Interest paid on loan taken for acquiring shares of associate company is allowable expenditure u/s 36

The issue in this appeal of the assessee is regard to the disallowance of interest expenditure for acquiring shares of associate company u/s 36(1)(iii).

In this matter, assessee was engaged in the business of providing offshore software services such as data warehousing, application maintenance and support, application development, business intelligence and IT Infrastructure Management Service etc., to its associate company Bitwise Inc, USA.

During the year, assessee had invested in the equity shares of Bitwise Inc. of Rs.8.99 crore by taking term loan from Axis Bank Ltd. and had paid intetest of Rs. 69,51,455/-. The assessing officer disallowed the claim of interest on the grounds that interest on loan taken for purchasing shares for acquiring controlling interest in the company cannot be held to be expenditure incurred.Aggrieved by the order of the Assessing Officer, the assessee filed appeal before the ld.CIT(A).

The ld.CIT(A) confirmed the disallowance.

Aggrieved by the order of the ld.CIT(A), the assessee filed appeal before the Tribunal.

The ld. AR submitted that investment in Bitwise Inc., was for getting control in interest and not for earning dividend. Bitwise Inc., is a sole work provider to assessee company. Assessee company since its beginning had only one customer i.e. Bitwise Inc., USA. To carry out offshore jobs, it is always essential to have a setup at customers optionedlocation. Acquisition of shares of Bitwise Inc., USA made BitwiseInc., USA 100% subsidiary of assessee company. Thus, assessee had ensured continuous flow of business.

The ld. DR argued that the amount borrowed was not for the purpose of business as investment is not business of the assessee. The assessee had borrowed money for investment in shares. Therefore, interest paid on loan is not an allowable expenditure.

ITAT relied on order passed by Hon’ble Bombay High Court in the decision of PCIT vs. Concentrix Services (I)(P.) Ltd. [2019] 111 taxmann.com 269 (Bombay) which states as the interest expenditure incurred on loans taken for investment in acquiring controlled interest in a Company which was in the same line of business as that of the Respondent would be allowable expenditure u/s 36(1)(iii) of the Act. Therefore, the interest expenditure ofRs.69,51,455/- is allowed as revenue expenditure.