18 January 2021
Interest Paid on Borrowed Fund for Acquiring Controlling Interest in another Company allowable as Business Expenditure. The expenses are in connection with loans taken for Bank for the acquisition of a Company. Please assist the interest on loan and finance expenditure on account of the loan could have been allowed as business expenditure or not . I have referred judgement PCIT v. Concentrix Services (I) (P.) Ltd. (2019) 267 Taxman 625 (Bom.)(HC) in which they allowed interest on loan and finance expenditure on account loan as business expenditure on the ground that the Respondent is not in the business of investment of shares but in the business of Information Technology enabled Services, BPO and Call Centres.
Please guide whether we taken a loan for purchasing 100% shares of another company and after acquisition that company becomes 100% subsidiary company .
Loan taken for that acquisition is allowed and the interest on loan and finance expenditure on account of the loan could have been allowed as business expenditure or not .
09 July 2024
Based on the reference to the judgment in PCIT v. Concentrix Services (I) (P.) Ltd. (2019) 267 Taxman 625 (Bom.)(HC), where interest on loans taken for the acquisition of a company was allowed as business expenditure, here’s how it generally applies to your situation:
### Key Considerations:
1. **Nature of Business**: - The deductibility of interest on loans primarily depends on whether the borrowing is used for the purposes of the taxpayer's business. In the case of Concentrix Services, the Bombay High Court allowed the deduction because the taxpayer's core business was IT-enabled services, BPO, and call centers, not investment in shares.
2. **Acquisition of Controlling Interest**: - When a company takes a loan to acquire 100% shares of another company, and that company subsequently becomes a 100% subsidiary, the interest paid on the loan can be considered a business expenditure if the acquired company’s operations are integrated into the business activities of the acquiring company.
3. **Business Purpose Test**: - The critical factor is establishing that the loan was taken to facilitate and enhance the taxpayer’s core business activities rather than for the purpose of making investments. If the acquisition is strategic and contributes to the expansion or enhancement of the taxpayer's existing business operations (such as diversification, synergy creation, or expansion into new markets), the interest on the loan can typically be treated as deductible business expenditure.
4. **Documentation and Justification**: - It’s important to maintain proper documentation and evidence showing that the loan was used specifically for acquiring the shares and that the acquisition aligns with the taxpayer's business objectives. This includes board resolutions, loan agreements, acquisition documents, and financial statements reflecting the integration or benefits derived from the acquisition.
### Conclusion:
Given the precedent set by the Bombay High Court’s decision in Concentrix Services case, where the taxpayer's main business activities were considered, interest on loans taken for acquiring a company can be allowed as business expenditure if it can be demonstrated that the acquisition serves the business purposes of the taxpayer. Ensure that you have a clear narrative explaining how the acquisition enhances or expands your business operations and maintain supporting documentation for tax assessment purposes.
For specific advice tailored to your situation and to ensure compliance with tax laws, it’s advisable to consult with a qualified tax advisor or chartered accountant who can provide detailed guidance based on your company’s specific circumstances and the prevailing tax regulations.
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