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TMI Blog2016 (2) TMI 401X X X X Extracts X X X X X X X X Extracts X X X X ..... s erred on the facts and circumstances of the case and in law for allowing the expenses when assessee has not carried out any business activity during the year except for parking of its investible fund in equity shares of a closely associated concern. 3. The appellant craves leave to add, alter or amend any ground of appeal raised above at the time of hearing." 3. The assessee company is a joint venture entity between the AXA India Holdings and Bharati Enterprises (Holdings) P. Ltd and was engaged in the business of investments. The return of income was filed by the assessee on 31.10.2007 declaring loss of Rs. 1,18,34,157/-. The case was processed u/s 143 (1) of the Income-tax Act, 1961. Subsequently, the case was selected for scrutiny and notice u/s 143(2) of the Act was issued on 24.09.2008. During the year under consideration, the assessee company declared NIL gross receipts and posted a net loss of Rs. 2.20 crores which after necessary adjustments in computation of income was reduced to a loss of Rs. 1.18 crores. During the course of assessment proceedings, the assessee had debited an amount of Rs. 1,64,53,604/- under the head "Interest on unsecured loans". The assessee ra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... make strategic investments in the business entities. During the F.Y. 2006-07 the appellant company has invested a sum of Rs. 57,80,03,400/- for subscribing the equity shares of Bharti AXA Life. This fact is duly reported in the Audited Financial Statement of the appellant company for F.Y. 2006-07 at schedule-S in the balance sheet. From this activity of the appellant company, it is established that it has commenced its business activities and has made investments during the period, therefore, the findings of the Assessing Officer that appellant company has not commenced its business activities is not based on proper appreciation of facts. As regards the Assessing Officer's decision of treating the interest payment claimed of Rs. 1,13,15,271/- as capital expenditure. It is seen that provisions of section 36 (1)(iii) of the IT Act are very clear in this regard and the same are reproduced hereunder :- "36(1) The deduction provided for in the following clauses shall be allowed in respect of the matters dealt with therein in computing the income referred to in section 28 - (iii) the amount of the interest paid in respect of capital borrowed for the purposes of the business or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that company and further that such an investment was integral part of business of assessee. Whether assessee was entitled to deduction of interest paid on overdraft under section 36(1)(iii) - Held yes [In favour of assessee] FACTS The assessee took a loan of Rs. 3,70,00,000 from the bank and invested the same into its sister concern P, though no dividend was received by the assessee. The assessee claimed a deduction under section 36(1)(iii) in respect of the interest payable by it to the bank. The Assessing Officer held that since the investment was out of borrowed funds for business, the proportionate interest was to be disallowed. He further observed that since the assessee was entitled to receive an amount or 20 per cent from P on account of I.C.D. an amount of Rs. 19,73,333 was to be disallowed and was, therefore, added to the gross total income. The Commissioner (Appeals) confirmed the order of the Assessing Officer. The Tribunal, however, found that the assessee had invested the amount in question in subsidiary company P for the acquisition of its shares, i.e. to have a control over majority shares but not to earn dividend. It was clear that such an investment was integr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpanies. On appeal, the Commissioner (Appeals) held that to the extent, the borrowed funds were used for acquiring shares by way of stock-in-trade, the assessee was entitled to deduction for interest and on that basis, he allowed interest to that extent. On appeal: Held-I In the case or CIT v. Lokhandwala Construction Industries Ltd. [2003] 260 ITR 579 (Bom.), it was held that interest paid on capital borrowed for business purpose is allowable irrespective of the fact as to whether the capital was borrowed to acquire a revenue asset or a capital asset. Therefore, if funds are borrowed by an investment company for making investment in shares which may be held as investment or as stock-in-trade or for the purpose of controlling interest in other companies, interest paid on such borrowed funds will be deductible under section 36(1)(iii). Therefore, interest expenditure was allowable under section 36(1))(iii) and the disallowance to the extent sustained by the Commissioner (Appeals) was directed to be deleted. Facts-II The assessee claimed loss on account of valuation of the stock of certain shares by valuing them at cost or market price whichever was lower. The Assessing O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to park in own concern is business activity and treating it to be revenue expenditure. He submitted that since business of the assessee has not commenced during the year, therefore, AO has rightly disallowed all the expenses except mandatory one and Ld. CIT (A) has wrongly deleted all the disallowances made by AO. He, therefore, prayed that the order of the ld. CIT (A) be set aside and that of the AO be restored. 7. On the other hand, the ld. AR, while reiterating the submissions made before the ld. CIT (A), submitted that the tax deductibility of interest paid on capital borrowed for the purposes of business is covered u/s 36(1)(iii) of the Act. The ld. AR, in order to explain the ambit and scope of the applicability of section 36(1)(iii), relied on the case of CIT vs. Dalmia Cement (P.) Ltd. - 254 ITR 377 (Del.). Further, the ld. AR relied on the decision of Tetron Commercial Ltd. Vs. CIT - 261 ITR 422 (Cal.) wherein the Hon'ble Calcutta High Court has elaborately explained the scope of deductibility of expenses u/s 36(1)(iii). Ld. AR submitted that on the basis of the above precedents, it becomes abundantly clear that even if capital borrowed by the taxpayer is utilized on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ld. CIT (A) that the expenditure is to be treated as revenue in nature because the assessee is an investment company. We take note that assessee-company is a joint venture entity between AXA India Holdings and Bharti Enterprises (Holdings) Pvt. Ltd. and the business of the assessee company is to make strategic investments in the business entities. We find that during the year under consideration, the assessee has invested a sum of Rs. 57,80,03,400/- for subscribing the equity shares of Bharti AXA Life and this fact was duly reported in the Audited Financial Statement of the assessee company at Schedule-S in the balance sheet. By doing this activity, it has commenced its business activities and has made investments during the period, therefore, the findings of the Assessing Officer that assessee has not commenced its business activities is erroneous and not based on proper appreciation of facts as held by ld. CIT (A). We further find that the amount of interest claimed by the assessee is in respect of capital borrowed for the purpose of business or profession carried out by the assessee company during the year, therefore, the interest paid on the capital borrowed for business pu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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