2000 (1) TMI 148 - AT - Income Tax

Summary

Issues Involved:
1. Legitimacy of the payment of interest on loans.
2. Jurisdiction of the Commissioner of Income-tax (CIT) u/s 263.
3. Examination of the transaction's genuineness and its impact on revenue.

Summary:

1. Legitimacy of the Payment of Interest on Loans:
The assessee, a group company of Hindustan Development Pvt. Ltd. (HDL), raised a loan of Rs. 14,32,10,000 from other group companies to purchase shares of HDL and paid interest of Rs. 1,33,11,190. The CIT found the assessment erroneous and prejudicial to the interest of Revenue concerning the payment of interest. The CIT opined that the financial transactions were accommodation transactions to reduce long-term capital gains and deemed the interest paid as non-business expenditure.

2. Jurisdiction of the Commissioner of Income-tax (CIT) u/s 263:
The assessee contended that the conditions precedent for assuming jurisdiction u/s 263 did not exist. The Assessing Officer (AO) had examined the complete details during regular assessment proceedings and allowed the interest paid out of the dividend income. The CIT's action under section 263 must resemble that of a surgeon's knife, correcting only the errors that had crept into the assessment. The CIT must provide clear reasons for considering the order erroneous and prejudicial to the interest of Revenue.

3. Examination of the Transaction's Genuineness and its Impact on Revenue:
The assessee argued that the shares were purchased at prevailing market prices and the transaction was genuine. The Tribunal in the case of Lakshmangarh Estates & Trading Co. Ltd. had accepted the genuineness of similar transactions. The Apex Court in the case of Rajendra Prasad Moody held that interest on money borrowed for investment in shares, even if no dividend was yielded, was admissible as a deduction u/s 57(iii). The Tribunal found that the AO had made full and necessary enquiries before allowing the interest amount, and the conditions for assuming jurisdiction u/s 263 did not exist.

Conclusion:
The Tribunal concluded that the interest paid by the assessee for the purchase of HDL shares was allowable, and the CIT's order was quashed. The appeal of the assessee was allowed.