2015 (2) TMI 1203 - AT - Income Tax

Revision u/s 263 - CIT took the view that the interest on loans relatable to dividend so declared is not allowable as deduction under Section 36(1)(iii) - Held that - As already noticed that the Ld. CIT has passed the impugned revision order only on the reasoning that the interest on borrowings, if any made, for disbursing dividend is not allowable as deduction under Section 36(1)(iii) of the Act. However, the various case laws relied on by the Ld. counsel make it very clear that the interest on the amounts borrowed for payment of dividend is allowable as deduction. Thus, it is seen that the very foundation on which the impugned revision order has been passed by Ld. CIT fails, in which case we are not able to sustain the same. Accordingly, we set aside the revision order passed by the Ld. CIT. - Decided in favour of assessee

Summary

Issues:
Challenge to validity of revision order dated 22.03.2013 by Ld. Commissioner of Income Tax-I, Coimbatore for assessment year 2008-09 regarding deduction of interest on loans for declaring dividend on preference shareholders.

Analysis:
The appeal challenged the validity of a revision order by the Ld. Commissioner of Income Tax-I, Coimbatore related to the assessment year 2008-09. The Ld. CIT observed that the assessee debited Profit & Loss account with a sum towards dividend payable to preferential shareholders. The assessee had accumulated losses and declared dividends in anticipation of income from foreign subsidiaries. The Ld. CIT concluded that borrowed funds were used for declaring dividends, disallowing the interest on loans under Section 36(1)(iii) of the Income-tax Act, 1961. The Ld. CIT set aside the assessment order for reassessment. The assessee contended that only interim dividends were declared, to be recovered later, with sufficient funds available. The Ld. CIT's presumption of using borrowed funds was disputed, citing realized cash surplus and non-cash expenditures like depreciation. The assessee argued that interest on borrowed amounts for dividend payment is deductible, referencing various case laws supporting this claim.

The Ld. D.R. argued that the Assessing Officer overlooked the matter, justifying the Ld. CIT's revision order. The tribunal found merit in the assessee's contentions, noting the Ld. CIT's revision order was based on the incorrect premise that interest on borrowed funds for dividend payment is non-deductible under Section 36(1)(iii) of the Act. Contrary to the Ld. CIT's reasoning, the tribunal referenced case laws supporting the allowance of interest on borrowed amounts for dividend payments. Consequently, the tribunal concluded that the foundation of the Ld. CIT's revision order was flawed, leading to its reversal. The tribunal allowed the assessee's appeal, setting aside the revision order passed by the Ld. CIT.

In conclusion, the tribunal allowed the appeal, holding that interest on borrowed funds for declaring dividends to preference shareholders is an allowable deduction under Section 36(1)(iii) of the Income-tax Act, 1961. The revision order by the Ld. CIT was deemed unsustainable due to erroneous presumptions about the law and facts, as supported by relevant case laws, resulting in its reversal by the tribunal.