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Issues Involved:
1. Disallowance of interest u/s 36(1)(iii) of the IT Act, 1961. 2. Allowability of interest u/s 57(iii) of the IT Act, 1961. Summary: Issue 1: Disallowance of interest u/s 36(1)(iii) of the IT Act, 1961 The main issue in the assessee's appeal (ITA No. 506/Hyd/2007) relates to the disallowance of interest amounting to Rs. 3,65,14,210 u/s 36(1)(iii) of the IT Act, 1961. The AO observed that the interest paid towards the acquisition of shares should have been capitalized as the loan was not borrowed for the purpose of business. The AO described the transaction as a "colourable transaction" and disallowed the interest, adding it back to the total income. The CIT(A) confirmed the disallowance but directed the AO to tax the dividend receipt as income from other sources and allow interest on utilized borrowed funds u/s 57(iii) of the Act. The Tribunal, after considering the rival contentions and the material on record, held that the assessee is in the business of investment in shares and the monies have been borrowed for the purpose of business. The Tribunal noted that the company is a NBFC registered with the RBI and has been consistently showing its holdings as investments. The Tribunal allowed the entire interest u/s 36(1)(iii) of the Act, directing the AO to compute the total income of the assessee under the head business income as per the normal provisions of the Act. Issue 2: Allowability of interest u/s 57(iii) of the IT Act, 1961 In the Departmental appeal (ITA No. 632/Hyd/2007), the grievance was against the direction of the CIT(A) to allow proportionate deduction of interest u/s 57(iii) of the Act. The Tribunal, having already held that the entire interest has to be allowed as business expenditure u/s 36(1)(iii) of the Act in the assessee's appeal, rendered the Department's ground infructuous. Conclusion: The appeal of the assessee (ITA No. 506/Hyd/2007) is partly allowed, and the appeal of the Department (ITA No. 632/Hyd/2007) is dismissed.
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