the assessee in the companies in order to have controlling stake which is considered as for the purpose of the business. Therefore, there cannot be any disallowance of interest expenses. The facts of the present case are identical to the facts of the case as discussed in M/S. PHIL CORPORATION LTD., 2011 (6) TMI 187 - BOMBAY HIGH COURT . Accordingly, we set aside the findings of the Ld. CIT(A) and direct the AO to delete the addition made by him. Hence the ground of the appeal of the assessee is allowed.

Summary

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

Analysis:

Issue: Disallowance of Interest Expenses

The appeal was filed against the order of the Commissioner of Income Tax (Appeals) confirming the disallowance of interest expenses under section 36(1)(iii) of the Income Tax Act, 1961. The Assessing Officer disallowed an amount of ?11,10,427 out of total interest expenses of ?14,57,943, attributing it to interest-free advances made by the assessee. The Commissioner found that the investment made by acquiring shares of different companies was capable of generating tax-free dividend income and hence disallowed the interest under section 14A of the Act, dismissing the appeal.

During the assessment proceedings, the assessee contended that the investment in shares was for strategic purposes to have controlling stake in the companies. The companies in which the investment was made were later amalgamated with the assessee as per the order of the Gujarat High Court. The Tribunal analyzed previous judgments and held that the investment was made for a business purpose, and there was a nexus between the expenditure and the business interest. The Tribunal referred to the decision in PCIT v/s E-City Investment and Holdings Company, where it was held that the Revenue cannot decide the reasonableness of expenditure when there is a commercial expediency. The Tribunal also cited the judgment in CIT vs. Phil Corpn. Ltd., supporting the deduction under section 36(1)(iii) for interest paid on overdraft used for investments to have control over companies.

Consequently, the Tribunal set aside the findings of the Commissioner and directed the Assessing Officer to delete the disallowed amount of interest expenses. The appeal of the assessee was allowed, and the order was pronounced in the Court on 01/02/2022 at Ahmedabad.

This detailed analysis provides a comprehensive understanding of the judgment, focusing on the disallowance of interest expenses under section 36(1)(iii) of the Income Tax Act, 1961.