DCIT., CIRCLE 8(1), HYDERABAD vs. EAST INDIA PETROLEUM LIMITED, HYDERABAD

In response, the assessee submitted that the company has filed revised return of income, incorporating the order passed by the NCLT on 11.01.2019, amalgamating M/s RPPPL with assessee company, from the appointed date 01.04.2017. As per the order of the NCLT, the scheme of amalgamation has been treated as ‘purchase method’ in terms of Accounting Standard-14 (“AS-14”) issued by Institute of Chartered Accountants of India (“ICAI”) and accordingly, all assets and liabilities of the transferor company has been accounted in the books of accounts of the transferee company, i.e. assessee company, which resulted in taking over excess liabilities to the tune of Rs.88,21,86,061/- and the same has been treated as ‘goodwill’ in the books of accounts of transferee company, on which depreciation @25% has been claimed in terms of section 32 of the Act. The assessee had also explained the interest debited to Profit & Loss account towards loan borrowed from Axis Finance Ltd. and argued that as on the appointed date, M/s RPPPL was not having shares of assessee company and subsequently, the shares held by Energy Infra Limited, Mauritius had been purchased to consolidate the business and therefore, interest paid on said loan is in the nature of interest expenditure on loan borrowed for the purpose of the business of the assessee and same can be allowed as deduction u/s 32 of the Act.

The Assessing Officer, after considering the submissions of the assessee and also taking note of provisions of section 32 of the Act, observed that, in order to claim depreciation on any asset, the assessee must be owner of the asset and further, the asset must be used for the purpose of business or profession during the previous year. In the given case, amalgamation order has been passed on 11.01.2019, though w.e.f.01.04.2017 and therefore, the so called goodwill arising out of amalgamation cannot be actually be called to have at all been used in the business for the F.Y.2017-18, relevant to A.Y.2018-19. Therefore, observed that the depreciation claimed on goodwill cannot be allowed as deduction. The Assessing Officer, further noted that had it been the case of the assessee that goodwill has been used during the year, the assessee would have claimed the depreciation in the original return, which the assessee has not claimed, therefore, rejected the arguments of the assessee and disallowed depreciation of Rs.22,05,65,250/-. The Assessing Officer, further noted that the assessee company had debited interest expenses on loan borrowed from Axis Finance Ltd and the same has been used for the purpose of acquiring share capital of assessee company from Energy Infra Limited, Mauritius and from the amalgamation, the entire loan liability has been taken over by the assessee company. Since the loan liability has been taken over by the assessee company, it is as good as assessee company has borrowed loan to acquire its shares, which cannot be said that interest paid on loan borrowed from Axis Finance Ltd. is for the purpose of business and therefore, disallowed entire interest expenditure u/s 37(1) of the Act.

Being aggrieved by the assessment order, the assessee preferred an appeal before the CIT(A) and challenged the additions made towards disallowance of goodwill and depreciation in light of the decision of Hon'ble Supreme Court in the case of CIT Vs. Smifs Securities Ltd. (2012) 348 ITR 302 (SC) and argued that depreciation arising on account of amalgamation is in the nature of an intangible asset and the same is eligible for depreciation u/s 32 of the Act. The assessee had also challenged the disallowance of interest expenditure u/s 37 of the Act, on the ground that the interest expenditure covered u/s 30 to 36 needs to be dealt with relevant provisions of the Act and cannot be dealt under the provisions of section 37(1) of the Act. Therefore, the Assessing Officer erred in disallowance of interest expenditure u/s 37(1). Further, interest on loan borrowed from Axis Finance Ltd. is for the purpose of business of the assessee, because, M/s RPPPL has borrowed loan from Axis Finance Ltd. for the purpose of acquiring share capital of assessee company from Energy Infra Ltd., Mauritius to consolidate business and because both the companies are having similar business activity and it really helps the assessee to achieve business advantage and therefore, it can be said that interest paid on loan is wholly and exclusively incurred for the purpose of business. The Ld.CIT(A) after considering the submissions of the assessee and also taking note of relevant provisions of law, held that goodwill arising on account of amalgamation, by virtue of order of NCLT dated 11.01.2019 with appointed date from 01.04.2017 is in the nature of intangible asset, on which, the assessee is entitled for depreciation u/s 32(1) of the Act and this principle is supported by the decision of Hon'ble Supreme Court in the case of CIT Vs. Smifs Securities Ltd.(supra). Therefore, directed the Assessing Officer to delete the additions made towards disallowance of depreciation on goodwill. The Ld.CIT(A), further observed that the loan borrowed from Axis Finance Ltd to the extent of Rs.116 crores was for the purpose of business of the assessee, which is evident from the loan utilised for acquiring share capital from Energy Infra Ltd., Mauritius, therefore, interest paid on loan borrowed from financial institutions for the purpose of business needs to be allowed u/s 36(1)(iii) of the Act. Therefore, directed the Assessing Officer to delete the addition made towards interest expenditure u/s 37(1) of the Act.

Aggrieved by the order of the Ld.CIT(A), the Revenue is in appeal before the Tribunal.

The first issue that came up for consideration from Ground No.2 of Revenue’s appeal is deletion of addition made towards disallowance of depreciation on goodwill. The facts with regard to the issue are that the assessee company is engaged in the business of providing terminalling services to oil marketing companies for storage of bulk liquid products including fuels like high speed diesel, motor spirit, petroleum products like gas condensate and naphtha and petrochemicals as well as liquefied gas fuels like butane, propane and liquefied petroleum gas (LPG) at Visakhapatnam Port, Andhra Pradesh is a subsidiary of M/s RPPPL. M/s RPPPL was amalgamated with the assessee company by virtue of an order of the NCLT, Hyderabad, dated 11.01.2019 w.e.f. appointed date, i.e. 01.04.2017. As per the scheme of amalgamation approved by the NCLT vide order dated 11.01.2019, all the assets and liabilities of the transferor company, M/s RPPPL become the properties of transferee company, i.e. assessee company. Clause 11.1and 11.2 of the Scheme provides that the transferor company is the holding company of the transferee company, upon sanction of the scheme, the inter-company shareholding will be cancelled and there will be no issue of any shares to the transferor company to the extent of the number of shares held by the transferor company in the transferee company and the shares held by the transferor company in the transferee company shall stand cancelled. Clause 12 of the Scheme further provides that, upon sanction of the Scheme, the transferee company shall after providing adjustment as per clause 12.2 and 12.3 record in its financial statements, the assets, liabilities and reserves of the transferor company at their respective book values, as appearing in the financial statements of the transferor company, immediately preceding the appointed date. Similarly, the balance of the Profit & Loss account of the transferee company shall be aggregated with the balance in Profit & Loss account of the transferor company or transferred to the general reserve in accordance with Accounting Standard (AS) 14 – Accounting for Amalgamations prescribed under Section 133 of the Companies Act, 2013 r.w.Rule 7 of the Companies (Accounts) Rules 2014 and the Companies (Accounting Standard) Amendment Rules, 2016 under the ‘Purchase Method’. As on the appointed date, the total value of the assets of the amalgamating company i.e.

The Ld.CIT-DR submitted that the Ld.CIT(A) erred in law and on facts to allow claim of depreciation on goodwill, created on account of balancing accounting entry i.e., the difference between net assets and liabilities taken over, in pursuance to amalgamation as goodwill, which is eligible for depreciation u/s 32(1)(ii) of the Act as intangible asset. The Ld.CIT-DR further submitted that as per section 32 and 5th proviso (now 6th proviso), depreciation on any asset including intangible assets allowable to the predecessor and the successor in the case of succession referred to in clause (xiii), clause (xiiib) and clause (xiv) of section 47 or section 170 or to the amalgamating company and the amalgamated company in the case of amalgamation, or to the demerged company and the resulting company in the case of demerger, as the case may be, shall not exceed in any previous year, the deduction calculated at the prescribed rates, as if, the succession or the amalgamation, as the case may be, had not taken place, and such deduction shall be apportioned between the predecessor and the successor, or the amalgamating company and the amalgamated company, as the case may be, in the ratio of the number of days for which the assets were used by them. Therefore, claiming depreciation on balancing charge, arising on account of accounting under assets and liabilities taken over from the transferor company in pursuant to amalgamation cannot be treated as goodwill and depreciation u/s 32(1)(ii) cannot be allowed. In this regard, she relied upon the decision of ITAT Hyderabad in the case of Signode India Ltd. Vs. Dy.Commissioner of Income Tax 2021(3)

The learned counsel for the assessee, Shri H.Srinivasulu, Advocate, on the other hand, supporting the order of the Ld.CIT(A), submitted that, the facts with regard to the scheme of amalgamation, approved by the NCLT, vide order dated 11.01.2019 was not disputed by the Assessing Officer. Further, before the approval of scheme of amalgamation, the NCLT has issued notices to Assessing Officer to file objections, if any, for the proposed amalgamation for which, the Assessing Officer, except stating that there is demand, has not raised any objection for the proposed scheme of amalgamation. Further, as per the scheme of amalgamation approved by the NCLT, the same has been treated as ‘purchase method’ in terms of AS-14 issued by ICAI / Accounting for amalgamation and as per said method, difference between assets and liabilities in case of excess liabilities, the same shall be treated as goodwill and further in case of excess assets, the same shall be credited to capital reserve account. The assessee, while giving effect to NCLT order has accounted all assets and liabilities of the transferor company in the books of accounts of the assessee company, which resulted in excess liabilities taken over to the extent of Rs.88.2 crores and the same has been treated as goodwill and depreciation has been claimed. Further, the Assessing Officer never disputed the fact that the assessee company has taken over excess liabilities, by virtue of amalgamation and the same needs to be accounted as goodwill in terms of AS-14, but disallowed the depreciation claimed on goodwill, only on the ground that the asset has not been put to use, as required u/s 32 of the Act. However, the fact remains that, the concept of user has to be interpreted in the context of intangible assets, which means, the existence of goodwill arising from the amalgamation tantamounts to user and therefore, the word user should be interpreted in such a manner, it will enable the assessee to obtain the benefit intended by the legislature. In this regard, he relied upon the decision of Hon'ble Supreme Court in the case of Mysore Minerals Limited, 239 ITR 775 (SC). The learned counsel for the assessee further submitted that, there is no dispute with regard to the fact that the goodwill is an intangible asset within the meaning of section 32(1)(ii) of the Act and this fact has been reiterated by the Hon'ble Supreme Court in the case of CIT Vs. Smifs Securities Ltd.(supra). Further, this fact has been reiterated by the Hon'ble Supreme Court in the case of Hewlett Packard India Sales Pvt. Ltd. [2024] 463 ITR 329 (Kar). Therefore, from the ratios laid down by the Hon'ble Supreme Court, it is very clear that goodwill is an intangible asset in nature of any other business or commercial rights of similar nature, which is eligible for depreciation u/s 32(1)(ii) of the Act. The Ld.CIT(A), after considering the relevant facts has rightly allowed depreciation claimed on goodwill and therefore, the order of the Ld.CIT(A) should be upheld. In this regard, he relied upon the decision of ITAT Chennai in the case of Trivitron Healthcare P.Ltd. Vs. CIT [2022] 98 ITR (Trib.) 105 [ITAT (Chen)]. The assessee had also relied upon the decision of ITAT Hyderabad in the case of S&P Capital IQ (India) Private Limited Vs. ACIT in ITA-TP No.463/Hyd/2022 and the decision in the case of Texksystems Global Services Pvt.Ltd. Vs.DCIT in ITA No.290/Hyd/2023.

We have heard both the parties, perused the material on record and gone through the orders of the authorities below. We have also carefully considered the relevant case laws referred to by both the parties in support of their arguments. There is no dispute with regard to the fact that the assessee has claimed deprecation on goodwill which was arisen, on account of amalgamation of M/s RPPPL with the assessee company, by virtue of an order of NCLT dated 11.01.2019 w.e.f appointed date 01.04.2017, by which, all assets and liabilities of the transferor company has been taken over by the transferee company. The purpose and the terms of the scheme have been specified in documents submitted before the NCLT. In fact, the NCLT has passed an order and approved the scheme of amalgamation vide order dated 11.01.2019 and sanctioned the scheme of amalgamation. Further, the Assessing Officer has not raised any objection for the scheme of amalgamation. As per the scheme of amalgamation approved by the NCLT, all assets and liabilities of the transferor company becomes the assets and liabilities of the transferee company from the appointed date and upon sanction of the scheme, the transferee company shall have to provide adjustment as per Clause 12.2 and 12.3 and recorded in its financial statements, the assets, liabilities and reserves of transferor company at their respective book values, as appearing in the financial statements of the transferor company immediately preceding the appointed date. Similarly, the balance of the Profit & Loss account of the transferor company is transferred to the general reserve, in accordance with AS-14 accounting for amalgamations, prescribed u/s 133 of the Companies Act, 2013, r.w.Rule 7 of the Companies (Accounts) Rules, 2014 and the Companies (Accounting Standard) Amendment Rules 2016 under the Purchase Method. The amalgamation is between the subsidiary company and the holding company, i.e., the holding company is amalgamated with subsidiary company. Therefore, the inter-company shareholding will be cancelled and there will be no issue of any shares to the transferor company, to the extent of the number of shares held by the transferor company. In other words, amalgamation provides for taking over all assets and liabilities of the transferor company, without issuing any share capital to the shareholders of the transferor company. The assessee company has given effect to the order of the NCLT and recorded all assets and liabilities of transferor company in its books of accounts in their book value. Further, as on the appointed date i.e. 01.04.2017, net assets of the transferor company were at Rs.4,4025,742/-, whereas the total liabilities of transferor company were at Rs.119,87,67,193/-. The equity capital held by the holding company in the subsidiary company was Rs.27,25,55,390/-. The net result of transfer of all assets and liabilities resulted in excess liabilities taken over by the assessee company to the tune of Rs.88,21,86,061/- and the same has been treated as goodwill in terms of AS-14, on which the assessee has claimed depreciation.

In this factual background, if we examine the legal contentions raised by the Ld.CIT-DR in light of provisions of section 32(1)(ii) and 6th Proviso, provided therein, we need to examine, whether 5th proviso to section 32(1) of the Act restrict depreciation on goodwill, arising on account of amalgamation or it only restricts goodwill to the predecessor or successor company in case of amalgamation or demerger etc. The 5th proviso to section 32(1) of the Act, has been inserted by the Finance Act, 1996, to restrict claim of aggregate deduction, which is evident from memorandum of Finance Bill of 1996, as per which, in case of succession in business and amalgamation of companies, predecessor of business and successor of amalgamating company and amalgamated company, as the case may be, are entitled to depreciation allowance on same assets, which in aggregate cannot exceed depreciation allowance, in any previous year at prescribed rates. Therefore, it is proposed to restrict aggregate deduction in a year, depreciation at the prescribed rate and apportion the same allowance in the ratio of number of days for which said assets were used by them. From the memorandum explaining Finance Bill, and purpose of introduction of 5th proviso to section 32(1) of the Act, it is very clear, as per which predecessor and successor in a scheme of amalgamation should not claim depreciation over and above normal depreciation allowable on a particular asset. In other words, in a scheme of amalgamation where existing assets of amalgamating company are acquired by amalgamated company, then while claiming depreciation after amalgamation, amalgamated company can claim depreciation only on the basis of number of days, a particular asset were used by them. Therefore, in our considered view, said proviso only determines amount of depreciation to be claimed in the hands of predecessor / amalgamating company and in hands of the successor or amalgamated company, only in the year of amalgamation based on the date of such amalgamation. However, it does not in any way restrict claim of depreciation on assets acquired after amalgamation or during the course of amalgamation. Therefore, it is very clear from 5th proviso to section 32(1) of the Act, that once any asset, including intangible asset, more particularly, goodwill is added to the respective block of assets of the amalgamated company, in the context of claim of depreciation in the hands of amalgamated company and such addition to the block of assets would not fall within the purview of the 5th proviso to section 32(1) of the Act. Effectively, scope of the said proviso is narrow as could be culled out for the purpose, for which said proviso was inserted in the statute as reflected in the Memorandum to the Finance Bill. To further clarify, 5th proviso to section 32(1) of the Act, with regard to depreciation on goodwill is restricted to assets, which belongs to amalgamating company and its application cannot be extended to the assets, which arise in the course of amalgamation to the amalgamated company. The intention of law was to extend the benefit available to the amalgamated company on succession and not to restrict depreciation on assets which generated in the course of succession. It is very clear from the proviso that it refers to depreciation allowable to the predecessor and successor in the case of succession and this should be understood as reference to the assets that belong both to the predecessor and successor and which can only once belonged to the predecessor company and it does not apply to the assets which were generated in the hands of amalgamated company for the first time, as a result of amalgamation as approved by the High Court. In our considered view, 5th proviso applies only to those assets which commonly exist between predecessor and successor, however, it does not apply to asset, which has been created or acquired after amalgamation. The creation of new asset, by virtue of amalgamation like goodwill completely go out of reckoning of said proviso.

Having said so, let us come back, whether goodwill is an intangible asset in nature of any other business or commercial rights similar nature, which is eligible for depreciation u/s 32 of the Act or not. This issue is no longer res-integra. Hon'ble Supreme Court in the case of CIT Vs. Smifs Securities Ltd. (supra) has considered an identical issue and held that a reading of the words ‘any other business or commercial rights of similar nature’ in clause (b) of Explanation 3 indicates that goodwill would fall under the expression ‘any other business or commercial rights of similar nature’. The principle of ejusdem generis would strictly apply while interpreting the said expression which finds place in Explanation 3(b). Goodwill is an asset under Explanation 3(b) to section 32(1) of the Act. Similar view has been taken by the Hon'ble Supreme Court in the case of CIT Vs. Hewlett Packard India Sales Pvt Ltd. (supra), where, the Hon’ble Supreme Court, by following its earlier decision in the case of CIT Vs. Smifs Securities Ltd. (supra) has upheld the order of Hon'ble Karnataka High Court, where, the Hon'ble High Court held goodwill is valuable asset eligible for depreciation.

The assessee had also relied upon the decision of ITAT Chennai in the case of Trivitron Healthcare P.Ltd. Vs. CIT (supra). The ITAT in the context of goodwill arising on account of amalgamation has considered the issue in light of provisions of section 31(1)(ii) and 6th proviso, provided therein and after considering the relevant facts held as under :

The assessee had also relied upon the decision of ITAT Hyderabad Benches in the case of Teksystems Global Services (P) Ltd.(supra), where, the Tribunal has considered an identical issue of depreciation on goodwill and after considering relevant facts, held as under :

It remains an undisputed fact that the seller company is assessed to tax and the capital gains offered by it are accepted without any adjustment. Assessee placed reliance on the decision of the Hon'ble High Court of Delhi in the case of Triune Projects Private Limited 77 taxmann.com 40 and the view taken by the Co-ordinate Bench of the Bangalore Tribunal in the case of I&B Seeds Pvt. Limited., 142 taxmann.com 274 for the principle that once the department accepted the capital gains in the hands of the seller, the said transaction cannot be doubted in the hands of the purchaser. These decisions bind us.

Viewing from any angle, the circumstances cited by the authorities to hold that the BTA is a colourable device created only to reduce the tax, does not hold water. We, therefore, while disagreeing with the authorities, return a finding that it is legitimate for the assessee to go for acquisition of IT services division of Allegis India and there is no material to make it a colourable device in the shape of any undue advantage derived by the assessee. We, accordingly, direct the learned Assessing Officer to allow the depreciation on goodwill.

Now coming to the depreciation on other tangible assets, it is disallowed on the ground that such assets were not put to use by the assessee during the year under consideration. When once we accept the BTA, it goes without saying that the assessee acquired the IT services division of Allegis India on a going concern basis. Submission made on behalf of the assessee that in the hands of the seller, depreciation in respect of such assets was allowed and in accordance with the provisions under the 6th proviso to section 32(1) of the Act is a verifiable fact. If such assets are considered for depreciation in accordance with law in the hands of the seller, the question of putting such assets to use by the assessee does not arise and only requirement is compliance with the 6th proviso to section 32(1) of the Act. 16. 6th proviso to section 32(1) of the Act reads that in any previous year, the aggregate deduction in respect of depreciation of the tangible assets allowable to the predecessor and successor in case of succession shall not exceed the deduction calculated at the prescribed rates as if the succession had not taken place, and such deduction shall be apportioned between the predecessor and successor in the ratio of the number of days for which the assets were used by them. No record is available before us throwing light on the proportion of the depreciation claimed by the seller, but the assessee is entitled to claim such depreciation only in proportion to the number of days for which the asset held by it. We, therefore, deem it just and proper to cause verification of this fact and to allow such depreciation.

In view of this matter and considering the facts and circumstances of the case, we are of the considered view that the assessee is eligible for depreciation on goodwill created on account of amalgamation. The Assessing Officer without appreciating relevant facts, simply disallowed depreciation on goodwill. The Ld.CIT(A) has rightly deleted the additions made by the Assessing Officer. Therefore, we are inclined to uphold the findings of the Ld.CIT(A) and reject the grounds taken by the Revenue on this issue.

The next issue that came up for consideration from ground 3 and 4 of Revenue’s appeal is deletion of addition made towards disallowance of interest paid on loan borrowed from Axis Finance Ltd. The assessee company had borrowed loan from Axis Finance Ltd and paid interest of Rs.18,68,28,250/- for the financial year, relevant to the assessment year under consideration. The Assessing Officer, during the course of assessment proceedings observed that, on examination of the amalgamating company i.e. financials of M/s RPPPL, it was seen that it had taken loan of Rs.116 crores from Axis Finance Ltd. for acquiring shares of the assessee company from M/s Energy Infra Limited, Mauritius and on this loan booked interest of Rs.18,68,28,250/- and debited to the Profit & Loss account. On amalgamation, the same loan liability has been taken over by the assessee and interest paid on said loan has been treated as revenue expenditure. The Assessing Officer further observed that, if interest claim is allowed, it will tantamount to allowing assessee company, payment of interest on money borrowed, for buying its own share capital, therefore, called upon the assessee to explain as to why the interest paid on loan shall not be disallowed. In response, the assessee submitted that the amalgamating company, M/s RPPPL has taken loan from Axis Finance Ltd. and utilised the loan proceeds for acquiring shares of the assessee company from M/s Energy Infra Limited, Mauritius. Further, at the time of amalgamation i.e. on the appointed date, M/s RPPPL was not holding shares of the assessee company. Further, it has acquired shares from Energy Infra Limited, Mauritius to have control over the business of the assessee company, because it gives benefit in the long run by curtailing other competitor to establish similar business, where the assessee is operating business in India. Therefore, any interest paid on loan for acquiring control over shares in any company partakes the nature of loans taken for the purpose of business and interest paid on the said loan needs to be allowed. The Assessing Officer, however, was not convinced with the explanation furnished by the assessee and according to the Assessing Officer, as per section 37 of the Act, expenditure should not be of capital nature in order to be admissible. Since the interest paid on loan borrowed for the purpose of acquiring shares of assessee company from third party is in the nature of capital expenditure and was not allowed as deduction, therefore, rejected the claim of the assessee and disallowed interest expenditure u/s 37 of the Act.

On appeal, the Ld.CIT(A) for the reasons stated in their appellate order, deleted the additions made by the Assessing Officer, by holding that the Assessing Officer has wrongly invoked the provisions of section 37(1) of the Act, because, when the loan is taken in the ordinary course of business and the said loan is utilised for acquiring controlling on interest in any company, which gives business advantage in the long run, then, the same cannot be considered as not for the purpose of business and therefore, invoking provisions of section 37(1) of the Act, when the particular expenditure covered under the specific provisions of section 30 to 36 is not in accordance with law. The Ld.CIT(A) further held that once the loan taken from any banks or financial institutions is for the purpose of business, then, interest paid on said loan should be allowed u/s 36(1)(iii) of the Act, therefore, directed the Assessing Officer to delete the additions made towards disallowance of interest paid on loans.

The Ld.DR, submitted that the Ld.CIT(A) erred in deleting the additions made towards disallowance of interest, without appreciating the fact that there is no commercial or business activity in the amalgamating company and the assets held by the amalgamating company were only investment in shares of the amalgamated company, purchased during the previous year, which could not have given rise to any goodwill. The Ld.DR further submitted that the Ld.CIT(A) failed to appreciate that the loan liability of the amalgamating company was used for purchase of shares of the amalgamated company and therefore, no interest can be allowed on such usage of funds, as they are capital in nature and not for the purpose of business of either amalgamating company or amalgamated company. The Ld.CIT(A), without appreciating relevant facts, simply deleted the additions made by the Assessing Officer.

The Ld.AR on the other hand, submitted that first of all, the Assessing Officer erred in invoking section 37 and disallowing interest expenditure, because an item of expenditure covered u/s 30 to 36 cannot be covered u/s 37 of the Act. Further, as per the scheme of amalgamation, as approved by the NCLT, the assets and liabilities of amalgamating company shall become assets and liabilities of amalgamated company, with effect from the appointed dated and therefore, any interest paid on such loan becomes expenditure of the assessee company. Further, the loan borrowed from Axis Finance Ltd. is for the purpose of business of assessee company, because, by acquiring shares from Energy Infra Limited, Mauritius, the assessee has prevented the other company to establish similar facility of storage of petroleum products, which gives competition in the market. Therefore, the arguments of the Ld.DR that the loan borrowed from bank is for the purpose of acquisition of shares and interest paid on such loans partakes the nature of capital expenditure and therefore, cannot be allowed is incorrect. In this regard, he relied upon the decision of Hon'ble Bombay High Court in the case of CIT Vs. Zuari Industries Ltd. [2020] 420 ITR 323(Bom).

We have heard both the parties, perused the material on record and gone through the orders of the authorities below. There is no dispute with regard to the fact that M/s RPPPL was a holding company of the assessee company. Further, the assessee company shares were held by Energy Infra Limited, Mauritius. M/s RPPPL acquired the share of assessee company from Energy Infra Limited, Mauritius and for this purpose, taken loan from Axis Finance Limited, on which, interest has been debited in Profit & Loss account. Admittedly, as on appointed date, 1st April, 2017, M/s RPPPL was not holding shares of assessee company. Therefore, the issue of interest paid on loans, whether it is deductible u/s 36(1)(iii) of the Act is to be examined, in light of amalgamation between the two companies under the scheme of amalgamation. There is no dispute with regard to the scheme of amalgamation approved by NCLT by order dated 11.01.2019 and as per the said scheme, all assets and liabilities of the transferor company becomes the assets and liabilities of the transferee company from the appointed date. The scheme further provides that immediately, after sanction of the scheme, the transferee company shall record all assets and liabilities, including the balance in Profit & Loss account, in their books of accounts. Going by the scheme of amalgamation, there is no dispute that whatever liabilities of the transferor company would become liabilities of the transferee company and consequently, any interest paid on said loans would become expenditure in the hands of the transferee company. Therefore, we are of the considered view that the Assessing Officer is erred in holding that the assessee has taken loan from banks, for the purpose of acquiring its own share capital and therefore, interest paid on said loan partakes the nature of capital expenditure and cannot be allowed as deduction.

Having said so, let us come back to the issue on merits. Admittedly, amalgamating company and the amalgamated company are in similar line of business, which is evident from the main clause in their MOA. Further, the shares of amalgamating company i.e. the assessee company were held by Energy Infra Ltd. Mauritius. To consolidated business operations and to prevent competition in the market, amalgamating company has acquired shares of assessee company from third party and for this purpose, has borrowed loans from Axis Finance Limited. Once, the purpose of loan is to acquire shares of any company for taking controlling interest, in our considered view, the said loan becomes the borrowed capital for the purpose of business of the assessee and any interest paid on borrowed capital needs to be allowed as deduction u/s 36(1)(iii) of the Act. This legal principle is supported by the decision of Hon'ble Supreme Court in the case of S.A Builders Ltd., 299 ITR 01 (SC). This legal principle is also supported by the decision of Hon'ble Gujarat High Court in the case of B.Nanji and Co. Vs. DCIT [2020] 425 ITR 286 (Guj), where it has been clearly held that any loan borrowed to purchase shares, so as to have effective control, in order to expand its business, then the investment in shares was for expansion of business of the assessee and therefore, any loan borrowed for the purpose of purchase of shares would necessarily becomes the loan borrowed for the purpose of business of the assessee and any interest paid on such loan needs to be allowed u/s 36(1)(iii) of the Act. Similar view has been taken by Hon'ble Bombay High Court in the case of CIT Vs. Zuari Industries Ltd. (supra), though, once it was shown that the borrowing was for the business purpose, interest paid on such borrowing would allowable deduction. The sum and substance of ratios laid down by various courts including Hon'ble Supreme Court is that even if the loan is borrowed for controlling interest in any company by acquiring shares, then the said purchase of shares tantamount to expansion of business and therefore, any interest paid on borrowed capital for the purpose of business should be allowed as deduction. In the present case, there is no dispute with regard to the fact that the amalgamated company has borrowed loan from Axis Finance Limited for the purpose of acquiring shares of assessee company, which was held by M/s Energy Infra Limited, Mauritius and therefore, in our considered view, interest paid on said loan is deductible u/s 36(1)(iii). The Assessing Officer, without appreciating relevant facts simply disallowed interest u/s 37(1) of the Act. The Ld.CIT(A), after considering the relevant facts has rightly deleted the addition. Therefore, we are inclined to uphold the order of the Ld.CIT(A) and reject the grounds taken by the Revenue.

In the result, appeal filed by the Revenue is dismissed.