2011 (8) TMI 446 - HC - Income Tax

Deduction of interest under Section 36(1)(iii) - Interest given on the loan for investment made in shares of company related to business. - Held that - Probably to carry on the business of the company, technical service is required which is provided by the assessee. In addition to that to have control over the company they have also invested money in acquiring shares to the extent of 25.1%. Therefore, the material on record clearly establishes the intention on the part of the assessee to carry on the business after acquiring shares and therefore as the said business to be carried is the business of the assessee and the amount is borrowed for the purpose of the said business, the amount of interest paid in respect of the capital borrowed is eligible for deduction under Section 36(1)(iii) of the Act

Summary

Issues Involved:
1. Allowability of deduction of interest under Section 36(1)(iii) of the Income-tax Act, 1961.
2. Nexus between borrowed funds and business purpose.
3. Interpretation of "for the purpose of business" under Section 36(1)(iii).

Issue-wise Detailed Analysis:

1. Allowability of deduction of interest under Section 36(1)(iii) of the Income-tax Act, 1961:
The core issue in these appeals is whether the interest paid on a loan borrowed to invest in shares of another company qualifies for deduction under Section 36(1)(iii) of the Income-tax Act, 1961. The Tribunal upheld the Appellate Commissioner's decision allowing the deduction, which was challenged by the revenue. The High Court examined the relevant provisions and precedents to determine the correctness of this decision.

2. Nexus between borrowed funds and business purpose:
The assessee, engaged in rendering technical services, borrowed Rs. 2 crores to invest in shares of Spicer India Limited, a joint venture with Dana Corporation, USA. The assessing authority disallowed the interest deduction, claiming the loan was not for the assessee's business purpose. The Appellate Commissioner and Tribunal, however, found a direct nexus between the investment and the assessee's business, noting that the investment facilitated business opportunities and technological advancements.

3. Interpretation of "for the purpose of business" under Section 36(1)(iii):
The High Court referred to various judgments to interpret the phrase "for the purpose of business." The Supreme Court in CIT v. Malayalam Plantations Ltd. clarified that this phrase is broader than "for the purpose of earning profits" and includes activities rationalizing administration, protecting assets, and other business-related acts. The Calcutta High Court in CIT v. Jardine Henderson Ltd. and CIT v. Rajeeva Lochan Kanoria emphasized that borrowed capital used for business purposes, even if for acquiring capital assets, qualifies for interest deduction under Section 36(1)(iii).

Judgment Summary:
The High Court concluded that Section 36(1)(iii) allows interest deduction on borrowed capital used for business purposes, irrespective of whether the business is existing or new. The Court found that the assessee's investment in Spicer India Limited shares was intended to carry on business, not merely to earn dividends. The investment facilitated business operations and technological advancements, thus qualifying as a business purpose under Section 36(1)(iii). Consequently, the interest paid on the borrowed capital was deemed allowable as a deduction. The appeals were dismissed, and the substantial question of law was answered in favor of the assessee.