2015 (5) TMI 685 - HC - Income Tax

Expenditure under Section 36 (1) (iii) - whether was not linked to earning of dividend income? Entitlment to deduction under Section 80M in respect of net dividend and not gross dividend - Held that - This Court, therefore, is of the opinion that the law as declared by the Supreme Court in Cocanada Radhaswami Bank and United Commercial Bank 1965 (4) TMI 11 - SUPREME Court , Western States Trading (P) Ltd. v. CIT 1971 (1) TMI 11 - SUPREME Court and Brooke Bond & Co. Ltd. v. CIT 1986 (9) TMI 2 - SUPREME Court in such cases is that if the expenditure is incurred for the purpose of promotion of business- more specifically as in the facts of this case to retain control or as part of a strategic investment of the assessee/company, such expenses by way of interest outgo would have to be treated under Section 36 (1) (iii) and not under Section 57. The matter is, therefore, remitted to the AO for full appraisal of the fact situation and findings in the light of our conclusions. If, as a result of the AO s determination, it is found that such expenditure is incurred, the net expenditure is obviously to be taken into consideration under Section 80M of the Act in the facts of the present case. - Decided in favour of assesse for statistical purposes.

Summary

Issues:
1. Interpretation of deduction under Section 80M of the Income-tax Act, 1961.
2. Characterization of shares as stock-in-trade or investment shares.
3. Treatment of expenditure under Section 36(1)(iii) in relation to earning dividend income.

Analysis:
1. The High Court addressed the interpretation of deduction under Section 80M of the Income-tax Act, 1961. The court referred to the decision in Distributors (Baroda) Pvt. Ltd. v. Union of India & Ors., 155 ITR 120, which concluded that net dividend should be considered for deduction under Section 80M. Both parties agreed on this interpretation, settling the first issue.

2. The characterization of shares as stock-in-trade or investment shares was considered. The court found this issue irrelevant, a view shared by both parties, and did not delve further into it.

3. The treatment of expenditure under Section 36(1)(iii) concerning earning dividend income was extensively discussed. The case involved interest expenditure incurred while repaying a loan borrowed for subscribing to a rights issue. The court analyzed various precedents, including CIT v. Cocanada Radhaswami Bank Ltd. and United Commercial Bank v. CIT, emphasizing that the nature of income received does not solely determine its treatment. The court noted that if expenditure is incurred for business promotion or strategic investment, it should be treated under Section 36(1)(iii) and not Section 57. The court remitted the matter to the Assessing Officer for a detailed examination to determine the admissibility of such expenditure under Section 80M in light of the conclusions reached.

In conclusion, the High Court partially allowed the appeal, providing clarity on the interpretation of deduction under Section 80M, disregarding the characterization of shares, and emphasizing the treatment of expenditure under Section 36(1)(iii) in relation to earning dividend income. The case highlighted the importance of analyzing the purpose of expenditure in determining its tax treatment and emphasized the need for a thorough assessment by the tax authorities in such matters.