2013 (6) TMI 69 - HC - Income Tax

Interest on account of investment in shares disallowed - set off of interest received with interest paid - business purpose - AO found that amount borrowed is not used for business purpose but used to lend the money to directors - ITAT allowed the claim - Held that - A perusal of the entire order of the tribunal demonstrates that it had proceeded on wrong assumption of fact that the assessee is in the business of investment in shares and there is no dispute that the purchase of shares of Rs.2 crores of Agmo Tex Ltd. was for the purpose of its business. On the aforesaid wrong assumption of facts, the Tribunal had proceeded to place reliance on certain judgements of the Apex Court and of this court and had thereafter jumped to the conclusion that even if the investment in shares had not yielded any income, the interest payable on the borrowed amount is to be allowed as business expenditure u/s. 36(1)(iii). It is clear that the entire approach of the Tribunal is manifestly illegal as it wrongly assumed that the assessee is in the business of investment in shares with not referring to any material in this regard. There is no finding that in the previous years, the assessee has ever made investments in shares of any company, or had earned profit or loss therefrom. Tribunal had totally glossed over the main controversy between the parties & failed to notice the reasoning given by the AO and CIT(A) in holding that the investment by the assessee in the shares of M/s. Agmo Tex Ltd. is not in connection with its own business but to extend financial support to it in which the assessee himself is the Managing Director. Order of the tribunal deleting the addition cannot be sustained - question of law answered in favour of the revenue.

Summary

Issues Involved:
1. Justification of ITAT in deleting the addition of Rs. 18,32,000/-.
2. Determination of whether the investment in shares was for business purposes under Section 36(1)(iii) of the Income Tax Act, 1961.

Issue-Wise Detailed Analysis:

1. Justification of ITAT in Deleting the Addition of Rs. 18,32,000/-:
The primary issue was whether the Income Tax Appellate Tribunal (ITAT) was justified in law in deleting the addition of Rs. 18,32,000/- sustained by the CIT (A) without appreciating the facts of the case. The ITAT had allowed the assessee's appeal by finding that the investment of Rs. 2 crores in the shares of Agmo Tex Ltd. was for business purposes and, therefore, an allowable expense under Section 36(1)(iii) of the Income Tax Act, 1961. The Tribunal held that it was immaterial that the assessee controlled Agmo Tex Ltd. or that the investment had not yielded any dividends. The department contended that the Tribunal's order was cryptic and failed to consider relevant factors, arguing that the investment was not for business purposes but to support Agmo Tex Ltd. financially.

2. Determination of Whether the Investment in Shares was for Business Purposes:
The court examined the applicability of Section 36(1)(iii) of the Income Tax Act, 1961, which allows for the deduction of interest paid on capital borrowed for business purposes. The court reiterated the principles for allowing interest deductions: the capital must be borrowed for business purposes, the interest must be payable, and the borrowing must not be for private purposes or unconnected with the business. The court reviewed various precedents, including CIT v. Rajendra Prasad Moody (1978), Sarabhai Sons (P) Ltd. v. CIT (1993), and CIT v. Rajeeva Lochan Kanoria (1994), which emphasized that borrowed funds must be used for business purposes to qualify for interest deductions.

The court found that the Assessing Officer and CIT(A) had correctly determined that the investment in Agmo Tex Ltd. was not for business purposes but to support the financially struggling company. The court noted several factors supporting this conclusion:
- The assessee's business was financing, not investing in shares.
- Agmo Tex Ltd. was a family-owned company in financial distress, and the investment was intended to increase the equity of promoters and facilitate borrowing.
- The investment was a deliberate attempt to save Agmo Tex Ltd. from interest liability and was not a prudent business decision.

The court criticized the Tribunal for proceeding on the wrong assumption that the investment was for business purposes and for failing to consider the findings of the Assessing Officer and CIT(A). The Tribunal had wrongly assumed that the assessee's business included investing in shares and had not addressed the main controversy regarding the purpose of the borrowed funds.

Conclusion:
The court concluded that the Tribunal's order was based on incorrect assumptions and had overlooked critical findings. The Tribunal's deletion of the addition of Rs. 18,32,000/- was not sustainable. The court remitted the matter back to the Tribunal for fresh consideration in light of the observations made. The appeal was allowed in favor of the revenue, and the question of law was answered against the assessee.