Expenditure incurred for acquisition of controlling stake in subsidiary is revenue in nature – Delhi ITAT


M/s Eicher Motors Ltd v DCIT (ITA No.207 /Del /2013 dated 12.12.2014) – Delhi ITAT

Background:

The assessee incurred consultancy charges of Rs 20,36,319 for services rendered in relation to bid-cum-delisting of shares of Eicher Limited, a subsidiary company. During the course of assessment proceedings, the assessee submitted that the said expenses were incurred for acquisition of the entire controlling interest in subsidiary company – Eicher Limited since the assessee was a promoter of the said subsidiary and also has business interest in it. It was, further, submitted that the assessee being a promoter of Eicher Limited and holding business interest in that company, decided to acquire entire control over that company and, consequently, made an open offer to the public share-holders to acquire their shares and delist Eicher Limited from Stock Exchange for which services of J M Morgan Stanley Pvt. Ltd [Merchant Banker] and ILFS Investments Securities Limited [Syndicate Member] were obtained. Pursuant to the delisting of shares of Eicher Limited [after acquisition of shares from public share-holders], Eicher Limited was amalgamated with the assessee w.e.f. 4.3.2008 pursuant to the scheme of amalgamation being approved by the Hon’ble High Court of Delhi.

However, the AO disallowed the expenditure holding that the expenditure was capital in nature as the same was incurred in relation to acquisition of a new asset. The CIT(A) confirmed the disallowance.

HELD:

  • The assessee was a promoter of Eicher Ltd and held business/controlling interest with that company.
  • With a view to acquire complete control over that company, the assessee decided to acquire shares of Eicher Limited from Public shareholders and delist the same from Stock Exchanges thereafter.
  • Acquisition of shares in subsidiary company to strengthen controlling interest in such company was in furtherance of the business of the assessee i.e., holding investments in operating companies. Accordingly, expenditure in relation thereto would be regarded as being incurred for the purposes of business which is allowable deduction u/s 37(1) of the Act.
  • Assessee placed reliance on certain judicial precedents viz:
    (i) Addl. CIT v. Laxmi Agents (P) Ltd – 125 ITR 227 (Guj)
    (ii) CIT v. Amritaben R Shah 238 ITR 777 (Bom)
    (iii) Srishti Securities (P) Ltd v. JCIT 321 ITR 498 (Bom)
    (iv) CIT v. Premier Poly Sacks 321 ITR 450 (Mad)
  • The ratio laid down by various judiciaries is that interest expenditure incurred on borrowed funds utilised for acquiring controlling interest in companies would be allowable business deduction since the acquisition of controlling interest in a company is in furtherance of the business purposes of the assessee.
  • To illustrate further, the judgments rendered by various judiciary in the context of allow ability of claim of interest u/s 36(1)(iii) would equally be applicable to the claim of deduction u/s 37(1) of the Act in as much as the conditions precedent for deduction under the both the provisions is same, namely, an expenditure must have been incurred for the purposes of business.
Other Issue:
  • 14A disallowance – The dividend which is exempt from taxation is earned on account of investment made in share in the earlier years. The additional shares allotted to the assessee’s company in the current assessment year were on account of amalgamation of subsidiary companies. Therefore, no portion of the interest expenses incurred was in relation to investments in shares.  CIT(A) has categorically found that the assessee had enough interest free funds in the form of reserves and surplus and there was no relation between the interest expenditure and the dividend income. Therefore, disallowance of interest expenditure, by invoking the provision of Section 14A, was uncalled for.

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