TaxTMI 
TaxTMI 
TaxTMI 
2019 (7) TMI 741
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....23,231/- - Rs. 6,22,39,538/- ) vide his order dated 23.01.2013 by making disallowances on account of payment of interest on loan and processing fee to obtain such loan to an extent of Rs. 6,12,33,844/- and Rs. 10,05,694/- respectively. 4. It is noted during the course of scrutiny proceedings that the Assessing Officer asked the assessee why the interest on secured or unsecured loan amounting to Rs. 6,12,33,844/- and processing fee to an extent of Rs. 10,05,694/- should not be disallowed as it was not related to business activity and are being in the capital in nature. In reply, it was stated that the assessee paid the said interest on borrowed loans to acquire or purchase of shares of DPSC Ltd vide its written submission dated 10.01.2013. The Assessing Officer found the written submissions are not acceptable and added above said amounts to the total income of the assessee for the reasons as under: "1. It has been claimed that the assessee is engaged in the business of generation, transmission, distribution and supply of electrical energy or power in forms and manner for public and private purposes. But the final accounts submitted by the assessee reveals a picture which is quite....
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.... not been furnished as a matter of proof in support of the share purchase transactions. 4. The assessee has quoted the provisions of section 36(1)(iii)of the Income Tax Act, 1961 to establish that the interest on loan is allowable as a revenue expenditure. For the sake of convenience, the provisions of the said section is reproduced as below:- "36(1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in Section 28 - ( i ) and ( ii )****** (iii) the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession :- Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset for extension of existing business or profession (whether capitalized in the books of account or not); for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction. Explanation - Recurring subscriptions paid periodically by shareholders, or subscribers in Mutual Benefit Societies which ful....
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....C.P No.854 of 2010. This action of the assessee also establishes the fact beyond doubt that purchase of shares of DPSC Ltd with borrowed fund had not been done in order to carry out any business but it is purely an investment decision. This disentitles the assessee to claim any expenditure towards interest and processing fee paid for the loan taken for the purchase of shares. 8. The assessee has also furnished several case decisions in support of the claim of interest and processing fee as business expenditure, But the facts and circumstances of those cases are different from the instant case and hence, these are not applicable here. Under the circumstances, the claim of the assessee of interest amounting to Rs. 6,12,33,844/- and processing fees of Rs. 10,05,694/-are disallowed and the same are added back to the total income. Penalty proceedings u/s. 271(1)(c) has been initiated separately." 5. We observe from the aforesaid reasons for the denial of claim of deduction that assessee did not earn any income during the relevant year under consideration. No fixed assets were shown in the audited balance sheet. No business started as on 31.03.10 which is relevant year under consi....
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....rder. This ground of appeal is directed against the disallowance made by the Ld. DCIT for the interest on loan availed from M/s Srei Infrastructure Finance Limited and India Power Corporation Limited from M/s SREI Infrastructure Finance Limited and India Power Corporation Limited utilized for purchase of shares of DPSC Ltd. amounting to Rs. 6,12,33,844/-. The ld. DCIT (AO) has rejected the Appellant's contention on grounds that the interest cost was not incurred for the purpose of the business. 2. During the course of appellate proceedings, the Ld. ARs for the Appellant submitted that interest on borrowed funds utilized for acquisition of shares of companies in same line of business is allowable u/s 36(1)(iii). In this regard, the appellant relied on the decision of the Hon'ble Bombay High Court in CIT -vs.-Phil Corporation Ltd. (2011) 244 DTR 226 (Bom.). Reliance was also placed by the assessee on the decision of Hon'ble Calcutta High Court in CIT vs. Raieeva Lochan Kanoria [1994) 208 ITR 516(Cal) wherein the assessee has borrowed capital for the purpose of acquiring controlling stake in a company and claimed deduction in respect of interest paid on said borrowing ....
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....ediency behind such loan. 8. Supporting the ground raised by the Revenue, the ld. DR, Sri A.K. Nayak submits that the assessee is not at all engaged in the business of power generation. Loans availed but utilized in acquiring shares of other companies and there was no business by the assessee in the relevant year under consideration. Interest paid on such loans cannot be allowed as a deduction as there was no business by the assessee. He referred to Para No.4 of impugned order and argued that the CIT(A) erred in holding the activity of purchase of shares is an activity in the course of business which is contrary to the evidence as main objective of assessee's business is power generation. He argued that the acquisition of controlled stake in a business by way of purchase of shares even with borrowed capital does not mean that the business 'asset' within the meaning of proviso to section 37(1)(iii) of the Act. 9. Further shareholders of a company and the company itself are two different entities. The business carried on by the company does not indicate the business is actually carried on by the shareholders. Shares purchased by the assessee with the borrowed fund from SREI Infras....
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....of Revenue has not challenged the findings of Tribunal that the assessee's business activity consists of acquiring share for managing, controlling and rehabilitating different companies. There was no object of controlling stake in the case of Rajeeva Lochan Kanoria and argued that the CIT(A) erred in allowing the deduction to the assessee by wrong conclusion in applying the ratio laid down by the Hon'ble High Court of Calcutta in the case of Rajeeva Lochan Kanoria (supra). The ratio laid down by the Hon'ble High Court is not applicable to the case on hand. 13. Referring to Tetron Commercial Ltd. (supra) and M/s. First American Securities Pvt. Ltd. (supra), the ld. DR submitted that the assessee claimed the deduction u/s 36(1)(iii) of the Act in the present case and in the above decisions no claim was made u/s 36(1)(iii) of the Act. He submits the facts in the aforementioned cases are not identical and finding therein not applicable in the present case. 14. In reply, the ld. AR argued that the expenditure u/s 36(1)(iii) incurred for the purpose acquiring stake in similar business of other companies is required to be allowed as deduction. The ld. AR referred to Page No.6 of CIT(A) ....
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....companies which are in similar business to stake control in the said company is permissible under Memorandum of Association. Considering the same, the CIT(A) held the purchase of shares of DPSC Ltd. by availing loan from SREI Infrastructure Ltd. is incurred for the purpose of business to arrive such conclusion. The CIT(A) placed reliance in the case of Phil Corporation Ltd. (supra), Rajeeva Lochan Kanoria (supra), First American Securities Pvt. Ltd. (supra) and Tetron Commercial Ltd. According to CIT(A) the facts and circumstances in the case of Rajeeva Lochan Kanoria (supra) of Hon'ble High Court of Calcutta are similar to the facts and circumstances of the assessee. We find that the Hon'ble High Court of Calcutta was pleased to hold making strategic investments is also a commercial transaction which amounts to commencement of business. Therefore it is clear from the observation of the Hon'ble High Court of Calcutta when the shares of other companies purchased to stake control which is in similar business amounts to a commencement of business, therefore the contention of ld. DR that the assessee has no object in the Memorandum of Association to purchase shares of other companies t....
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....pra) is applicable to the facts on hand and the assessee is entitled to claim deduction of interest paid on borrowed funds. 19. The ld. AR referred to orders of the 'SMC' Bench in the case of Baba Satyanarayan Himghar P. Ltd. in ITA No.2027/Kol/2017 and Coordinate Bench in the case of Divakar Solar System Ltd. vs. DCIT reported in [2017] 88 taxmann.com 770 (Kolkata -Trib.). We find in the case of Baba Satyanarayan Himghar P. Ltd. (supra), the 'SMC' Bench by placing reliance in the case of CIT vs. Tulip Star Hotels Ltd. Hon'ble High Court of Delhi reported in [2011] 338 ITR 482 (Delhi) held that the payment of interest on a borrowed loan utilized for acquiring shares to gain control interest in a competitor company is an allowable deduction u/s 36(1)(iii) of the Act. The relevant portion of which is reproduced hereinbelow: 5. The Hon'ble Delhi High Court in the case of CIT vs. Tulip Star Hotels Ltd. [2011] 338 ITR 482 (Delhi), has held as follows:- "....the assessee was in the business of owning, running and managing hotels. For the effective control of new hotels acquired by the assessee under its management it had invested in a wholly owned subsidiary company. The expenditu....
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....s correctly disclosed as stock in trade in the balance sheet. The assessee's reliance in this regard on the decision of the Hon'ble Calcutta High Court in the case of CIT vs Rajeeva Lochan Kanoria reported in 208 ITR 616 (Cal) is well founded. We find that the ld AR also placed reliance on the recent decision of co-ordinate bench of Delhi Tribunal in the case of ITO vs First American Securities Pvt. Ltd in ITA No.4768/Del/2012 dated 11.1.2016. We find that this tribunal after referring to several judicial pronouncements on the issue concluded as under:- "We also find that it is very specifically mentioned in the objects of the MOU that assessee company is to make strategic investments in the business entities and accordingly, it has made strategic investment of Rs. 57,80,03,400/- in Bharti AXA Insurance Co. Ltd. Therefore, we find that the interest expenditure incurred by the assessee is for business purposes. And also, this is acknowledged by the AO himself in the assessment order wherein he has stated that assessee has "parked its investible funds in the equity shares of a closely associated concern". Hence, we find that there was no basis for treating the interest expe....