Relief to Tata Chemicals: ITAT Allows Deduction of ₹156 crores Interest on Loan Utilized for Overseas Investment u/s 36 (1) (iii) [Read Order]

The Mumbai bench of Income Tax Appellate Tribunal (ITAT) has set aside an order passed by the Principal Commissioner of Income Tax (PCIT) which disallowed the interest expenditure incurred by Tata Chemicals Ltd. on loan taken by it for investing in its overseas subsidiary company.

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The return of income filed by the assessee was finally assessed and an order under Section 143(3) read with Section 144C(13) and 144B of the Income Tax Act, 1961 was passed on 28.01.2022 assessing the total income at ₹824,20,33,550.

Subsequently, the Principal Commissioner of Income Tax (PCIT), Mumbai-2 noticed that the assessee company had claimed an interest expenditure of ₹276.66 crores out of which interest on loan utilized for investment in overseas subsidiaries was ₹156.12 crores. The assessee company had made investment in shares of the overseas subsidiary company and claimed deduction of interest expenditure of ₹156.12 under Section 36(1)(iii) of the Act, 1961.

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The PCIT was of the view that interest expenditure pertaining to the loan amount provided to the subsidiaries of the assessee company was not eligible for deduction under Section 36(1)(iii) of the Act.  The PCIT observed that the assessee was earning dividend income which was taxable as income from other sources and accordingly he treated the assessment order passed under Section 143(3) read with Section 144C(13) and Section 144B of the Act, 1961 as erroneous.

The counsel for the assessee, Nitesh Joshi, submitted that the department had earlier allowed deduction to the assessee under section 36 (1) (iii) of the Act, 1961 in respect of loan provided to the subsidiary of the assessee company. He placed reliance on various judicial pronouncements to support his contention.

The Departmental Representative, Pushkaraj Bhangepatil, supported the order of PCIT and stated that the order passed by the assessing officer was rightly upheld by the PCIT.

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The bench comprising Anikesh Banerjee, Judicial Member and Amarjit Singh, Accountant M observed  the earlier order passed by the department allowing the deduction under section 36 on the interest paid by the assessee. The bench further placed reliance on the decision of Bombay High Court in Concentrix Services Pvt Ltd (2019) wherein it was held that where the assessee claims a deduction of interest on capital borrowed all that assessee has to show is that the borrowed fund were utilized for business purpose if so then interest will have to be allowed as deduction.

The bench also perused the decision of Hon’ble Bombay High Court in the case of Phil Corporation (2011)wherein it is held that assessee has invested the amount in the subsidiary company for acquiring its share to have of control over majority shares but not to earn dividend interest therefore, the assessee was entitled to deduction under section 36(1)(iii) of the Act, 1961.

The bench thus observed that the PCIT passed the order without considering the factual and legal submissions filed by the assessee. Hence, the order passed by the PCIT was held to be not sustainable in law and was consequently set aside.

To Read the full text of the Order CLICK HERE

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