Interest Paid On Loan Taken To Invest In Shares Of Subsidiary In Normal Course Of Business Activities Is Allowable Expenditure: Bombay High Court

The Bombay High Court has held that if an assessee for commercial expediency and in the normal course of its business activities takes loan to invest in shares of its subsidiary, the interest paid on these advances utilised is allowable expenditure under Section 36(1)(iii) of the Income Tax Act.

The bench of Justice K. R. Shriram and Justice Neela Gokhale has observed that assessee had an aggregate shareholding of 64% in the subsidiary and, therefore, it cannot be contended that share application money made is not for business purpose.

The assessee/appellant is in the business of manufacture and trading of consumer electronics and home appliances, investments in shares and securities and properties, etc. The assessee filed its return of income for Assessment Year 2008-09 declaring total income. An assessment was completed under Section 143(3) of the Income Tax Act, 1961 and an order came to be passed determining the income of the assessee. Subsequently, by an order under Section 154, the income of assessee was revised at Rs.588,02,16,620.

Subsequently, the assessment was reopened under Section 147 and a notice under Section 148 came to be issued. The reason to believe included three items namely, disallowance of transport expenses Rs.46,028, disallowance of interest under Section 36(1)(iii) of Rs.12,87,36,636 and disallowance of upfront fee of Rs.1,25,00,000.

The reassessment order came to be passed determining the income of Rs.602,14,99,280 in view of the three disallowances. The assessee preferred an appeal before the Commissioner of Income Tax (Appeals). The CIT(A) partly allowed the appeal. The CIT(A) deleted the disallowance of interest under Section 36(1)(iii) amounting to Rs.12,87,36,636 and the upfront fee of Rs.1,25,00,000.

The department preferred the appeal before the Income Tax Appellate Tribunal (ITAT). The ITAT dismissed the appeal.

The department contended that that interest bearing funds were given by assessee to its subsidiary as interest free deposits in the guise of share application money. Therefore, interest paid to Central Bank of India (CBI) which had advanced term loan of Rs.500 Crores, to the extent of Rs.12,87,36,636 has to be disallowed.

The department submitted that since the upfront fees paid to CBI was for taking the term loan, which was given to its subsidiary as interest free deposit in the guise of share application money and not for assessess's own business, the upfront fee also should be disallowed. The interest bearing funds were diverted for non- business purposes.

The assessee contended that the amount of loan taken from CBI was advanced to the subsidiary for acquiring further share capital valuation was very high, assessee for commercial expediency advanced interest free deposit to the subsidiary. The investment in shares, securities was one of the activities of the assessee and, therefore, no disallowance of interest ought to have been made.

The court held that since both the CIT(A) as well as the ITAT had come to a factual finding and the law is also clear that if an assessee for commercial expediency and in the normal course of its business activities takes loan to invest in shares of its subsidiary, the interest paid on these advances utilised is allowable expenditure under Section 36(1)(iii).

Counsel For Petitioner: Suresh Kumar

Counsel For Respondent: Bryan Pillai

Case Title: The Principal Commissioner of Income Tax Versus Videocon Industries Ltd. & Anr.

Case No.: Income Tax Appeal No.434 Of 2018 With Income Tax Appeal No.863 Of 2017

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