The Bangalore bench of the Income Tax Appellate Tribunal ( ITAT ) has recently held that interest paid on borrowing by assessee carrying out business in investing in shares allowable as business expenditure.
Assessee RMZ Hotels Private Limited has advanced a sum of Rs.41 crores towards purchase of shares of M/s. Akarshaka Infrastructure Pvt. Ltd (AIPL). To invest this amount of Rs.41 crores, the assessee availed loan from M/s. Millenia Realtors Pvt. Ltd. The assessee paid an interest of Rs.99,02,829/-. The shares have not been allotted to the assessee in this assessment year under consideration. However, the same has been allotted to the assessee in subsequent financial years 2018-19 relevant to assessment year 2019-20. According to the lower authorities, (AIPL) became the holding company of the assessee company from the financial year 2018-19 relevant to assessment year 2019-20. Hence, the assessing officer disallowed the claim of deduction of payment of interest on the loan borrowed from M/s. Millenia Realtors Pvt. Ltd. At Rs.99,02,829/-.
V. Srinivasan counsel for the assessee submits that after acquiring shares from the AIPL it becomes a Subsidiary company of Assessee company.
The assessee had advanced a sum of Rs. 41 Crores towards the purchase of the subject shares in AIPL and the amount advanced to its Wholly Owned Subsidiary was made out of commercial expediency and for expansion of its business and not for the extension of its business.
Ganesh R. Ghale counsel for the revenue submits that,
“The shares were allocated in the next financial year and as such during the year under consideration the assessee was not the owner of the shares in AIPL. As such AIPL was not its subsidiary at all during the year under consideration, as being claimed by the assessee”
The provision to Section 36(l)(iii) of the Income Tax Act 1961 has already been amended by the Finance Act, 2015 and the said amendment the words ‘for extension of existing business or profession’ were omitted. As such with effect from Assessment Year 2016-17 the proviso became applicable irrespective of the fact whether the capital was borrowed for expansion of the business or extension of the business.
After considering the contentions of the contentions of the both parties the single bench of the ITAT, Chandra Poojari, (Accountant Member) allowed the appeal filed by the assessee .
The bench observed that, the Memorandum of Association of the company is permitted to carry on the business of investment by holding shares also to deal in shares.
Moreover when the assessee has borrowed the funds for the purpose of making investment in shares and that investment is one of the business activity of the assessee company amount borrowed for such investment is for the purpose of business and the interest incurred on such borrowers to be wholly and exclusively for the purpose of business and it has been fulfilled the condition laid down in section 36(1)(iii) of the Income Tax Act 1961.
Thereafter the bench held that the business of the assessee is to invest in shares and that the borrowing was for the purpose of business, the entire interest has to be allowed under s. 36(l)(iii) of the Income Tax Act 1961.
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