2008 (1) TMI 633 - HC - Income Tax

Interest on Borrowed capital Capital used for purchase of shares - shares purchased not for acquiring the controlling rights in another company, but the shares were purchased for non-business purpose, especially, for earning interest and dividend disallowance justified Appeal dismissed

Summary

Issues:
1. Disallowance of interest under section 36(1)(iii) for acquiring controlling rights in another company.

Analysis:
The Tribunal considered the disallowance of interest amounting to Rs.789.58 lakhs made by the Assessing Officer due to the utilization of borrowed capital for purchasing shares in certain companies. The Revenue argued that the investment was made to acquire controlling rights, making it a capital expenditure. However, the Tribunal disagreed, citing a previous case where it was held that the assessee was engaged in the business of purchase and sale of shares, not for acquiring controlling rights. The Tribunal found that the assessee's main objective was the sale/purchase of shares, as per its memorandum of association and articles of association.

The Tribunal further analyzed the assessee's activities during the relevant assessment year, noting the purchase and sale of shares in different companies. It concluded that the assessee was indeed carrying on the business of sale/purchase of shares and debentures, similar to a previous case involving Akalu Holdings Pvt. Ltd. The Tribunal upheld the Commissioner of Income-tax (Appeals)'s decision to delete the addition of Rs.1,24,96,574, emphasizing that the assessee did not aim to acquire control over the business of a specific company with its shareholding percentage.

In light of the facts and circumstances, the Tribunal distinguished a previous High Court decision where interest on borrowed funds was disallowed for acquiring controlling rights, stating that the present case involved different facts. The Tribunal affirmed that the interest paid on borrowings for purchasing shares and debentures was allowable as it was utilized for earning interest, dividends, and other business purposes. The Tribunal dismissed the Revenue's appeal, relying on the findings and decisions from the assessment year 1996-97.

Both the Commissioner of Income-tax (Appeals) and the Tribunal agreed that the shares were not purchased to acquire controlling rights but for non-business purposes like earning interest and dividends. Consequently, the High Court found no grounds to interfere with the impugned order and dismissed both appeals at the admission stage.