2014 (11) TMI 55 - HC - Income Tax

Classification of expenses Business expenses or not - Whether the Tribunal was right in holding that the interest on borrowed funds utilised for investment in shares can be treated as a business expenditure Held that - It is beyond any cavil that capital was borrowed by the assessee and interest was paid on the borrowed capital - The amount so borrowed was invested in shares and debentures for the purpose of business - when the amount is utilized for business purpose, the interest paid will have to be allowed as deduction in terms of Section 36(1)(iii) of the Act - The scope and ambit of Section 36(1)(iii) of the Act was considered by the Calcutta High Court in CIT v. Rajeeva Lochan Kanoria, 1994 (2) TMI 42 - CALCUTTA High Court - when the assessee claims deduction of interest paid on capital borrowed, all that the assessee has to show is that the capital which was borrowed was used for the business purpose in the relevant year of account and it does not matter whether the capital was borrowed or not to acquire revenue asset or capital asset - if the funds are borrowed by an investment company for making investment in shares which may be held as investment or as stock-in-trade or for the purpose of controlling interest in other companies, interest paid on such borrowed funds will be deductible under section 36(1)(iii) of the Income-tax Act - there is nothing in Section 36(1)(iii) of the Act that would dis-entitle the assessee to claim deduction in respect of interest paid on the capital borrowed for the purposes of business thus, the order of the Tribunal is upheld Decided against revenue.

Summary

Issues:
1. Interpretation of Section 36(1)(iii) of the Income Tax Act.
2. Treatment of interest on borrowed funds utilized for investment in shares as a business expenditure.

Issue 1: Interpretation of Section 36(1)(iii) of the Income Tax Act

The case involved an appeal by the Revenue challenging the order of the Income Tax Appellate Tribunal regarding the assessment years 1992-1993 to 1994-1995. The primary question was whether the interest arising from investments in shares and debentures, funded by borrowed capital, should be treated as income from business or under other sources. The Assessing Officer initially categorized the investments as capital assets, leading to the interest income being assessed under other sources. However, the Commissioner of Income Tax (Appeals) and the Tribunal both ruled in favor of the assessee, stating that the investments were part of the finance business, making the interest income eligible for deduction under Section 36(1)(iii) of the Act.

Issue 2: Treatment of interest on borrowed funds utilized for investment in shares as a business expenditure

The High Court analyzed Section 36(1)(iii) of the Income Tax Act, emphasizing that the deduction for interest paid is allowable if the capital is borrowed for business purposes. The Court noted that the language of the provision is clear and unambiguous, requiring the interest paid on borrowed capital used for business to be allowed as a deduction. In this case, the assessee had borrowed capital and invested it in shares and debentures for business purposes, making the interest paid eligible for deduction under the Act.

The Court referred to previous judgments, including the decision of the Calcutta High Court in CIT v. Rajeeva Lochan Kanoria, which highlighted that as long as the borrowed capital is utilized for business purposes, the interest paid should be allowed as a deduction. The Court also cited the Bombay High Court's decision in CIT v. Srishti Securities (P) Ltd., reinforcing the principle that interest paid on capital borrowed for business activities is deductible under Section 36(1)(iii) of the Act.

Ultimately, the High Court upheld the findings of the Commissioner of Income Tax (Appeals) and the Tribunal, dismissing the appeals filed by the Revenue and ruling in favor of the assessee. The Court concluded that there was no legal basis to disallow the deduction claimed for interest paid on the capital borrowed for business purposes, in accordance with Section 36(1)(iii) of the Income Tax Act.