2009 (1) TMI 527 - AT - Income Tax

Summary

Issues Involved:
1. Legality of the CIT's order u/s 263.
2. Allowability of interest on borrowed funds u/s 36(1)(iii).

Summary:

1. Legality of the CIT's order u/s 263:
The substantive ground raised by the assessee pertains to the order passed by the CIT u/s 263. The CIT noticed that the Assessing Officer's orders were erroneous and prejudicial to the interests of the revenue. The CIT issued a show-cause notice, stating that the interest claims on borrowings for the assessment years 1996-97 and 1997-98 were wrongly allowed u/s 36(1)(iii). The CIT found that the assessee purchased shares of Sterlite and MALCO to have controlling interest, and the Assessing Officer allowed interest without proper enquiries, making the orders erroneous.

2. Allowability of interest on borrowed funds u/s 36(1)(iii):
The assessee argued that it engaged in dealing in shares and making investments for deriving income, holding shares as 'stock in trade'. It claimed interest expenditure u/s 36(1)(iii) as the borrowed money was used for buying shares shown as stock in trade. The assessee also contended that even if the investments were for securing controlling interest, the interest on borrowed funds is deductible u/s 36(1)(iii). The CIT, however, found that the assessee's primary intention was to acquire controlling interest, not to trade or earn dividends, making the interest claim ineligible. The Tribunal upheld the CIT's order, stating that the Assessing Officer's failure to examine the issue and apply mind rendered the orders erroneous and prejudicial to the revenue's interests.

Conclusion:
The Tribunal confirmed the CIT's invocation of provisions u/s 263, dismissing the assessee's appeals for the assessment years 1996-97 and 1997-98.