Interest expenditure incurred for investment in group concerns constituted business activity and was allowable u/s 36(1)(iii)

ACIT Vs Tata Sons Ltd. (ITAT Mumbai)

Conclusion: The dominant object of assessee’s investment in group concerns was to exercise business control by way of acquiring shareholding and not to earn the dividend. Assessee’s activity of holding such investment constituted business activity and therefore, the interest would be fully deductible u/s 36(1)(iii).

Held:  Assessee was engaged in export of software and was assessed for the year under consideration u/s 143(3) on 21/03/2006 wherein the returned income of Rs.10.53 Crores as filed by assessee was assessed at Rs.858.87 Crores. Assessee was stated to be an investment company holding major investment in the equity of Tata group of companies. AO opined that assessee failed to establish that it was in the business of acquiring controlling interest with a view to sell investment it at a profit. The commercial expediency to make investment could not be shown by assessee. The increase in stake in various group concerns was not to acquire the shares as part of stock in trade but the intention was to increase the controlling stake which would be capital in nature. Therefore, the interest was to be capitalized and not to be charged on revenue account. The dividend income earned by assessee was only incidental. Further, the business of controlling interest has not yielded any income which was assessable and therefore, the interest was to be capitalized. Merely because assessee had the object of dealing in investment in shares would not give it the characteristics of dealers of shares. AO opined that interest expenditure could not be allowed either u/s 36(1)(iii) or u/s 37  since the same was not incurred wholly and exclusively for the purposes of business. Further, the same could also not be allowed u/s 57(iii) as it was no wholly and exclusively incurred for the purpose of earning of such income. It was held that assessee was principal holding company for its various group entities. The object of investment in group concerns was to secure controlling interest. Under an agreement, the assessee received subscriptions from the group entities in lieu of Brand promotion / enhancement of goodwill of the group as a whole. Such subscriptions monies termed as ‘brand promotion subscriptions’ aggregated to Rs.62.64 Crores which were offered as well as accepted as ‘Business Income’. AO failed to appreciate the fact that making of investments could, by itself, constituted business activity. Infact, AO after appreciating the object clause as well as report of Board of directors came to a conclusion that the main object of the assessee was to make investment so as to gain controlling interest. The dominant object of investment was to exercise business control by way of acquiring shareholding and not to earn the dividend. Assessee’s activity of holding such investment constituted business activity and therefore, the interest would be fully deductible u/s 36(1)(iii) notwithstanding the fact that assessee earned various streams of income out of these investments, one of which was assessable under the head ‘Income from other sources’. Consequently, the interest expenditure of Rs.246.88 Crores would be fully deductible u/s 36(1)(iii).

FULL TEXT OF THE ORDER OF ITAT MUMBAI

1.1 Aforesaid cross appeals for Assessment Year (AY) 2003-04 contest the order of Ld. Commissioner of Income-Tax (Appeals)-XXXIII, Mumbai, [in short referred to as ‘CIT(A)’], Appeal No.CIT(A)-XXXIII/Rg.2(3)/IT/41-T/06-07 dated 16/03/2007.

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