Case Law Details
Brief of the Case
ITAT Delhi held In the case of ITO vs. M/s. First American Securities Pvt. Ltd. that the interest expenditure is to be treated as revenue in nature because the assessee is an investment company. It is very specifically mentioned in the objects of the MOU that assessee company is to make strategic investment in the business entities and accordingly, it has made strategic investment in unquoted shares of jointly controlled entities. Therefore, we find that the interest expenditure incurred by the assessee is for business purposes. Hence, there was no basis for treating the interest expenditure claimed by the assessee as capital expenditure.
Facts of the Case
The assessee company is a joint venture entity between the AXA India Holdings and Bharati Enterprises (Holdings) P. Ltd and was engaged in the business of investments. The return of income was filed by the assessee declaring loss of Rs.1,18,34,157/-. The case was processed u/s 143. Subsequently, the case was selected for scrutiny and notice u/s 143(2) was issued on 24.09.2008. During the year under consideration, the assessee company declared NIL gross receipts and posted a net loss of Rs.2.20 crores which after necessary adjustments in computation of income was reduced to a loss of Rs.1.18 crores. During the course of assessment proceedings, the assessee had debited an amount of Rs.1,64,53,604/- under the head “Interest on unsecured loans”. The assessee raised capital and unsecured loans during the year under consideration and invested the same in long term unquoted equity shares of M/s Bharati Axe Life Insurance Co. Ltd of Rs.57.80 crores. The AO asked the assessee to show cause as to why the interest expenses not be deemed to be capital in nature being related to long term investment in unquoted shares of a jointly controlled entity.
It was further observed that the assessee had made the investment in the shares of a jointly controlled entity for the purpose of substantial control over such entity and the shares were not tradable freely being unquoted and the investments were also classified as long term. Accordingly, the AO held that the interest expenses of Rs.1,64,53,604/- are capital in nature and could not be claimed as revenue expenditure. Further, the AO observed that the assessee has not carried out any business activity during the year except for parking of its investible funds in equity shares of a closely associated concern. In view of this, the AO held that the only expense which would be allowable would be that which was incurred by the assessee mandatorily to survive as a corporate concern, i.e., the Audit fee of Rs 28,090/-.
Contention of the Assessee
The ld counsel of the assessee submitted that the tax deductibility of interest paid on capital borrowed for the purposes of business is covered u/s 36(1)(iii). The ld. AR, in order to explain the ambit and scope of the applicability of section 36(1)(iii), relied on the case of CIT vs. Dalmia Cement (P.) Ltd. – 254 ITR 377 (Del.). Further, the ld. AR relied on the decision of Tetron Commercial Ltd. Vs. CIT – 261 ITR 422 (Cal.) wherein the Hon’ble Calcutta High Court has elaborately explained the scope of deductibility of expenses u/s 36(1)(iii). Ld. AR submitted that on the basis of the above precedents, it becomes abundantly clear that even if capital borrowed by the taxpayer is utilized on the capital account, the interest paid by the taxpayer on such borrowed capital would be allowable as deduction u/s 36(1)(iii) as long as the said capital expenditure is incurred for the purpose of business. He submitted that the very business of the assessee is that of making strategic investments for which the assessee has borrowed money and paid interest thereon. Thus, there can be no doubt that the expense incurred by the assessee by way of payment of interest on such unsecured loan is a business expenditure.
He further relied on the decision of Srishti Securities (P.) Ltd. vs. JCIT – 2005- (148)-Taxman-0049-TBOM. Ld. AR submitted that on the basis of above judicial pronouncements, it can be safely concluded that interest paid by an investing company, on the funds used for making investment in other entities with the objection of acquiring / maintaining controlling interest in such entitles, is a deductible expense u/s 36(1)(iii).
Contention of the Revenue
The ld counsel of the revenue supported the order of AO. He submitted that in view of the nature of the investment, the apparent purpose of strategic control and close nexus between the assessee and the investee concern, it can be safely concluded that it is not a trade investment for business purpose. He further submitted that by mere description of its business as that of making strategic investments, the assessee cannot conceal the real nature of the transaction which is to acquire management control over the organization, which is a transaction on capital account. He, therefore, submitted that the AO has rightly held these interest expenses of Rs. l,64,53,604/- as capital in nature.
He further submitted that the CIT (A) has wrongly concluded that mere investing in its own concern without having any return during the year is business activity of the company during the year. Therefore, it is not justified in treating the interest payment on loan taken for the purpose to park in own concern is business activity and treating it to be revenue expenditure.
Held by CIT (A)
The CIT (A) allowed the appeal of the assessee and allowed the interest exenses as revenue expenditure. It was held that the amount of interest claimed by the appellant is in respect of capital borrowed for the purpose of business or profession carried out by the appellant company during the year. The capital borrowed has not been utilized for acquisition of any asset or for extension of any business or profession, therefore, the interest paid on the capital borrowed for business purposes has to be an allowable business expenditure. The same cannot be denied. It is very specifically mentioned in the objects of the MOU that appellant company is to make strategic investment in the business entities. In follow up that object during the F.Y. 2006-07 it has made strategic investment of Rs.57,80,03,400/- in Bharti AXA Insurance Co. Ltd. Therefore, the interest expenditure incurred by the appellant company is for business purposes of the appellant company.
Further CIT (A) held that during the F.Y. 2006-07 the appellant company has invested a sum of Rs.57,80,03,400/- for subscribing the equity shares of Bharti AXA Life. This fact is duly reported in the Audited Financial Statement of the appellant company for F.Y. 2006-07 at schedule-S in the balance sheet. From this activity of the appellant company, it is established that it has commenced its business activities and has made investments during the period, therefore, the findings of the Assessing Officer that appellant company has not commenced its business activities is not based on proper appreciation of facts.
Held by ITAT
ITAT held that we are in agreement with the CIT (A) that the expenditure is to be treated as revenue in nature because the assessee is an investment company. The assessee-company is a joint venture entity between AXA India Holdings and Bharti Enterprises (Holdings) Pvt. Ltd. and the business of the assessee company is to make strategic investments in the business entities.
During the year under consideration, the assessee has invested a sum of Rs.57,80,03,400/- for subscribing the equity shares of Bharti AXA Life and this fact was duly reported in the Audited Financial Statement of the assessee company at Schedule-S in the balance sheet. By doing this activity, it has commenced its business activities and has made investments during the period, therefore, the findings of the Assessing Officer that assessee has not commenced its business activities is erroneous and not based on proper appreciation of facts as held by CIT (A).
ITAT further held that the amount of interest claimed by the assessee is in respect of capital borrowed for the purpose of business or profession carried out by the assessee company during the year, therefore, the interest paid on the capital borrowed for business purposes has to be an allowable business expenditure and the same cannot be denied. It is very specifically mentioned in the objects of the MOU that assessee company is to make strategic investment in the business entities and accordingly, it has made strategic investment of Rs.57,80,03,400/- in Bharti AXA Insurance Co. Ltd. Therefore, we find that the interest expenditure incurred by the assessee is for business purposes. Hence, there was no basis for treating the interest expenditure claimed by the assessee as capital expenditure. Also, the ITAT, Mumbai Bench in the case of Srishti Securities (P.) Ltd. vs. JCIT 2005- (148)-Taxman-0049-TBOM held that if funds are borrowed by an investment company for making investment in shares which may be held as investment or as stock-in-trade or for purpose of controlling interest in other companies, interest paid on such borrowed funds will be deductible under section 36(1)(iii).
In view of the above, we are of the opinion that the ratio of the aforesaid judgments is squarely applicable to the assessee’s case and the CIT (A) has rightly held that the expenditure as revenue in nature in the facts of the case.
Accordingly appeal of the revenue dismissed.
