Interest on borrowings for equity in hotel subsidiary allowed as business deduction under s.36(1)(iii) IT Act (1)(iii)

HC upheld the ITAT's finding that interest on funds borrowed by the assessee to subscribe to equity in its wholly owned subsidiary was deductible as business expenditure under s.36(1)(iii) of the IT Act. The Court accepted that the assessee, engaged in owning, running and managing hotels, had invested in the subsidiary to secure effective control over newly acquired hotels under its management, rendering the borrowing intrinsically linked to its business. Any debate on deductibility under s.57(iii) was treated as academic. Holding that no substantial question of law arose from the Tribunal's order, the HC dismissed the Revenue's appeals.

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Issues:
1. Deduction of interest on borrowed funds utilized for acquiring subsidiary company.
2. Allowability of interest expenditure under section 36(1)(iii) and section 57(iii) of the Income-tax Act.

Analysis:

Issue 1:
The respondent-assessee borrowed funds to subscribe to the equity capital of a subsidiary company, which used the funds to acquire a hotel. The assessee claimed the interest paid on the borrowed money as a deduction, arguing it was a business expenditure. The Assessing Officer initially disallowed the expenditure, but the Commissioner of Income-tax (Appeals) reversed this decision. The Income-tax Appellate Tribunal (ITAT) also upheld the Commissioner's decision across different assessment years. The Tribunal noted that the assessee was in the business of owning and managing hotels and had invested in the subsidiary for effective control of new hotels. Citing the Supreme Court judgment in S. A. Builders v. CIT (Appeals), the Tribunal allowed the deduction of interest on borrowed funds, stating that a holding company advancing borrowed money to a subsidiary for business purposes would ordinarily be entitled to such a deduction.

Issue 2:
The Tribunal allowed the interest expenditure under section 36(1)(iii) of the Income-tax Act, considering it as expenditure incurred for business purposes. Additionally, the Tribunal opined that the expenditure would also be allowed under section 57(iii) of the Act. Despite potential controversy over the applicability of section 57(iii), the Tribunal was convinced that the expenditure incurred in this case was for business purposes and thus allowable under section 36 of the Act. The memorandum of association of the assessee highlighted its objectives related to owning, managing, and dealing in various hospitality-related establishments, further supporting the argument that the interest expenditure was incurred for business purposes. Consequently, the High Court found no legal question to be raised and dismissed the appeals.

In conclusion, the High Court upheld the Tribunal's decision, affirming the allowance of interest expenditure on borrowed funds for acquiring a subsidiary company as a legitimate business expense under the Income-tax Act.

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