2020 (9) TMI 24 - AT - Income Tax

Disallowance of interest expenditure u/s 36 - interest was paid by the assessee on Short Term Borrowings used for paying share application money - nature of business activities undertaken by the assessee as a non-banking finance company - HELD THAT - Share application money was paid by the assessee company in the ordinary course of its business of making investment in shares and, therefore, interest expenditure incurred on the borrowed fund utilised for making the payment of share application money is deductible u/s 36(1)(iii) as claimed by the assessee. We accordingly delete the disallowance made by the AO and confirmed the Ld. CIT(A) out of interest expenditure and allow this appeal of the assessee.

Summary

Issues:
Disallowance of interest expenditure on short term borrowings utilized for payment of share application money.

Analysis:
1. The assessee, a non-banking finance company, filed its return declaring total income at Nil, debiting interest expenditure of &8377; 2,65,87,704 on short term borrowings of &8377; 28,14,87,977 as at 31.03.2013. The AO disallowed &8377; 49,05,630 interest attributable to share application money payment, questioning its business purpose under section 36(1)(iii) of the Income Tax Act, 1961.

2. The assessee contended that share application was part of its investing activity as an NBFC, supported by its financial statements. The Ld. CIT(A) upheld the disallowance, stating the interest was related to capital investment in shares, not business. The assessee appealed to the Tribunal.

3. The Tribunal noted the assessee's regular share investments since 2005-06 and its business nature as an NBFC. Citing judicial precedents, the Tribunal held that interest on borrowed funds for share application money was deductible under section 36(1)(iii) if borrowed for business purposes. Relying on the Calcutta High Court's decision in J.K. Industries, the Tribunal allowed the appeal, deleting the disallowance.

4. The Tribunal's decision was based on the principle that once capital is borrowed for business, the purpose of fund utilization becomes immaterial. Following this legal position and considering the business nature of the assessee, the Tribunal allowed the appeal, emphasizing that interest expenditure on borrowed funds for share application money was deductible under section 36(1)(iii).

5. The Tribunal's ruling aligns with established legal interpretations, emphasizing that interest on borrowed funds utilized for business activities, including share investments, is allowable as a deduction. The Tribunal's decision reflects the understanding that the nature of fund utilization for business purposes is crucial in determining the deductibility of interest expenditure.

6. In conclusion, the Tribunal allowed the appeal, overturning the disallowance of interest expenditure made by the AO and confirmed by the Ld. CIT(A). The decision highlights the importance of establishing a direct nexus between borrowed funds, business activities, and interest expenditure to determine deductibility under the Income Tax Act, 1961.