Interest paid on borrowing for carrying out business of investing in shares is allowable expenditure

RMZ Hotels Private Limited Vs NFAC Delhi (ITAT Bangalore)

ITAT Bangalore held that business of the assessee is to invest in shares and that the borrowing was for the purpose of business. Accordingly, interest paid on such borrowing is allowable under section 36(1)(iii) of the Income Tax Act.

Facts- The assessee has advanced a sum of Rs.41 crores towards purchase of shares. AO questioned the sources of Rs. 41 crores. The assessee stated that it had taken loan from M/s. Millenia Realtors Pvt. Ltd. The assessee paid an interest of Rs.99,02,829/-.

The said amount has been given towards purchase of shares and shares has not been allotted in the assessment year under consideration and it has been allotted in the next financial year 2018- 19 relevant to assessment year 2019-20. According to the AO, the shares has not been allotted in the assessment year under consideration and the amount paid as an advance to acquire shares to M/s. Akarshak Infrastructure Pvt. Ltd. (AIPL) for the period of pre-acquisition during the assessment year under consideration. As such, the said interest payment on the loan borrowed from M/s. Millenia Realtors Pvt. Ltd. cannot be allowed as a deduction u/s 36(1)(iii) of the Income-tax Act,1961. Against this assessee went in appeal before ld. CIT(A), who has confirmed the order of AO.

Conclusion- The investment activity is one of the business of the assessee and this loan continues to be for business purposes. The activity of investment of the assessee cannot be said that it is not the business activity of the assessee company. In other words, 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 borrowals 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 Act.

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