2025 (3) TMI 926 - AT - Income Tax

Revenue fails to prove borrowed funds used for investment in subsidiary's convertible debentures

DCIT (CC) -7 (3, Mumbai Versus Macrotech Developers Limited

The ITAT Mumbai dismissed the Revenue's appeal regarding disallowance of interest expenses. The assessee company invested in compulsory convertible ... Disallowance of interest expenses for not utilising the funds for the purpose of business - HELD THAT:- The assessee has earned interest income on investment made in compulsory convertible debentures. As undisputed fact that assessee held 95.30% shares in the Shreeniwas Cotton Mills Ltd. and after acquiring compulsory convertible debentures, the shareholding of the assessee company in that company would be of 99.76%. This fact was not converted by the assessing officer that assessee had made investment in the said associated company to acquire controlling interest in its subsidiary. The assessee has also submitted before both the authorities that it had interest free investment of Rs. 505.32 crores (purchase consideration Rs. 1005.20 crores – face value of investment of Rs. 499.88 crores) and the said investment was presumed to be funded out non-interest bearing fund of OCD of Rs. 450 crores as discussed in the finding of CIT(A). CIT(A) has also discussed the decision of Shristi Securities Pvt. Ltd. and assessee itself on the proposition that investment made with a view to acquiring controlling interest in an another company is considered to be for the purpose of business. Appeal of the Revenue is dismissed. ISSUES PRESENTED and CONSIDEREDThe primary issue in this appeal was whether the disallowance of interest expenses amounting to Rs. 5,56,27,303/- under Section 36(1)(iii) of the Income Tax Act was justified. The disallowance was based on the assertion that the borrowed funds were not utilized for the purpose of business, as they were invested in Compulsory Convertible Debentures (CCDs) of Shreeniwas Cotton Mills Ltd., from which no interest was received during the assessment year in question.ISSUE-WISE DETAILED ANALYSISRelevant legal framework and precedents:Section 36(1)(iii) of the Income Tax Act allows for the deduction of interest paid on capital borrowed for the purposes of the business or profession. The key consideration is whether the borrowed capital was used for business purposes, irrespective of whether it was used for acquiring stock-in-trade or capital assets. The legal precedents cited include the Bombay High Court decision in Shrishti Securities Pvt. Ltd., which established that the purpose of borrowing is irrelevant as long as the capital is used for business purposes.Court's interpretation and reasoning:The Tribunal interpreted that the investment in CCDs of Shreeniwas Cotton Mills Ltd. was a strategic business decision aimed at acquiring a controlling interest in a subsidiary, which is a legitimate business purpose. The Tribunal emphasized that the commercial expediency of a transaction should not be questioned by the Assessing Officer, and the primary purpose of the investment was not to earn interest but to further the business objectives of real estate development.Key evidence and findings:The Tribunal noted that the appellant held a significant shareholding in Shreeniwas Cotton Mills Ltd. and that the investment in CCDs increased this shareholding to 99.76%. The appellant argued that the investment was funded by non-interest-bearing funds, and this was supported by the financial statements and the appellant's submissions.Application of law to facts:The Tribunal applied the principles established in the Shrishti Securities Pvt. Ltd. case and other precedents to conclude that the investment in CCDs was for business purposes. The Tribunal recognized the strategic nature of the investment to gain control over a subsidiary engaged in real estate development, aligning with the appellant's business activities.Treatment of competing arguments:The Tribunal considered the Revenue's argument that the lack of interest income from the investment indicated non-business use of funds. However, it rejected this argument, emphasizing that the test for business purpose is not dependent on immediate income generation but on the strategic objectives of the business.Conclusions:The Tribunal concluded that the disallowance of interest expenses under Section 36(1)(iii) was not warranted, as the investment in CCDs was a strategic business decision and the borrowed funds were used for business purposes.SIGNIFICANT HOLDINGSThe Tribunal upheld the decision of the CIT(A), which allowed the appeal of the assessee, confirming that the interest expenses were deductible under Section 36(1)(iii). The Tribunal reiterated the principle that the purpose of borrowing is irrelevant as long as the borrowed capital is used for business purposes, as established in the Shrishti Securities Pvt. Ltd. case.Core principles established:The Tribunal reaffirmed that strategic investments to acquire controlling interest in a subsidiary can be considered as being made for business purposes. It also emphasized that the commercial expediency of a transaction should not be questioned by the Assessing Officer.Final determinations on each issue:The Tribunal dismissed the appeal of the Revenue, thereby upholding the CIT(A)'s decision to allow the interest expenses as a deduction under Section 36(1)(iii). The Tribunal found no infirmity in the CIT(A)'s decision, which was based on established legal principles and the specific facts of the case.