2024 (2) TMI 893 - HC - Income Tax

Disallowance of the interest expenses claimed u/s 36(1)(iii) - interest bearing funds were given to subsidiary company as interest free deposits in guise of share application money - ITAT confirmed CIT(A) order deleting the addition - HELD THAT - CIT(A) and the ITAT arrived at finding of fact that the amount advanced to subsidiaries was for the business purposes as the same are linked with the business of the subsidiary in which assessee had deep interest - valuation of Telecom business at the relevant time was very high and hence, it was a commercially expedient decision to invest in that business. Both the CIT(A) and the ITAT accepted assessee s view point that if the subsidiary company expands and progresses, assessee will be benefited by the same as the valuation and net-worth of assessee will also increase. Moreover, the transaction was approved and authorised by the Board of Directors in the normal course of business activities and hence, any interest paid on funds utilized for the purpose of such business activity is allowable expenditure under Section 36(1)(iii) - On facts also, it was concluded that assessee had an aggregate share holding of 64% in the subsidiary and, therefore, it cannot be contended that share application money made is not for business purpose. Since both the CIT(A) as well as the ITAT had come to a factual finding and the law is also clear that if an assessee for commercial expediency and in the normal course of its business activities takes loan to invest in shares of its subsidiary, the interest paid on these advances utilized is allowable expenditure under Section 36(1)(iii) of the Act - no substantial question of law arises. Appeal dismissed.

Summary

Issues involved:
The issues involved in the judgment are related to the disallowance of interest expenses claimed under Section 36(1)(iii) of the Income Tax Act, 1961, and the upfront fees paid to Central Bank of India. The key questions of law revolve around the justification of upholding the decisions of the Lower Authorities in deleting these disallowances without appreciating the purpose for which the funds were utilized.

Details of the Judgment:

Issue 1: Disallowance of interest expenses claimed under Section 36(1)(iii):
The assessee, engaged in the business of consumer electronics, investments, and properties, filed its income tax return for AY 2008-09. An assessment was completed, revising the income. Subsequently, the assessment was reopened, and disallowances were made, including interest expenses and upfront fees. The CIT(A) partly allowed the appeal by deleting the disallowance of interest expenses and upfront fees. The Revenue appealed to the ITAT, which upheld the CIT(A)'s decision. The Revenue contended that the interest-bearing funds were diverted for non-business purposes. However, the CIT(A) and ITAT found that the funds were utilized for business purposes, specifically for the subsidiary's telecom business, which was commercially expedient. The Board of Directors authorized the transactions, and it was concluded that the interest paid on the funds utilized for business activities is allowable under Section 36(1)(iii) of the Act. The Court affirmed the factual findings of the lower authorities and dismissed the appeal.

Issue 2: Disallowance of upfront fees paid to Central Bank of India:
The Revenue argued that the upfront fees paid to Central Bank of India should be disallowed as it was used to obtain a loan for the subsidiary, not for the assessee's business. However, the CIT(A) and ITAT found that the fees were paid for a commercially expedient decision to invest in the subsidiary's telecom business, which was beneficial for the assessee. The Court upheld the lower authorities' decision, stating that if an assessee, for commercial expediency, takes a loan to invest in shares of its subsidiary, the interest paid on such advances is allowable under Section 36(1)(iii) of the Act.

Separate Judgment:
In a separate judgment, Income Tax Appeal No. 434 of 2018 was adjourned to 16th February 2024, as the counsel did not have a copy of the appeal at the time of the hearing.

Overall, the Court found no reason to interfere with the lower authorities' decisions, as the transactions were deemed to be for business purposes and commercially expedient, thus allowing the interest expenses and upfront fees claimed by the assessee.