2009 (1) TMI 408 - HC - Income Tax

The assessee had borrowed funds on which the assessee paid total interest of Rs. 14,37,255 for which deduction was claimed under section 57(iii) of the Income-tax Act. Amount borrowed must be utilized for business utilization for acquiring capital asset Held that interest is deductible - Held that the object of the loan is irrelevant, the interest which was disallowed to the extent of investment will have to be allowed as held by the Tribunal. Revenue s appeal is dismissed

Summary

Issues:
1. Allowability of deduction of interest on borrowed funds for acquiring shares shown as investment and stock-in-trade.
2. Consideration of claim for loss under the head "Business" regarding shares held as investment and stock-in-trade.
3. Valuation of closing stock of shares held as investment and not as stock-in-trade.

Issue 1: Allowability of deduction of interest on borrowed funds for acquiring shares shown as investment and stock-in-trade:

The assessee acquired shares in different financial years, initially as investments and later as stock-in-trade. The dispute arose regarding the deduction of interest paid on borrowed funds for acquiring these shares. The Assessing Officer disallowed the interest deduction, claiming the primary object of acquiring shares was not to earn dividends but to acquire controlling interest. The Commissioner of Income-tax (Appeals) bifurcated the interest on a pro rata basis between investment and stock-in-trade. The Income-tax Appellate Tribunal relied on precedents and held that interest paid on borrowed funds for acquiring shares, whether as investment or stock-in-trade, is deductible under section 36(1)(iii) of the Income-tax Act. The Tribunal directed the deletion of the disallowance sustained by the Commissioner of Income-tax (Appeals).

Issue 2: Consideration of claim for loss under the head "Business" regarding shares held as investment and stock-in-trade:

The Tribunal considered the denial of the appellant's claim for loss under the head "Business" concerning shares held as investment and not as stock-in-trade. It was noted that the shares were initially shown as investment but later as stock-in-trade in the balance-sheets of subsequent years. The Tribunal observed that the Revenue authority had not properly examined the issue and directed verification of the conversion of investment into stock-in-trade with reference to the relevant year's books of account. The Tribunal instructed that the claim should be evaluated in light of the provisions of section 45(2) of the Income-tax Act.

Issue 3: Valuation of closing stock of shares held as investment and not as stock-in-trade:

The Revenue appealed on various questions, including the justification of allowing interest deduction on borrowed funds under section 36(1)(iii) when shares were held as investment and not stock-in-trade. The Tribunal, citing legal precedents, held that the nature of the expense, whether on capital or revenue account, was irrelevant for claiming deduction under section 36(1)(iii). The Tribunal relied on judgments emphasizing that as long as borrowed funds were utilized for business purposes, interest deduction should be allowed. The Tribunal also addressed the issue of valuation of closing stock of shares held as investment, not stock-in-trade, and concluded that the view taken was appropriate, dismissing the appeal.

In conclusion, the High Court upheld the Tribunal's decision, emphasizing the allowance of interest deduction on borrowed funds for acquiring shares, irrespective of whether held as investment or stock-in-trade. The Court also supported the Tribunal's approach regarding the consideration of loss claims under the head "Business" and the valuation of closing stock of shares held as investment. The appeal was dismissed based on the established legal principles and factual assessments made by the Tribunal.