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.
The Tribunal recorded undisputed facts concerning the commercial relationship between the assessee and FIL. Both companies were engaged in the business of exhibition of cinematographic films through multiplex and single-screen cinemas. The assessee acquired 1,75,65,288 shares of FIL during F.Y. 2009-10 and a further 1,075 shares on 6 January 2011, increasing its shareholding to 50.27%, following which FIL became its subsidiary. The shareholding subsequently increased to 69.54%. FIL thereafter merged with the assessee with effect from 1 April 2012 pursuant to orders of the Gujarat High Court and Bombay High Court. By virtue of the amalgamation, the assessee’s resources increased from 30 multiplexes to 55 and from 109 screens to 204.
On these facts, the Tribunal concluded that the shares were not acquired merely to obtain controlling interest. They were also acquired to expand the assessee’s business activities, and the dominant purpose was not investment for earning dividend but maximisation of business resources. The Tribunal, relying upon B. Nanji & Co. vs. DCIT, 124 ITR 357, deleted the disallowance made by the CIT (Appeals).
The High Court held that, in view of the Tribunal’s findings of fact, the issue was no longer res integra because of the subsequent decision of the Supreme Court in Sharp Business System vs. Commissioner of Income Tax, (2026) 484 ITR 509 (SC). The Supreme Court had considered a case where borrowed funds were utilised for investment in shares of a subsidiary for acquiring controlling interest and held that the investment was made for commercial expediency. It affirmed the allowability of interest on funds invested in a sister concern for acquiring controlling interest and followed the principle of commercial expediency recognised in S.A. Builders Ltd.
Accordingly, the Gujarat High Court answered the substantial question of law in favour of the assessee and against the Revenue and dismissed the appeal.
Cases Discussed
- CIT vs. Corretech Energy Private Limited, (2014) 45 Taxmann.com 116 (Guj.)
- B. Nanji & Co. vs. DCIT, 124 ITR 357
- Sharp Business System vs. Commissioner of Income Tax, (2026) 484 ITR 509 (SC)
- S.A. Builders Ltd. vs. CIT (Appeals) Chandigarh & Anr.
FULL TEXT OF THE JUDGMENT/ORDER OF GUJARAT HIGH COURT
1. Heard learned Senior Standing Counsel Mr. Rutvij Patel for the appellant.
2. Though served, none appeared for the respondent.
3. This appeal was admitted by order dated 19.09.2022 for consideration of the following substantial question of law:
“Whether in the facts and circumstances of the case, the Hon’ble ITAT has erred in law and on facts in holding that the assessee is eligible for deduction of the interest expenditure incurred for the purpose of investment in shares as business expenditure under the provisions of Section 36(1)(iii) of the Income Tax Act, 1961, without appreciating that the interest paid to holding company which was incurred on the funds borrowed for making investment in shares in another company cannot be said to be incurred for the purpose of the business of the assessee and as such the same is not allowable either under the provisions of section 36(1)(iii)/37(1) of the Income Tax Act or under the provisions of Section 57(iii) of the Income Tax Act?”
4. Brief facts of the case are that the respondent-assessee is a limited company engaged in the business operation of multiplex entertainment complex related services.
5. For the Assessment Year 2012-13, the assessee had shown investment in the equity shares of Rs. 17879.85 Lakhs (Rs. 8502.73 Lakhs of the opening balance) in M/s. Fame India Limited (‘FIL’ for short). The investment made by the assessee was out of interest-bearing loan from holding company M/s. Gujarat Flurochemicals Limited (‘GFL’ for short).
6. The assessee therefore, incurred interest expenses amounting to Rs. 8,60,16,920/- on borrowing from GFL.
7. The Assessing Officer made disallowance under Sections 14A of the Income Tax Act, 1961 [for short ‘the Act’] read with Rule 8D of the Income Tax Rules,1962, [for short ‘the Rules’] and under Section 115JB of the Act.
8. The assessee, being aggrieved by the order passed by the Assessing Officer, preferred an appeal before the CIT (Appeals) on the ground that there cannot be any disallowance under the provisions of Section 14A of the Act read with Rule 8D of the Rules in view of the decision of this Court in case of CIT vs. Corretech Energy Private Limited reported in (2014) 45 Taxmann.com 116 (Guj.), as there was no dividend income earned by the assessee on such investment in the year under consideration.
9. However, the CIT (Appeals) was of view that such interest expense cannot be allowed under Section 36 (1)(iii) of the Act and accordingly, the CIT (Appeals) following the earlier years, held that the interest expenses cannot be allowed as deduction under Section 36 (1)(ii) or Section 57(i) of the Act and made addition of the interest paid to GFL of Rs. 8,60,16,920/- to the total income of the assessee.
10. Being aggrieved by the order of the CIT (Appeals), the assessee preferred an appeal before the Tribunal, the Tribunal recorded the following undisputed facts:
“ i. The assessee and FIL, both are engaged in the business of exhibition of cinematographic films in multiplex cinema and single screen cinema.
ii. The assessee company acquired 1,75,65,288 share of FIL during F.Y. 2009-10 and further acquired 1075 shares as on 6th January 2011. Accordingly, the assessees shareholding increased to 50.27% in the share capital of FIL. Thus, FIL became subsidiary of the assessee company w.e.f. 6th January 2011.
iii. The shareholding of the assessee company in FIL further increased to 69.54% in the year under consideration. Thereafter the FIL got merged with assessee company w.e.f. 1 April 2012 by virtue of order of Hon’ble Gujarat High court dated 20th March 2013 and Hon’ble Bombay High Court dated 10th May 2013.
iv. By virtue of amalgamation, the resources of assessee increased from 30 multiplex to 55, from 109 screen to 204 and seating capacity from.”
11. The Tribunal, considering such undisputed facts, concluded that, that the assessee did not merely acquire the shares of FIL to have the controlling interest, but the shares were also acquired to expand its business activities and the dominant purpose was not to make investment for the purpose of dividend, but to maximize the resources.
12. The Tribunal, after considering the decision of this Court in case of B. Nanji & Co., vs. DCIT reported in 124 ITR 357 involving similar facts and circumstances, held in favor of the assessee by deleting the disallowance made by the CIT (Appeals).
13. In view of the above findings of fact arrived at by the Tribunal, the question raised in this appeal is no more res-integra in view of the decision of Apex Court in case of Sharp Business System vs. Commissioner of Income Tax, reported in (2026) 484 ITR 509 (SC) wherein, the Hon’ble Apex Court, after considering similar facts, has held as under:
“39. Adverting to the facts of this case, we find that the respondent assessee had claimed interest on borrowed funds under Section 36(1)(iii) of the Act which was utilized for investment in M/S Ceylon Glass Company Ltd., a subsidiary company of the assessee. The investment was made for controlling the interest in the associate concern by purchase of shares. Thus the investment was clearly for commercial expediency. We agree with the finding recorded by the ITAT and affirmed by the High Court that assessee is entitled to claim allowance of interest on the funds invested in sister concern for acquiring of controlling interest.
40. Following the decision of this Court in SA Builders Ltd. (supra), we find that the purpose for which the advances were made to the sister concern and its directors would also be covered by the principle of commercial expediency.
41. Accordingly, the decision of the ITAT on this point, which was not interfered with by the High Court, is hereby affirmed. Consequently, the appeal filed by the revenue on this issue is dismissed. The question framed in paragraph 5.2 of this judgment is thus answered in favour of the assessee and against the revenue.”
14. In view of the above dictum of law, we answer the question in favor of the assessee and against the Revenue.
The Appeal is accordingly dismissed.
