1998 (2) TMI 97 - HC - Income Tax

Financial Corporation Speculation In Shares Interest On Borrowed Capital Intercorporate Dividends

Summary

Issues:
1. Interpretation of whether the assessee qualifies as a financial company under section 40A(8) of the Income-tax Act, 1961.
2. Treatment of interest paid by the assessee on borrowed money for the purpose of calculating profit or loss under the head 'Profits and gains of business.'
3. Determination of whether relief under section 80M of the Income-tax Act, 1961, should be allowed on the gross amount or net amount of dividend received by the assessee.

Analysis:

Issue 1:
The primary issue in this case was whether the assessee could be classified as a financial company under sub-clauses (ii) and (iv) of clause (c) of Explanation to section 40A(8) of the Income-tax Act, 1961. The Income-tax Officer initially disallowed a portion of interest under section 40A(8) on the grounds that the assessee was not a financial company due to its income mainly arising from speculation in shares. However, the Commissioner of Income-tax (Appeals) and the Tribunal both held that the assessee satisfied the conditions to be considered a financial company based on the nature of its business activities, particularly its substantial investments in shares and loans. The court concurred with this finding, emphasizing that the principal business carried out by the company is crucial in determining its classification. As such, the court ruled in favor of the assessee on this issue.

Issue 2:
The second issue pertained to the treatment of interest paid by the assessee on borrowed money for calculating profit or loss under the head 'Profits and gains of business.' The Income-tax Officer argued that only a portion of the interest should be treated as related to share investments and deducted against dividend income. However, the Commissioner and the court held that once the capital is borrowed for business purposes, the entire interest payment should be allowed as a deduction for computing profit or loss without the need for apportionment. Citing relevant case law, the court supported the view that interest paid for business purposes should be deductible under section 36(1)(iii) of the Act. Consequently, the court ruled in favor of the assessee on this issue as well.

Issue 3:
The final issue revolved around the deduction under section 80M concerning whether it should be allowed on the gross amount or net amount of dividend received by the assessee. The court referred to a previous decision in the case of CIT v. National and Grindlays Bank Ltd., where it was held that relief under section 80M should be granted on the entire amount of dividend received. Given that the Revenue did not contest this interpretation, the court ruled in favor of the assessee on this issue, aligning with the precedent set in the aforementioned case.

In conclusion, the court's judgment favored the assessee on all three issues raised in the reference application, affirming their status as a financial company, allowing the full deduction of interest paid for business purposes, and granting relief under section 80M on the gross amount of dividend received.