Interest on borrowings for acquiring controlling interest in shares was held deductible as business expenditure.

Interest on borrowed funds used to acquire shares for securing controlling interest and expanding an existing business was treated as business expenditure, not as investment outlay. Applying the jurisdictional HC's approach, the tribunal accepted that the share acquisition was a commercially expedient business decision made to support control, development and expansion of operations. The borrowing was therefore regarded as for business purposes, making the interest deductible under section 36(1)(iii) of the Income-tax Act, 1961. The disallowance was deleted in favour of the assessee.

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Issues: Whether interest on borrowed funds used to acquire shares of a company for securing controlling interest and business expansion is allowable as a deduction under section 36(1)(iii) of the Income-tax Act, 1961.

Analysis: The investment in the shares was found to be a business decision made to control and develop the assessee's existing business relationship and to support expansion of its operations. The borrowed funds were therefore treated as having been used for business purposes rather than for a mere investment activity. Following the jurisdictional High Court, interest incurred on such borrowings was held to be deductible as revenue expenditure.

Conclusion: The interest expenditure was allowable under section 36(1)(iii) and the disallowance was deleted in favour of the assessee.

Ratio Decidendi: Interest on borrowed funds used for acquiring controlling interest in a company as part of a genuine business decision and business expansion is deductible where the borrowing is commercially expedient and for business purposes.

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