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AI Drafter - (New and Powerful) ✕ Generate professional replies, appeals, opinions to Show Cause Notices, assessment orders, audit objections, and other legal communications using TaxTMI's AI Drafter.
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Issues: Whether interest on borrowed funds utilized for making investments in subsidiary companies is allowable as business expenditure under Section 36(1)(iii) of the Income-tax Act, 1961.
Analysis: The admitted facts show that investments in subsidiaries were made long prior to the subject year, the subsidiaries carry on activities similar to the assessee's business, and there was no fresh diversion of borrowed funds in the year under assessment. Established legal principles provide that expenditure is allowable if incurred "for the purpose of business" which is wider than merely earning profits and that commercial expediency is a matter for the business decision-maker. Precedents recognize that where there is a proximate nexus between the business of the assessee and that of the investee and investments are made as part of strategic business planning (including special purpose vehicles), interest on borrowed capital used for such investments may be deductible under Section 36(1)(iii). Where, alternatively, investments are made with a view to earn dividends, any disallowance, if at all, would be by application of provisions such as Section 14A and Rule 8D to the extent of exempt income, and not under Section 36(1)(iii).
Conclusion: The interest on borrowed funds utilized for investment in subsidiaries is allowable as business expenditure under Section 36(1)(iii) of the Income-tax Act, 1961 in the facts of the case; the appeal by the revenue is dismissed.
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