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TMI Blog2005 (11) TMI 178X X X X Extracts X X X X X X X X Extracts X X X X ..... tain shares of Trumac on 9-11-1996 and 9-1-1997 for a consideration of Rs. 388.97 lakhs. In addition, it had also acquired certain shares of other companies also. For this purpose, the assessee borrowed an amount of Rs. 395 lakhs on 15-11-1996 from M/s. Kotak Mahindra Finance Ltd. ('Kotak') and paid interest of Rs. 17,14,779 for the period ending on 31-3-1997 relevant to assessment year 1997-98 and claimed the same as deduction under section 36(1)(iii) of the Act. The dividend income declared for assessment year 1997-98 was Rs. 29,84,252 which was offered as income from other sources. Similarly, the assessee had disclosed dividend income of Rs. 28,44,689 for assessment year 1998-99 which was claimed to be exempt from taxation under section 10(33) of the Act. It also claimed deduction of Rs. 23,06,528 under section 36(1)(iii) on account of interest paid to Kotak for assessment year 1998-99. 4. In the course of assessment proceedings, the Assessing Officer was of the view that interest paid on borrowings had nexus with the acquisition of shares and, therefore, the expenditure should be allowed under section 51(iii) and not under section 36(1)(iii). Consequently, the assessee was ask ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f procuring and retaining agency agreement with Trumac and not with the purpose of earning any dividend income. The intention of the assessee was to see that holding of shares does not go to any outside parties which could jeopardize the long-term interest of the assessee-company. According to it, such arrangements helped the assessee in earning sizeable income from the sale of Trumac products by way of commission. In support of its contention, the assessee also relied on the judgment of Gujarat High Court in the case of Addl. CIT v. Laxmi Agents (P.) Ltd [1980] 125 ITR 227 and the judgment of the Calcutta High Court in the cases of CIT v. Jardine Henderson Ltd. [1994] 210 ITR 981 and CIT v. Rajeeva Lochan Kanoria [1994] 208 ITR 616. 6. The Assessing Officer was not satisfied with the submissions of the assessee. According to him, there was no dispute that the assessee borrowed the amount for acquiring shares of Turmac and thus there was clear nexus between the borrowed funds and the utilization for acquiring the shares. It was further observed by him that the present acquisition of shares did not give the company any extra advantage compared to the preceding years since it had be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee. It was observed by the CIT(A) that the shares of Trumac were purchased with the sole intention of earning dividend income and, therefore, the deduction could not be allowed under section 36(1)(iii). It was also observed that the assessee-company was on the way to acquire controlling interest in that company. The CIT(A) also relied on the judgment of Madras High Court in the case of P.V. Mohamed Ghouse v. CIT [1963] 49 ITR 127 for the proposition that where the investment shares is made, not by way of stock-in-trade but otherwise then deduction was not admissible against business income. According to him, the judgment of Bombay High Court in the case of Maganlal Chhaganlal (P.) Ltd. was quite appropriate to the facts of the instant case. The judgment of Bombay High Court in the case of Mahendra Sobhagchand Shah relied upon by the ld. counsel for the assessee was distinguished on the ground that in that case the assessee was a dealer in shares. Accordingly, he upheld the order of the Assessing Officer by holding that interest was to be allowed as deduction under section 57(iii) and consequently the deduction under section 80M was to be restricted to the net income. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dgment in the case of Calico Dyeing & Printing Works v. CIT [1958] 34 ITR 265 (Bom.). 12. In view of the above legal background, the question which survives for our consideration is whether on facts it can be said that money was borrowed for the purpose of business. Admittedly 'Trumac' was a joint venture of assessee and Mafatlal Group of companies. In its reply to show-cause notice, the assessee had stated that promoters of assessee-company as well as of Mafatlal group had good business relationships having close association with Indian Textile Industry. This fact has not been disputed by the revenue at any stage. It is because of these facts, the Chairman of assessee-company was on the Board of Trumac' as non-executive Chairman and could get sole-selling agency for the distribution of the products manufactured by Trumac. Since it was main source of income, it was natural for a prudent man to safeguard its business interest. Therefore, if the assessee decided to increase its holding in 'Trumac', in our opinion, the assessee was guided by business consideration to safeguard its selling agency. If shares are purchased by outsiders then there is possibility that outsider may jeopard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i) that, however, the interest paid by the assessee was business expenditure and was allowable as deduction under section 10(2)(xv). The transaction of acquisition of assets was closely related to the commencement and carrying on of the assessee's business and interest paid on the unpaid balance of the consideration for the assets acquired had, in the normal course, to be regarded as expended for the purpose of the business which was carried on in the accounting periods." The above observations clearly show that if the expenditure is clearly related to the carrying on or conduct of the business, then such expenditure would be revenue in nature. 14. The decision of Gujarat High Court in the case of Addl. CIT v. Laxmi Agents (P.) Ltd. [1980] 125 ITR 227 is directly on the issue before us. In that case, the assessee was engaged in managing agency business. It borrowed money on interest for procuring snares of the managed company and claimed the interest as deduction against business income. It also claimed deduction of tax on inter-corporate dividends on gross amount under section 85A. The Assessing Officer did not allow deduction against business income but allowed the same against ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... court held that directorship was a vocation and, therefore, shares purchased in order to acquire controlling interest was allowable as business expenditure under section 36(1)(iii). Similar view was taken in subsequent case in CIT v. Jardine Henderson Ltd. [1994] 210 ITR 981 (Cal.). 17. The judgment of Hon'ble Bombay High Court in the case of CIT v. Maganlal Chhaganlal (P.) Ltd. [1999] 236 ITR 456 heavily relied upon by the revenue, in our opinion, is quite distinguishable. In that case assessee claimed deduction under section 80M on the gross amount while Assessing Officer allowed the same on net dividend, i.e. after adjusting interest paid on borrowed money. The Hon'ble High Court, following Supreme Court judgment in the case of Distributors (Baroda)(P.) Ltd. v. Union of India [1985] 155 ITR 120, held that deduction under section 80M was allowable on net dividend. No doubt, the assessee was carrying on business of manufacturing as well as dealing in shares and investing in shares. But the question whether interest was allowable under section 36(1)(iii) or 37 was neither raised nor considered either by tax authorities or by Tribunal or by the High Court. It is also not clear whet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in case any retrospective amendment is brought on the statute book by the Legislature.
21. The last issue arising from the appeal for assessment year 1997-98 relates to disallowance of depreciation of Rs. 6,32,672. The ld. DR has pointed out that assessee did not press this ground before the CIT(A) and, therefore, assessee cannot be said to be aggrieved from the order of the CIT(A) on this issue. However, the ld. counsel for the assessee has submitted that concession was made under mistake. Further it is submitted that in case the ground is not considered then some observations be made that concession before CIT(A) would not affect the penalty proceedings.
22. After hearing both the parties, we hold that the assessee cannot be said to be aggrieved from the order of the CIT(A) on this issue since it conceded before the CIT(A) to the disallowance. However, we observe that such concession would not affect the penalty proceedings since both the proceedings are independent proceedings. Subject to these observations, the ground raised by the assessee is dismissed as not entertained.
23. In the result, appeal in ITA No. 718 is partly allowed while appeal in ITA No. 3494 is allowed. X X X X Extracts X X X X X X X X Extracts X X X X
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