Disallowance of Interest on Loan for Share Acquisition: ITAT Upholds Deduction as Business Expense [Read Order]

The Hyderabad Bench of Income Tax Appellate Tribunal(ITAT) upheld the deduction of interest on a loan taken for share acquisition, recognizing it as a business expense.

The Revenue-appellant appealed against the order passed by Commissioner of Income Tax(Appeals)[CIT(A)] dated  19.08.2024 for the Assessment Year 2018-19. In this case, East India Petroleum Limited,respondent-assessee,provided terminalling services for oil marketing companies at Visakhapatnam Port, Andhra Pradesh. It filed its income tax return on October 30, 2018, for the assessment year 2018-19, declaring an income of ₹31,38,15,690.

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M/s Rushikonda Petroleum Projects Private Limited (RPPPL) was amalgamated with the respondent-assessee effective April 1, 2017, as per an National Company Law Tribunal(NCLT) order dated January 11, 2019. Following this, a revised return was filed on March 30, 2019, declaring nil income and claiming a tax refund of ₹9,23,40,520.

During scrutiny, the Assessing Officer(AO) found that RPPPL, formed in 2016, had borrowed funds from Axis Finance Ltd. to acquire a 51% stake in the respondent-assessee. The amalgamation created goodwill of ₹88,21,86,061, on which depreciation of ₹22,05,65,250 was claimed. The AO disallowed this, stating that depreciation under Section 32 required the asset to be used in business, which was not the case. The claim had also not been made in the original return.

The assessee had also claimed ₹18,68,28,250 as interest expenditure on the loan taken over from RPPPL. The AO ruled that the loan was used to buy shares of the assessee, making the interest ineligible for deduction under Section 37(1). Both depreciation and interest claims were disallowed.

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The assessee appealed to the CIT(A) against the disallowance of depreciation on goodwill and interest expenditure. Citing a Supreme Court ruling, it argued that goodwill from amalgamation qualified as an intangible asset eligible for depreciation under Section 32. It also contended that the loan from Axis Finance Ltd. was used for business purposes, making the interest deductible.

The CIT(A) ruled in favor of the assessee, stating that goodwill from amalgamation qualified for depreciation under Section 32. It also found that the ₹116 crore loan was used for business, allowing the interest deduction under Section 36(1)(iii). The AO was directed to delete both disallowances.

Aggrieved by the decision of the CIT(A) the revenue appealed before the tribunal.

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The issue concerned the disallowance of interest on a loan borrowed from Axis Finance Ltd. The company incurred ₹18.68 crore in interest after taking over the loan liability from the amalgamating company, M/s RPPPL, which had used the funds to acquire shares of the company. The AO disallowed the interest, treating it as capital expenditure under Section 37 of the Act.

On appeal, the CIT(A) deleted the disallowance, stating that the loan was taken in the ordinary course of business to gain control, which provided long-term benefits. Since interest on business loans was allowable under Section 36(1)(iii), the disallowance was not justified.

The Department appealed before the tribunal, arguing that the amalgamating company had no commercial activity and merely held investments, making the interest a capital expense. The company maintained that the expenditure was incurred for business advantage, as acquiring shares helped strengthen its market position.

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The two member bench comprising k.Narsimha Chary(Judicial Member) and Manjunatha G(Accountant Member) reviewed the matter and noted that the NCLT-approved amalgamation transferred all liabilities to the company’s books, making the interest on the loan a business expense.

Citing Supreme Court and High Court precedents, it held that a loan taken to gain controlling interest and prevent competition served a legitimate business purpose. Consequently, the ITAT upheld the CIT(A)’s decision to delete the disallowance, allowing the interest deduction under Section 36(1)(iii) of the Act.

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