Tata Chemicals in a reported case at [2026] 183 taxmann.com 164 (Mumbai – Trib.)[04-02-2026], had borrowed funds for the purpose of purchasing shares of its foreign subsidiaries. It incurred interest on such borrowings and claimed the same as a deductible business expenditure under Section 36(1)(iii) of the Income-tax Act, 1961.
The Assessing Officer disallowed the claim on the ground that shares of foreign subsidiary companies are capable of earning only dividend income, which is taxable under Section 56 under the head “Income from Other Sources.” Therefore the interest expenditure could not be allowed as a deduction under the head “Profits and Gains of Business or Profession.”
The company then raised an alternative plea that the interest expenditure should be allowed under Section 57(iii) as a deduction against income from other sources. However, the Department relied upon the jurisdictional High Court decision in Amritaben R. Shah, wherein it was held that if shares are acquired for the purpose of obtaining controlling interest in a company, the dominant intention is not to earn dividend income but to acquire control. Hence, such expenditure would also not qualify for deduction under Section 57(iii).
The Income Tax Appellate Tribunal (ITAT), while confirming the disallowance, held that permitting deduction of interest expenditure against business income, when the corresponding investment yields income assessable under an entirely different head, would be contrary to the fundamental scheme and principles governing the computation of income under the Act.
In view of this position, large companies that hold substantial investments in subsidiaries in their balance sheets and simultaneously incur significant interest expenditure reflected in their profit and loss accounts may need to re-strategize their investment portfolios and funding structures.