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TMI Blog2025 (3) TMI 926X X X X Extracts X X X X X X X X Extracts X X X X ..... wed funds have been utilized for the purpose of investment. On query, the assessee submitted that it had acquired Compulsory Convertible Debentures (CCD) of Shreeniwas Cotton Mills Ltd. of Rs. 1005.20 crores which was interest bearing @ 14.75%. After verification of the detailed filed, the assessing officer noticed that no interest has been received on the amount of Rs. 504,97,49,410/-. The assessing officer was of the view that interest bearing funds have been utilized for investment of Rs. 504,97,49,410/- in the compulsory convertible debentures of Shreeniwas Cotton Mills Ltd. of which no interest has been received during the year under consideration. Therefore, an amount of Rs. 5,56,27,303/- being the interest expenses u/s 36(1)(iii) of the Act was disallowed. 3. The assessing officer filed appeal before the ld. CIT(A). The ld. CIT(A) has allowed the appeal of the assessee. The extract of the decision of ld. CIT(A) is reproduced as under: "9. During the course of assessment proceedings, the AO noticed that the appellant company had debited interest expenses of Rs. 3951.64 Lakhs in the Profit & Loss Account. It appeared from the Balance Sheet of the appellant that the borrowed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 504,97,49,410/-. The AO, therefore, held that clearly, interest-bearing funds have been utilized by the appellant for investment of Rs. 504,97,49,410/- in the CCDs. He further held that since no interest had been received by the appellant on the amount of Rs. 504,97,49,410/- during the year under consideration, interest cost pertaining to the said amount is disallowable u/s. 36(1)(iii) of the Act. The AO, accordingly, worked out the interest disallowable at the rate of Rs. 12.75% at Rs. 5,56,27,303/-. The detailed working of interest disallowable has been given in para 6.3 of the impugned assessment order. The above amount of Rs. 5,56,27,303/- was, accordingly, added to the total income of the appellant. 11. Before me, the appellant has made detailed submissions on the issue, which are reproduced herein above. The appellant has contended that it had utilized the borrowed funds for the purpose of its business, and, therefore, no disallowance u/s. 36(1)(iii) was warranted. Further, the AO cannot decide as to what is commercial expediency. It is also not material that the interest paid by the appellant on its borrowings is greater than the interest earned by it or that the appel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 12.5 From the above discussion, it is seen that the main object of the appellant is real estate development and construction activities. The capital borrowed by the appellant has been invested in Compulsory convertible Debentures of Shreenivas Cotton Mills Ltd as a strategic investments in subsidiary wherein the construction projects were in progress. The appellant is able to substantiate the commercial expediency as the main object is not to earn an interest but to engage in real estate and construction activities. This issue is covered by the decision of Hon'ble Bombay High court in case of Shrishti Securities Pvt Ltd (321 ITR 498), wherein the Honble High court has decided as under- "We may also gainfully refer to the judgment of the Calcutta High Court in Rajeeva Lochan Kanoria's case (supra). The learned Court was considering section 36(1)(iii) and was pleased to observe as under :- "The only enquiry that is to be made is whether the payment of interest was in respect of capital borrowed for the purpose of the assessee's business or profession. There is no dispute that the capital was borrowed in the instant case and interest was paid on the borrowed capital. It i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The relevant portion of the decision is reproduced as under- "10. We have gone through the decision rendered by jurisdictional High Court in the case of Srishti Securities Pvt. Ltd. (321 ITR 498) dated 22.01.2009, wherein the Hon'ble High Court held that the object or the purpose of the capital borrowed whether it is for the purpose of acquisition of stock-in-trade or expenditure of capital nature will not be relevant and as long as the capital borrowed is for the purpose of business, the same will have to be allowed. The investment in the form of purchase of shares with a view to acquire controlling interest in another company was considered to be a business purpose." "11. Thus, from the records which are in the shape of written submission filed before Ld. CIT(A) and contained in para no. 6 of the order of Ld. CIT(A), we also noticed that assessee had invested the amount by purchasing the shares of M/s Sriniwas cotton Mills Ltd for obtaining controlling stakes in the said company. Therefore, respectfully following the decision of Hon'ble Bombay High court in the case of Srishti Securities Pvt. Ltd, we uphold the order of Ld. CIT(A)." 12.8 The facts of the present case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w the grounds of appeal of the assessee." 12.10 Respectfully following the decision of Hon'ble Jurisdictional High court in case of Shrishti Securities Pvt Ltd as mentioned above and decision of Jurisdictional Mumbai ITAT in appellants own case for the A-Y 2009-10 [ITAT "A" Bench order dated 30.07.2019], the appeal raised in ground no.1 is allowed." 4. Heard both the sides and perused the material on record. The assessee has earned interest income of Rs. 39.37 crores on investment made in compulsory convertible debentures of Shreeniwas Cotton Mills Ltd. It is 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 presume ..... X X X X Extracts X X X X X X X X Extracts X X X X
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