2008 (9) TMI 1029 - HC - Income Tax

Summary

Issues involved:
The issue involved in this case is whether the Appellate Tribunal was right in law and on facts in confirming the disallowance of the claim of deduction of investment funding charges against dividend income.

Summary:

1. Background:
The assessee claimed deduction of fund management charges incurred on funds borrowed from a company. The matter went to the Tribunal twice, with the Commissioner (Appeals) agreeing with the Assessing Officer that the expenditure was not incurred for earning dividend income.

2. Tribunal's Decision:
After considering case law related to claim u/s 57 (iii) and Section 36 (1) (iii) of the Income-Tax Act, the Tribunal allowed the appeal, stating that the expenditure was allowable as business expenditure u/s 36(1)(iii) of the Act.

3. Appellant's Arguments:
The Senior Standing Counsel for the appellant argued that the transaction was collusive, as there was no necessity to borrow funds and the dividend income was significantly lower than the investment.

4. Tribunal's Findings:
The Tribunal noted that the assessee had taken a loan and invested in shares as per the company's objectives. It was observed that the interest paid on the loan was shown as income by the lending company. The Tribunal also referred to a decision of the Gujarat High Court regarding the deduction u/s 57(iii) of the Act.

5. Legal Precedents:
The Tribunal cited the Supreme Court's decision in the case of S.A. Builders v. CIT, stating that since the assessee's business was investing in shares, the interest paid on the loan was allowable u/s 36(1)(iii) for commercial expediency.

6. Conclusion:
The Tribunal allowed the deduction based on the settled legal position regarding Section 36(1)(iii) of the Act. The Tribunal dismissed the appeal, stating that there was no substantial question of law raised.

In summary, the Tribunal upheld the deduction of investment funding charges against dividend income, considering the commercial expediency of the transaction and the nature of the assessee's business.