1997 (2) TMI 14 - SC - Income Tax

Whether on the facts and in the circumstances of the case, the Tribunal was right in allowing the claim of interest amounting to Rs. 51,612 paid on borrowed capital by the assessee for the purpose of shares when the dividend income therefrom was exempted under section 80K - Held, yes

Summary

Issues:
1. Interpretation of section 80K of the Income-tax Act, 1961.
2. Allowance of deduction for interest paid on borrowed capital for investment in shares.
3. Relevance of section 57(iii) in determining deduction eligibility.
4. Clarification on the impact of previous court decisions on the current case.

Analysis:
The case involves an appeal by the Revenue against a judgment of the Delhi High Court regarding the deduction of interest paid on borrowed funds for investment in shares, specifically focusing on the interpretation of section 80K of the Income-tax Act, 1961. The assessee had received dividends on shares and paid interest on borrowed capital for investments. The Income-tax Officer disallowed a portion of the interest amount but permitted deduction under section 80K for dividends received from an industrial company. The Tribunal held that the disallowed amount should have been allowed, leading to the Revenue's application under section 256(2) for a reference question. The High Court dismissed the application, citing section 57(iii) and deeming the question as academic due to the deduction of interest being mandatory.

The Supreme Court agreed with the High Court's decision but noted that the reasoning was influenced by a previous court decision later overruled. Section 80K, which was later deleted, allowed deductions for dividends from specific sources. The Court emphasized that interest paid on borrowed capital should be deducted before applying section 80K, as per section 57(iii). In this case, the interest amount was to be deducted from the dividend income, resulting in a lower income eligible for deduction under section 80K. As the dividend amount exceeded the income after deduction, the entire dividend was excluded from the assessee's income. The Tribunal's decision to allow the disallowed amount was deemed correct, leading to the dismissal of the appeal with no costs.

In conclusion, the judgment clarifies the application of section 80K and the relevance of section 57(iii) in determining deductions for interest paid on borrowed capital for investments in shares. The decision highlights the importance of proper income computation before applying specific deduction provisions and upholds the Tribunal's ruling in favor of the assessee.