2016 (5) TMI 476 - HC - Income Tax

Payment of interest towards purchase of debenture - revenue v/s capital expenditure - Held that - The finding concurrently recorded both By the CIT (A) and the learned Tribunal that the debentures were held by way of business assets is not under challenge. In the absence of any challenge to the aforesaid finding it is axiomatic that the interest paid or payable for purchase of a business asset is allowable under section 36 - Decided against revenue

Summary

Issues:
1. Interpretation of Section 37(1) of the Income Tax Act regarding the allowability of interest payment towards the purchase of debentures as revenue expenditure.
2. Determination of whether debentures were held as investments or business assets by the assessee.
3. Analysis of the findings of the CIT (A) and the Income Tax Appellate Tribunal regarding the nature of debentures held by the assessee.

Issue 1: Interpretation of Section 37(1) of the Income Tax Act
The appeal before the Calcutta High Court involved a question of law regarding the interpretation of Section 37(1) of the Income Tax Act, 1961. The central issue was whether the interest payment made by the assessee towards the purchase of debentures could be considered as revenue expenditure under this section. The assessing officer contended that the debentures were held as investments, and therefore, the interest paid should be added to the cost of acquisition. However, the CIT (A) and the Tribunal took a different view, considering the debentures as business assets, thus allowing the interest payment as business expenditure under Section 37(1).

Issue 2: Nature of Debentures Held by the Assessee
The crucial aspect of the case revolved around determining the nature of the debentures held by the assessee - whether they were held as investments or business assets. The assessing officer initially treated the debentures as investments based on the accounting policies mentioning that investments held by the company were long-term in nature and taken at cost. However, the assessee presented a different perspective, emphasizing that the debentures were part of their business activities as per the Memorandum and Articles of Association. Both the CIT (A) and the Tribunal agreed that the debentures were indeed business assets, considering the assessee's main activity of dealing in shares and securities and past treatment of similar transactions as business income.

Issue 3: Analysis of CIT (A) and Tribunal Findings
The findings of both the CIT (A) and the Tribunal supported the assessee's position that the debentures were held as business assets, and the interest payment was allowable as business expenditure under Section 37(1). The Tribunal highlighted the undisputed fact that the assessee treated the debentures as business assets, which was also acknowledged by the Department in previous assessments. Since there was no challenge to the finding that the debentures were business assets, the Court affirmed that the interest paid for the purchase of such assets was allowable under Section 36. Consequently, the Court dismissed the appeal, upholding the decision in favor of the assessee while directing each party to bear their costs.