2012 (6) TMI 265 - HC - Income Tax

Interest paid in respect of capital borrowed borrowed capital is utilized for purchasing shares of the two companies claiming the amount as a deductible business expenditure disallowance by Revenue as not a permitted deductions within the scope of Section 36(1)(iii) - Held that - The tribunal which has reversed the decision of the assessing officer and the affirming order of the appellate commissioner has not recorded a positive finding as to what exactly was the business activity of the assessee and as to how the activity constituted a business activity and the borrowing also constituted an investment which is in the nature of a capital investment for the purpose of business of the assessee - in the absence of a commensurate finding on the part of the tribunal remand the matter back for reexamination and to record a proper finding and then apply the legal principles.

Issues Involved:
Appeal under Section 260A of the Income Tax Act, 1960 regarding deduction claimed under Section 36(1)(iii) for interest paid on borrowed capital diverted for investment in subsidiary companies.

Analysis:

1. Issue of Deduction under Section 36(1)(iii):
The respondent company claimed deduction under Section 36(1)(iii) of the Income Tax Act for the interest paid on the amount borrowed from financial institutions, which was invested in securing shares of two subsidiary companies. The assessing officer disallowed the deduction, treating the income as income from other sources. The appellate commissioner and the tribunal had differing views on the matter. The tribunal, relying on precedents from other benches, allowed the deduction. However, the High Court found that the tribunal had not provided relevant findings to support its decision. The court emphasized the need for a positive finding on whether the investment constituted a capital investment for the business activity of the assessee. As such, the court set aside the tribunal's order and remanded the matter for reexamination.

2. Lack of Necessary Findings by Tribunal:
The High Court highlighted the tribunal's failure to record essential findings regarding the nature of the business activity of the assessee and whether the borrowing constituted a capital investment for the business. Without these crucial findings, the court deemed it impossible to determine the applicability of Section 36(1)(iii) of the Act. The court emphasized the importance of well-informed, reasoned orders by quasi-judicial tribunals, especially when reversing decisions of lower forums. The court noted that the tribunal's order lacked the necessary reasoning, leading to the decision to remand the matter for a proper examination and recording of findings.

3. Remand Order and Observations:
In light of the tribunal's shortcomings in providing necessary findings, the High Court set aside the tribunal's order and remanded the matter for further examination. The court expressed concerns over the quality of orders issued by the tribunal and stressed the importance of informed, reasoned decisions, particularly when differing from lower forum decisions. The court maintained that a proper appellate order should clearly state the reasons for allowing an appeal and reversing a lower forum's decision. The High Court answered the posed question negatively, indicating the setting aside of the tribunal's order, while leaving the precise answer open for future consideration if needed.

In conclusion, the High Court's judgment addressed the issues surrounding the deduction claimed under Section 36(1)(iii) of the Income Tax Act, emphasizing the need for proper findings to support decisions and the importance of reasoned orders in the appellate process.

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