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Issues:
1. Disallowance of interest deduction under sections 36(1)(iii) and 57(iii) of the Income-tax Act. 2. Treatment of shares of a company as investment or stock-in-trade for claiming loss on valuation. Issue 1: Disallowance of Interest Deduction The appeal was against the disallowance of interest deduction amounting to Rs. 13,41,215 by the ld. CIT(A). The assessee, an investment company, utilized borrowed funds for acquiring shares as investment and stock-in-trade. The Assessing Officer disallowed the interest deduction entirely, stating the primary objective was to acquire controlling interest rather than earning dividends. The ld. CIT(A) allowed deduction for interest to the extent of Rs. 96,040 for shares held as stock-in-trade. The remaining interest was deemed non-deductible under sections 36(1)(iii) and 57(iii) of the Act. The assessee argued that borrowed funds were fully used for business purposes, emphasizing the main object of the company to deal with shares and stocks. Citing various case laws, the assessee contended that interest on borrowed funds for share investments, whether for controlling interest or dividends, should be deductible under section 36(1)(iii). The Tribunal, after reviewing the facts and legal precedents, held that interest expenditure was allowable under section 36(1)(iii), overturning the disallowance by the ld. CIT(A). Issue 2: Treatment of Shares as Investment or Stock-in-Trade The second set of grounds pertained to the treatment of shares of a specific company as investment or stock-in-trade for claiming a loss on valuation. The shares were initially shown as investment but later as stock-in-trade in subsequent balance sheets. The revenue authorities rejected the claim, asserting the shares were held as investment. The Tribunal noted the conversion of shares from investment to stock-in-trade in later balance sheets. However, as the issue was not thoroughly examined, it was remanded back to the Assessing Officer. The AO was directed to verify the conversion claim based on entries in the relevant year's books of account and any board resolution. Additionally, the AO was instructed to assess the claim in line with section 45(2) of the IT Act and accept the loss if the conversion was genuine. Consequently, the appeal was treated as allowed for statistical purposes. This detailed analysis of the legal judgment from the Appellate Tribunal ITAT Mumbai covers the issues of interest deduction disallowance and the treatment of shares for loss valuation, providing a comprehensive understanding of the case and its implications.
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