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Issues Involved:
1. Disallowance of interest expenditure under Section 36(1)(iii) of the IT Act, 1961. 2. Applicability of Section 57(iii) of the IT Act, 1961 as an alternative claim for interest deduction. Detailed Analysis: 1. Disallowance of Interest Expenditure under Section 36(1)(iii) of the IT Act, 1961: The primary issue in this case revolves around the disallowance of interest expenditure amounting to Rs. 3,14,928 by the Assessing Officer (AO). The assessee-company borrowed funds from Amosha Holdings (P) Ltd. (AHPL) at an interest rate of 21.25%, using these funds to invest in shares of Nachmo Knitex Ltd. (NKL). The AO disallowed the interest expenditure on the grounds that it was not incurred for business purposes, referencing Section 36(1)(iii) of the IT Act, 1961, and relying on the Gujarat High Court's judgment in Sarabhai Sons (P) Ltd. vs. CIT. The CIT(A) examined the applicability of the Sarabhai Sons case and concluded that it was not relevant to the assessee's situation. The CIT(A) emphasized that Section 36(1)(iii) allows for the deduction of interest paid on capital borrowed for business purposes, which is less restrictive than Section 57(iii). The CIT(A) noted that the assessee's main business object, as stated in the memorandum of association, was to acquire, hold, and sell shares. The investment in NKL shares was part of this business activity, and the shares were sold in the subsequent year, further supporting the business purpose argument. 2. Applicability of Section 57(iii) of the IT Act, 1961 as an Alternative Claim for Interest Deduction: The assessee also argued that if the interest deduction was not allowable under Section 36(1)(iii), it should be considered under Section 57(iii). However, the CIT(A) did not delve into this alternative claim, having already concluded that the interest expenditure was admissible under Section 36(1)(iii). The CIT(A) referenced several judgments, including CIT vs. Dalmia Jain & Co. Ltd. and CIT vs. Karamchand Thapar & Bros. (P) Ltd., to support the decision. The Tribunal upheld the CIT(A)'s decision, agreeing that the investment in NKL shares was made for business purposes and that the interest expenditure was consequently allowable under Section 36(1)(iii). The Tribunal also noted that the facts of the Sarabhai Sons case were distinguishable, as the primary purpose there was to acquire 100% control over another company, unlike the present case where only a small percentage of shares was acquired. Conclusion: The Tribunal dismissed the Revenue's appeal, affirming that the interest expenditure of Rs. 3,14,928 was allowable under Section 36(1)(iii) as it was incurred for business purposes. The alternative claim under Section 57(iii) was deemed academic and not addressed, given the primary claim's acceptance. The Tribunal's decision was based on a thorough analysis of the facts, legal provisions, and relevant judicial precedents, ensuring that the interest expenditure was justifiably deductible under the IT Act.
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