2016 (6) TMI 976 - AT - Income Tax

Disallowance of Interest Expenditure claimed under section 36(1)(iii) - CIT(A) deleted the disallowance - Held that - No interference is called for in the impugned order of the learned CIT(A). We therefore sustain and confirm the decision of the learned CIT(A) in holding that since the amount advanced to VTL as share application money was done in the normal course of its business for purposes of its business and was made on grounds of commercial expediency the disallowance of interest claimed under section 36(1)(iii) of the Act was not warranted and in deleting the same. - Decided against revenue Disallowance of Upfront Fee paid to Central Bank of India - Held that - Consequent to our decision upholding the learned CIT(A) s view that the share application money advanced to VTL was for purposes of business of the assessee we also uphold the finding of the learned CIT(A) the upfront fee paid to Central Bank of India on loan taken from it is also allowable as a deduction from the assessee s income. - Decided against revenue

Summary

Issues Involved:
1. Disallowance of interest expenditure claimed under section 36(1)(iii) of the Income Tax Act.
2. Disallowance of upfront fee paid to Central Bank of India.

Issue-wise Detailed Analysis:

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

The Revenue appealed against the CIT(A)'s order, which deleted the disallowance of ?12,87,36,636 out of the interest expense claimed under section 36(1)(iii) of the Income Tax Act. The Assessing Officer (AO) had disallowed the interest, arguing that the interest-bearing funds were given to a subsidiary company as interest-free deposits under the guise of share application money, which was not for the assessee's business purposes. The CIT(A) found that the amount advanced to the subsidiary, Datacom Solutions P. Ltd. (now Videocon Telecommunications Ltd. - VTL), was for acquiring further share capital in the subsidiary, which was in the telecom business. The CIT(A) held that the investment was commercially expedient and for the purposes of the assessee's business, thus allowing the interest expenditure.

The Tribunal upheld the CIT(A)'s decision, noting that the AO did not substantiate the claim that the funds were used for non-business purposes. The Tribunal agreed with the CIT(A) that the share application money was advanced for business purposes, as the assessee had a significant shareholding in VTL and the investment was in line with its business activities. The Tribunal also referenced several judicial decisions, including S.A. Builders Ltd. (288 ITR 1) (SC), which supported the view that such interest expenditure is allowable if incurred for business purposes.

2. Disallowance of Upfront Fee Paid to Central Bank of India:

The Revenue also contested the deletion of the disallowance of ?1,25,00,000 upfront fees paid to Central Bank of India. The AO had disallowed this fee, arguing that the loan obtained was not used for the assessee's business but was given to the subsidiary without consideration. The CIT(A) allowed the deduction, reasoning that since the ?500 crores loan was advanced to VTL for business purposes, the upfront fee paid to the bank was also for business purposes and thus deductible.

The Tribunal concurred with the CIT(A), stating that the loan was indeed advanced for the assessee's business purposes, including investment in shares and securities, which is part of the assessee's business activities. Therefore, the upfront fee paid to obtain the loan was also for business purposes and deductible under section 36(1)(iii) of the Act.

Conclusion:

The Tribunal dismissed the Revenue's appeal, confirming that the disallowance of the interest expenditure and the upfront fee was unwarranted. The Tribunal upheld the CIT(A)'s findings that the funds were used for the assessee's business purposes and that the interest and fees paid were allowable deductions under section 36(1)(iii) of the Income Tax Act. The appeal was dismissed, and the CIT(A)'s order was sustained.