2010 (6) TMI 612 - KERALA HIGH COURT

Whether assessee is entitled to deduction of substantial amount paid towards interest on the borrowed funds utilised for acquisition of shares in a company of which the assessee acquired controlling interest of up to 90 per cent - assessee had received dividend income and no other benefit is derived from the company for the business carried on by it - Held that:- reasoning given by the Tribunal for disallowance by applying section 14A, squarely applies for the interest paid on the borrowed funds because it is on record that the entire funds borrowed were utilised for acquisition of shares by the assessee in the company, assessee would be entitled to deduction of interest under section 36(1)(iii) of the Act on the borrowed funds utilised for the acquisition of shares only if shares are held as stock in-trade which arises only if the assessee is engaged in trading in shares. So far as acquisition of shares is in the form of investment and the only benefit the assessee derived is dividend income which is not assessable under the Act, the disallowance under section 14A is squarely attracted and the Assessing Officer, in our view, rightly disallowed the claim, dividend income received by the assessee during the previous year was a meagre sum of Rs. 3 lakhs. This only shows that the business carried on by the leasing company was not very substantial to justify the assessee's investment through borrowed funds. Therefore, principle of commercial expediency gone into by the Supreme Court does not apply to the facts of this case.

Therefore, we hold that the Tribunal in principle rightly held that the utilisation of the borrowed funds for acquisition of shares will not entitle the assessee for claiming deduction of interest paid on such borrowed funds. However, we hold that the Tribunal was not justified in allowing the claim in excess of Rs. 2 lakhs. For the same reasoning applied by the Tribunal, the assessee is not entitled to deduction of any amount towards interest paid on funds borrowed by way of fixed deposits taken for acquisition of shares in the company, which helped the assessee only to earn some dividend. Consequently we allow the appeal by reversing the order of the Tribunal and by restoring the disallowance confirmed in first appeal.