Eicher Goodearth Ltd. Vs CIT (Delhi High Court)
Interest on Strategic Borrowings Allowable Under Section 36(1)(iii) if Used to Retain Business Control: Delhi HC
The Delhi High Court considered whether interest expenditure incurred on borrowings used to subscribe to a rights issue of shares could be allowed as business expenditure under Section 36(1)(iii) of the Income-tax Act, 1961 or only under Section 57. The Court noted that the issue regarding deduction under Section 80M stood concluded by the Supreme Court, requiring deduction on the basis of net dividend under Section 80M read with Section 80AA, while the question relating to the nature of shares as stock-in-trade did not arise. The assessee contended that borrowings were made to subscribe to the rights issue in order to retain its controlling interest in a closely related company having significant business nexus, including managerial services, technical support, licensing of plant and export of products. Relying on Supreme Court and High Court decisions, the assessee argued that the head under which dividend income is assessed does not determine the character of expenditure and that interest incurred for business purposes should be allowed under Section 36(1)(iii). The Revenue submitted that the lower authorities had not properly examined whether the borrowings were genuinely made for strategic business purposes, as their focus had largely remained on computation of deduction under Section 80M. The High Court held that where expenditure is incurred for promotion of business, including retaining control over another company or making a strategic investment, the resulting interest expenditure is to be considered under Section 36(1)(iii) and not under Section 57. However, since the factual aspects had not been adequately examined by the Assessing Officer and the Commissioner (Appeals), the Court remitted the matter to the Assessing Officer for a detailed appraisal of whether the borrowings were in fact made for such strategic business purposes. If the Assessing Officer so finds, the interest expenditure would qualify under Section 36(1)(iii), and the net expenditure would be considered while computing deduction under Section 80M. Accordingly, the appeal was partly allowed and the matter was remanded to the Assessing Officer for fresh determination in accordance with the Court’s conclusions.
