CIT Vs KEC International Ltd. (Madras High Court)
The Revenue filed an appeal under Section 260A of the Income Tax Act against the order of the Income Tax Appellate Tribunal for Assessment Year 2004-05. The appeal was admitted on three substantial questions of law relating to the legality of reopening the assessment, the allowability of licence fees paid by the assessee as business expenditure, and the allowability of interest on borrowed funds utilised for investment in shares as business expenditure under Section 36(1)(iii).
Before the High Court, the assessee submitted that the controversy was no longer res integra as it had already been decided by a Coordinate Bench of the Madras High Court in the assessee’s own case, Commissioner of Income Tax vs. R.P.G. Transmissions Limited (later renamed M/s. KEC International Ltd.), reported in (2013) 359 ITR 673 (Mad).
The High Court reproduced the relevant findings from the earlier judgment. In that decision, it had been observed that although substantial interest expenditure had been incurred on borrowed funds invested in shares, savings certificates and fixed deposits, Section 36(1)(iii) did not require that such investments be made wholly and exclusively for earning income. The earlier judgment noted that one of the assessee’s business objects was investment in shares of other companies and that the Tribunal had found a proximate nexus between the assessee’s business and the companies in which investments had been made. It was also observed that testing the allowability of interest solely on the basis of the quantum of returns earned was untenable. The Court further held that Section 36(1)(iii) imposed no restriction against investments in group or subsidiary companies. The earlier judgment also accepted the findings that the investments had been made for strategic business purposes to strengthen and promote the assessee’s existing business and that the Revenue had produced no material to establish that the borrowed funds had been utilised for non-business purposes. Accordingly, the earlier Coordinate Bench had answered the substantial questions of law in favour of the assessee.
