Gujarat HC Upholds Interest Deduction for Strategic Share Investment

PCIT Vs Inox Leisure Limited (Gujarat High Court)

Summary: The Gujarat High Court dismissed the Revenue’s Tax Appeal concerning deduction of interest expenditure incurred on funds borrowed for investment in shares of Fame India Limited (FIL), holding the substantial question of law in favour of the assessee and against the Revenue. The appeal arose for Assessment Year 2012-13 and concerned interest expenditure of Rs. 8,60,16,920/- incurred on borrowings from the assessee’s holding company, Gujarat Flurochemicals Limited (GFL).

The assessee, a company engaged in multiplex entertainment complex related services, had invested Rs. 17,879.85 Lakhs in equity shares of FIL, including an opening balance of Rs. 8,502.73 Lakhs. The investment was made out of an interest-bearing loan from GFL. The Assessing Officer made disallowance under Sections 14A and Rule 8D and under Section 115JB. Before the CIT (Appeals), the assessee relied upon the decision in CIT vs. Corretech Energy Private Limited, contending that no disallowance under Section 14A read with Rule 8D could be made because no dividend income had been earned during the relevant year.

The CIT (Appeals), however, held that the interest expenditure could not be allowed under Section 36(1)(iii) and, following the earlier years, held that the interest expenditure could not be allowed as deduction under Section 36(1)(ii) or Section 57(i), resulting in an addition of Rs. 8,60,16,920/- to the assessee’s total income.