TMI Blog2019 (7) TMI 741X X X X Extracts X X X X X X X X Extracts X X X X ..... fund which is a revenue expenditure allowable u/s 37(1) - HELD THAT:- Payment of interest on borrowed fund is allowable as deduction u/s 36(1)(iii) and the CIT(A) has rightly held, the payment of processing fee to obtain such loan is an incidental expenses, since we have allowed the payment of interest as an allowable deduction, the processing fee paid on the said loan is also an allowable expenditure u/s 37(1) - Ground No.2 raised by the Revenue is dismissed. - I.T.A No.1037/Kol/2018 - - - Dated:- 10-7-2019 - Shri J. Sudhakar Reddy, Accountant Member And Shri S.S. Viswanethra Ravi, Judicial Member For the Appellant : Shri A.K. Nayak, DR For the Respondent : Ms. Ruchira Lakhatia, ACA ORDER PER SHRI S.S. VISWANETHRA RAVI, JM: This appeal by the Revenue against the order dated 28.02.2018 passed by the Commissioner of Income Tax (Appeals)-10, Kolkata [ CIT(A) ] for Assessment Year 2010-11. 2. Ground No.1 is raised questioning the action of CIT(A) in deleting the additions made by the Assessing Officer on account of payment of interest on borrowed funds in the fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt assessment year, for the purpose of engaging in the business of power, the assessee had acquired shares of DPSC Ltd, a public limited company, engaged in the similar business that of the assessee. This means up to 31-3-2010, the assessee, on its own, was not carrying on any business and had not acquired any asset to carry out the business of generation, transmission, distribution and supply of electrical energy or power in forms and manner for public and private purposes Therefore, all the expenses debited in the profit and loss account, including the interest on loan and processing fee paid on such loan partake the character of an expense incurred in a period when the assess was not doing any business. 3. An agreement of share purchase dated 27-01-2010 has been filed in photocopy. On a close look on the papers it is seen that (a) it does not contain all the pages of the agreement, only first two pages on non judicial stamp paper of ₹ 100/- and ₹ 50/- had been provided along with page no. 16 of 49 of the Agreement; (b) the document is neither registered not notarized; (c) all the terms and conditions are not available from the pages provided and ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t reflect that any such business has been carried out by the assessee in the relevant previous year. By the same token, acquisition of controlling stake in a business by way of purchase of share, even with borrowed capital, does not mean that a business asset within the meaning of the proviso to section 36(1)(iii) has been acquired by the assessee for the purpose of carrying out its business. The shareholder of a company and the company itself are two different entities and the business carried on by the company does not indicate that the business is actually carried on by the shareholder. What has been acquired with the fund borrowed from SREI Infrastructure Finance Ltd. here is the shares of DPSC Ltd which is outside the purview of a business asset as clarified in Sec 36(1)(iii)of the l. T. Act, 1961. 6. So the basic criterion for allowing the interest on borrowed fund, which must be utilized for the purpose of business of the assessee, has not been satisfied and more so, in a situation where no business has been carried on by the assessee during the financial year ending on 31-3-2010 either on its own or with the shares acquired from DPSC Ltd. Hence, the int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ignature of lender company i.e. SREI Infrastructure Ltd. Therefore according to Assessing Officer the contention of acquiring shares of a company in the similar business to stake control in such a business even with borrowed capital does not mean a business asset within the meaning of proviso to section 36(1)(iii) of the Act. 6. Having aggrieved by the order of Assessing Officer, the assessee filed an appeal before the CIT(A). We find that the same arguments which were advanced before the Assessing Officer were reiterated before the CIT(A). Further it is observed that the Memorandum of Association is appears to have been filed before the CIT(A). The assessee placed reliance in the judgment of (i) Hon ble High Court of Calcutta in the case of CIT vs. Rajeeva Lochan Kanoria reported in 208 ITR 616 (Calcutta), (ii) ITO vs. M/s. First American Securities Pvt. Ltd. ITA No.4768/Del/2012 of Delhi ITAT and (iii) Tetron Commercial Ltd. vs. CIT of Hon ble High Court of Calcutta reported in 261 ITR 422 (Calcutta). Having considered the submissions and the case laws, the CIT(A) is of the opinion that the Memorandum of Association permits the assessee to acquire shares of other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of controlling stake in its subsidiary, M/s DPSC Limited for gaining control and advancement of its business. Hence, the business had duly commenced during the relevant previous year. Hon'ble Delhi ITAT in ITO -vs.- First American Securities Pvt. Ltd.(ITA 4768/Del/2012) under identical facts, held that by making strategic investments, the assessee has commenced its business. Reliance was placed on the decision of Hon'ble Jurisdictional High Court in Tetron Commercial Ltd. -vs.- CIT (2003) 261 ITR 422 (Cal) wherein it was held that even a single transaction carried out is an adventure and a business . 4. I have considered the rival submissions. The appellant is engaged in the business of generation, transmission, distribution and supply of electrical energy. The memorandum of association of the appellant also permits the appellant to acquire shares of assessee's engaged in similar line of business, DPSC whose shares have been acquired is a listed company engaged in generation, transmission and distribution of electricity. Hence, the activity of purchase of shares is activity in the course of business. Hence, I find strength and m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purpose of business which has not been satisfied by the assessee. There was no business carried on by the assessee during the year under consideration either on its own or with the shares acquired from DPSC Ltd. He submits the payment of interest on borrowed loan and the processing fee paid on such borrowed loan is part of the cost of investment made in the shares of DPSC Ltd. and should not be considered as an expenditure either u/s 36(1)(iii) or section 37 of the Act and vehemently argued that the assessee is not entitled to claim allowance as it is not related to acquisition of any asset. 10. Further, he submits that the action of any merging itself with India Power Corporation Ltd. by virtue of an order of Hon ble High Court of Calcutta clearly establishes beyond doubt the purchase of shares of DPSC Ltd. with borrowed fund and not being in order to carry out any business as it is purely an investment decision, which clearly disentitles the assessee to claim any expenditure towards interest and processing fee paid for the loan taken for the purpose of shares. He prayed to set aside the order of CIT(A) and restore the order of Assessing Officer. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the assessee through its subsidiaries is primarily engaged in the business of generation, transmission, distribution and supply of electrical energy or power in all forms and manner for public and private purpose and ancillary thereto and submitted that the assessee is entitled to get deduction u/s 36(1)(iii) of the Act. Further placed reliance in the case of Baba Satyanarayan Himghar P. Ltd. of SMC Bench of Calcutta, ITAT and submitted that the SMC Bench held that the interest paid on loan availed to acquire the shares to gain controlling interest of a competitor company to be an allowable deduction u/s 36(1)(iii) of the Act. Further preferred to the order of Kolkata Tribunal in the case of Divakar Solar System Ltd. vs. DCIT reported in [2017] 88 taxmann.com 770 (Kolkata Trib.) and submitted that the Coordinate Bench of Kolkata held that the interest paid on borrowed capital which were invested in shares for strategic business purposes is a commercial expediency would be an allowable deduction and supported the order of CIT(A). 15. In counter reply the ld. DR argued that the acquiring control is not the object of assessee and assessee is not entitled to c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 17. For better understanding, the substantial question of law raised by the appellant-Revenue before the Hon ble High Court of Calcutta relevant to the issue on hand in the case of Rajeeva Lochan Kanoria (supra) is reproduced hereinbelow: 1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that interest payment could not be disallowed for investment in shares as per provisions of Section 36(1)(iii) of the Income-tax Act, 1961, when such shares were not used as stock-in-trade but were acquired simply for the purpose of acquiring controlling interest in the companies concerned ? 2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that investment in shares was the admitted business for the assessee when the activity in such investment was only to purchase shares for acquisition of controlling interest of companies and had not earned any income (except director's fees) by such vocation ? 18. On perusal of the above substantial question of law, we note that the Department of Revenue raised above two substantial que ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany. The expenditure incurred was expenditure incurred for business purposes and was thus allowable under section 36 of the Income-Tax Act, 1961. 5.1. Similar is the decision of the jurisdiction High Court in the case of Caldern Pharmaceuticals Ltd. vs. CIT [2004] 265 ITR 243. 6. Respectfully following the propositions laid down in these case-law and applying the same to the facts of the case, and as the assessee has acquired these shares to gain controlling interest in a competitor company. I am of the considered opinion that the disallowance made is bad in law. Accordingly I delete the disallowance made by the Assessing Officer as affirmed by the ld. CIT(A) and direct the Assessing Officer to allow the claim of the assessee u/s 36(1)(iii) of the Act. 20. Further in the case of Divakar Solar System Ltd. (supra) the Coordinate Bench of Calcutta Tribunal held that the interest paid on borrowed capital needs to be allowed as deduction u/s 36(1)(iii) of the Act as it is a commercial expediency with a view to expand business and acquiring, controlling interest in subsidiary companies. The relevant portions of wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvestible funds in the equity shares of a closely associated concern . Hence, we find that there was no basis for treating the interest expenditure claimed by the assessee as capital expenditure. 8.1. Our above view is also fortified by the decision of CIT vs Phil Corpn Ltd in (2011) 14 taxmann.com 58 (Bom) ..... 5.4.3. We also find that the decision of the Hon'ble Supreme Court in the case of S.A. Builders Ltd vs CIT(Appeals) (supra) had been subsequently approved by another decision of the Hon'ble Supreme Court in the case of Hero Cycles (P) Ltd vs CIT reported in (2015) 379 ITR 347. 5.4.4. We find that the test of commercial expediency is proved in the instant case beyond doubt and hence the interest paid on borrowed capital is to be allowed. We find that all the aforesaid judgements relied upon hereinabove apply to the facts of the instant case and hence we hold that the interest paid on borrowed funds in the sum of ₹ 5,34,24,658/- would be squarely allowable as deduction u/s 36(1)(iii) of the Act. Accordingly, the Grounds 4(a) to 4(d) raised by the assessee are allowed. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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