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2016 (2) TMI 401 - ITAT DELHI

2016 (2) TMI 401 - ITAT DELHI - TMI - Addition on account of interest - capital expenditure or revenue expenditure - Held that:- We are in agreement with the ld. CIT (A) that the expenditure is to be treated as revenue in nature because the assessee is an investment company. We take note that assessee-company is a joint venture entity between AXA India Holdings and Bharti Enterprises (Holdings) Pvt. Ltd. and the business of the assessee company is to make strategic investments in the business en .....

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ctivities is erroneous and not based on proper appreciation of facts as held by ld. CIT (A). We further find that the amount of interest claimed by the assessee is in respect of capital borrowed for the purpose of business or profession carried out by the assessee company during the year, therefore, the interest paid on the capital borrowed for business purposes has to be an allowable business expenditure and the same cannot be denied. We also find that it is very specifically mentioned in the o .....

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t there was no basis for treating the interest expenditure claimed by the assessee as capital expenditure. - Decided against revenue - ITA No.4768/Del./2012 - Dated:- 11-1-2016 - SHRI A.T. VARKEY, JUDICIAL MEMBER and SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER For The Assessee : Shri Sumit Mangal, CA and Ms. Varsha Bhattacharya, Advocate For The Revenue : Shri Hemant Gupta, Senior DR ORDER PER A.T. VARKEY, JUDICIAL MEMBER : This appeal, at the instance of the revenue, is filed against the order o .....

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trol over the organization. This is transaction on capital account and enduring nature. The same cannot be held revenue expenses. 2. The Learned CIT(A) has erred on the facts and circumstances of the case and in law for allowing the expenses when assessee has not carried out any business activity during the year except for parking of its investible fund in equity shares of a closely associated concern. 3. The appellant craves leave to add, alter or amend any ground of appeal raised above at the .....

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he assessee company declared NIL gross receipts and posted a net loss of ₹ 2.20 crores which after necessary adjustments in computation of income was reduced to a loss of ₹ 1.18 crores. During the course of assessment proceedings, the assessee had debited an amount of ₹ 1,64,53,604/- under the head "Interest on unsecured loans". The assessee raised capital and unsecured loans during the year under consideration and invested the same in long term unquoted equity shares .....

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such entity and the shares were not tradable freely being unquoted and the investments were also classified as long term. In view of the nature of the investment, the AO observed that the apparent purpose of strategic control and close nexus between the assessee and the investee concern, it could be safely concluded that it was not a trade investment for business purposes. The AO further observed that by mere description of its business as that of making strategic investments, the assessee coul .....

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ern. In view of this, the AO held that the only expense which would be allowable would be that which was incurred by the assessee mandatorily to survive as a corporate concern, i.e., the Audit fee of ₹ 28,090/-. Accordingly, the AO completed the assessment u/s 143 (3) of the Act. 4. The assessee filed an appeal before the first appellate authority and the ld. CIT (A) while allowing the appeal of the assessee held the interest expenses of ₹ 1,64,53,604/- as revenue expenditure as unde .....

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reported in the Audited Financial Statement of the appellant company for F.Y. 2006-07 at schedule-S in the balance sheet. From this activity of the appellant company, it is established that it has commenced its business activities and has made investments during the period, therefore, the findings of the Assessing Officer that appellant company has not commenced its business activities is not based on proper appreciation of facts. As regards the Assessing Officer's decision of treating the .....

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on : [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 capitalised 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.]" It is seen that the amount of interest claimed by the appellant is in respect of capit .....

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iness entities. In follow up that object during the F.Y. 2006-07 it has made strategic investment of ₹ 57,80,03,400/- in Bharti AXA Insurance Co. Ltd. Therefore, the interest expenditure incurred by the appellant company is for business purposes of the appellant company. This fact has been acknowledged by the Assessing Officer himself in the assessment order wherein he has stated that appellant has "parked its investible funds in the equity shares of a closely associated concern" .....

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erest on borrowed capital - Assessee took loan from overdraft account and invested it into sister/subsidiary concern and claimed deduction under section 36(1)(iii) in respect of interest payable to bank which was disallowed by Revenue authorities. Tribunal found that overdraft was not used for mere investment in shares of sister subsidiary company to earn dividend but was used to have control over that company and further that such an investment was integral part of business of assessee. Whether .....

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proportionate interest was to be disallowed. He further observed that since the assessee was entitled to receive an amount or 20 per cent from P on account of I.C.D. an amount of ₹ 19,73,333 was to be disallowed and was, therefore, added to the gross total income. The Commissioner (Appeals) confirmed the order of the Assessing Officer. The Tribunal, however, found that the assessee had invested the amount in question in subsidiary company P for the acquisition of its shares, i.e. to have .....

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ry company to have control over that company and, therefore, the element of interest paid on the overdraft was not susceptible of bifurcation and, therefore, the assessee was entitled to the deduction under section 36(1)(iii). [Para 11] Thus, the Tribunal was right in deleting the addition of ₹ 19,73,333. [Para 12] SRISHTI SECURITIES (P.) LTD. V. JOINT COMMISSIONER OF INCOME-TAX, SPL. RANGE 39 [2005] 148 TAXMAN 49 (MUM.) (MAG.) I. Section 36(1)(iii) of the Income-tax Act, 1961 - Interest o .....

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of stock of certain shares valued at cost or market price whichever was lower - Assessing Officer rejected valuation on ground that shares were held as investment and not as stock-in-trade - Assessee contended that shares were acquired for investment originally and were later converted into stock-in-trade - Whether since revenue authorities had not property examined issue, same was to be restored back to Assessing Officer - Held, yes Facts-I The assessee an investment company utilized borrowed .....

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appeal, the Commissioner (Appeals) held that to the extent, the borrowed funds were used for acquiring shares by way of stock-in-trade, the assessee was entitled to deduction for interest and on that basis, he allowed interest to that extent. On appeal: Held-I In the case or CIT v. Lokhandwala Construction Industries Ltd. [2003] 260 ITR 579 (Bom.), it was held that interest paid on capital borrowed for business purpose is allowable irrespective of the fact as to whether the capital was borrowed .....

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e deleted. Facts-II The assessee claimed loss on account of valuation of the stock of certain shares by valuing them at cost or market price whichever was lower. The Assessing Officer rejected the valuation on the ground that the said shares were held as investment and not as stock-in-trade. On appeal, the Commissioner (Appeals) confirmed the order of the Assessing Officer. In the appeal, the assessee contended that the shares were acquired for investment originally and were later converted into .....

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ted judicial pronouncements are identical with the facts of the appellant's case, therefore, the ratio of the said judgment is squarely applicable with to the appellant's case. Therefore, the Assessing Officer was not justified in treating the interest payment on loan taken for business purposes as capital expenditure. Hence, the same is deleted. 5. Being aggrieved, the revenue is in appeal before us. 6. The ld. DR relied on the order of the AO. He submitted that in view of the nature of .....

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that the AO has rightly held these interest expenses of Rs. l,64,53,604/- as capital in nature. He further submitted that during the year, assessee has not carried out any business activity except for parking of its investible funds in equity shares of a closely associated concern. He submitted that the Ld.CIT (A) has wrongly concluded that mere investing in its own concern without having any return during the year is business activity of the company during the year. Therefore, it is not justif .....

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hand, the ld. AR, while reiterating the submissions made before the ld. CIT (A), submitted that the tax deductibility of interest paid on capital borrowed for the purposes of business is covered u/s 36(1)(iii) of the Act. The ld. AR, in order to explain the ambit and scope of the applicability of section 36(1)(iii), relied on the case of CIT vs. Dalmia Cement (P.) Ltd. - 254 ITR 377 (Del.). Further, the ld. AR relied on the decision of Tetron Commercial Ltd. Vs. CIT - 261 ITR 422 (Cal.) wherein .....

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he very business of the assessee is that of making strategic investments for which the assessee has borrowed money and paid interest thereon. Thus, there can be no doubt that the expense incurred by the assessee by way of payment of interest on such unsecured loan is a business expenditure and allowable as deduction u/s 36(1)(iii) of the Act. The ld. AR, in order to substantiate its claim, further relied on the decision of CIT vs. Phil Corporation Limited - (2014) 14 Taxmann.Com 58 (Bom.) wherei .....

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ct is correct and deserves to be accepted. He further relied on the decision of Srishti Securities (P.) Ltd. vs. JCIT - 2005- (148)-Taxman-0049-TBOM. Ld. AR submitted that on the basis of above judicial pronouncements, it can be safely concluded that interest paid by an investing company, on the funds used for making investment in other entities with the objection of acquiring / maintaining controlling interest in such entitles, is a deductible expense u/s 36(1)(iii) of the Act. He submitted tha .....

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n this case is whether the expenditure claimed by the assessee on account of interest is capital expenditure or revenue expenditure. We are in agreement with the ld. CIT (A) that the expenditure is to be treated as revenue in nature because the assessee is an investment company. We take note that assessee-company is a joint venture entity between AXA India Holdings and Bharti Enterprises (Holdings) Pvt. Ltd. and the business of the assessee company is to make strategic investments in the busines .....

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ss activities is erroneous and not based on proper appreciation of facts as held by ld. CIT (A). We further find that the amount of interest claimed by the assessee is in respect of capital borrowed for the purpose of business or profession carried out by the assessee company during the year, therefore, the interest paid on the capital borrowed for business purposes has to be an allowable business expenditure and the same cannot be denied. We also find that it is very specifically mentioned in t .....

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