2022 (6) TMI 72 - AT - Income Tax

Deduction of interest u/s. 36(1)(iii) - loan amount for making investment in shares - HELD THAT - As relying on case of M/S. TATA SONS LTD. AND (VICE-VERSA) 2021 (5) TMI 188 - ITAT MUMBAI interest on borrowed capital utilized for making investments would be eligible for deduction u/s. 36(1)(iii) of the Act because there is no bar for allowability of interest u/s. 36(1)(iii) of the Act for utilizing the borrowed funds for making investments specifically meant for the purposes of business of the Assessee. Coming to the instant case, it is not in dispute here that the Assessee is a NBFC company and engaged into the business of investment in shares, debentures, bonds and financing etc. as ordinary activities. During the year under consideration, the Assessee utilized the loan amount for making investment in shares in ordinary course and eventually earned dividend or capital gains. It is also not the case of the Revenue department that the Assessee had no commercial expediency for making the investments while using the borrowed funds. Having regards to the nature of activities the Assessee is engaged in, there is no justification for disallowance of interest u/s. 36(1)(iii) of the Act. - Appeal of assessee allowed.

Summary

Issues Involved:
1. Disallowance of interest on borrowed funds.
2. Applicability of the principle of res judicata in income tax proceedings.
3. Eligibility of interest deduction under Section 36(1)(iii) of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Disallowance of Interest on Borrowed Funds:
The primary issue in this case was the disallowance of interest amounting to Rs. 1,32,44,471/- claimed by the Assessee on the loan taken for making investments in shares and securities. The Assessing Officer disallowed the interest on the grounds that the loan was used to make investments in shares, resulting in dividend income or capital gains, which are not considered business income. The Commissioner of Income-tax (Appeals) upheld this disallowance, concluding that the investments were treated as capital assets and not business assets. Therefore, the interest paid on the borrowed funds could not be allowed as a business expense under Section 36(1)(iii) or 37(1) of the Act.

2. Applicability of the Principle of Res Judicata in Income Tax Proceedings:
The Assessee argued that the interest on the loan had been allowed in the preceding assessment years 2002-03 and 2003-04, invoking the principle of res judicata. However, the Commissioner (Appeals) and the Tribunal clarified that the principle of res judicata does not strictly apply to income tax proceedings. Each assessment year is a separate unit, and decisions in one year do not necessarily apply to subsequent years unless there is a fundamental aspect permeating through different assessment years that has been consistently accepted. The Tribunal cited the Supreme Court's decision in Parashuram Pottery Works Ltd. v. Income Tax Officer, emphasizing that while res judicata does not apply, there should be finality and certainty in tax litigation.

3. Eligibility of Interest Deduction under Section 36(1)(iii) of the Income-tax Act, 1961:
The Tribunal referred to several judicial precedents, including the jurisdictional High Court's decision in Eicher Goodearth Ltd. vs. CIT and the Mumbai Tribunal's decision in ACIT vs. Tata Sons Ltd., to establish that interest on borrowed capital utilized for making investments can be eligible for deduction under Section 36(1)(iii) of the Act. The Tribunal noted that the Assessee, being a non-banking financial company (NBFC) engaged in investment activities, had used the borrowed funds for business purposes. Therefore, the interest expense should be allowed as a deduction. The Tribunal concluded that the nature of the Assessee's business activities justified the deduction of interest under Section 36(1)(iii), and there was no justification for the disallowance made by the Assessing Officer.

Conclusion:
The Tribunal allowed the appeal filed by the Assessee, holding that the interest on borrowed funds used for making investments was eligible for deduction under Section 36(1)(iii) of the Income-tax Act, 1961. The disallowance of interest by the Assessing Officer and its affirmation by the Commissioner (Appeals) were set aside. The Tribunal emphasized the importance of considering the nature of the Assessee's business activities and the purpose of the borrowed funds in determining the allowability of interest expenses. The appeal was allowed, and the addition under challenge was deleted.