Case: The Commissioner of Income Tax-8 Vs. M/S. Srishti Securities Private Limited

Oral Judgment:F.I. Rebello, J.The assessee acquired shares in the financial year 1993-94. They were shown as investment in the balance sheet as on 31.3.1994. In the subsequent balance sheets as on 31.3.1995 and 31.3.1996 they were shown as stock in trade.2. The object Clause of the Memorandum and Articles of association of the assessee show their main object as under:"To purchase, acquire, hold, sell, invest, dispose and otherwise deal in shares, stocks debentures, stock, government securities, bonds, units of any company or other authority supreme municipality or local".The assessee held the funds which were utilized for acquiring shares by way of investment as well as by way of stock in trade. The value of the shares held as investment as on 31.3.1997 was Rs.2,59,22,692/- and the cost of shares held as stock in trade on the same day amounted to Rs.18,56,250/-. The assessee had borrowed funds on which the assessee paid total interest of Rs.14,37,255/- for which deduction was claimed u/s. 57(iii) of the I.T. Act. During the course of assessment proceedings, the assessee claimed deduction under Section 36(1)(3) of the Act. The A.O. disallowed the entire interest on the ground that primary object of acquiring shares was not to earn dividends but to acquire controlling interest in the company. As such A.O. disallowed the claim under Section 36(1)(c) of the Income Tax Act.3. In an appeal preferred before the C.I.T. (Appeals), the learned C.I.T. (A) bifurcated the interest on pro rata basis between investment and stock in trade. It held that to the extent the borrowed funds were used for acquiring shares by way of stock in trade, the assessee was entitled to deduction of interest and on that basis allowed interest @ Rs.96040/-. The balance interest was considered as neither allowable under Section 57(3) or under Section 37(1)(i) of the Act.4. This order was in appeal before the I.T.A.T. The learned tribunal addressed itself to the question, as to whether the assessee is entitled to deduction in respect of interest liability either under Section 36(1)(3) or under Section 57(3) of the Income Tax Act. Reliance was placed on the judgment of this court in the case of Commissioner of Income Tax Vs. Lokhandwala Construction Industries Ltd. 260 ITR 579 (Bom) for the proposition that 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. The learned tribunal also relied on the judgment of the Calcutta High Court in the case of CIT Vs. Rajeeva Lochan Kanoria 208 ITR 616 (Cal) where the Calcutta High Court took a view that under the provisions of Section 36(1)(3) of the Income Tax Act, the only enquiry to be made is whether the payment of interest was in respect of capital borrowed for the purpose of assessees business or profession. Such amount borrowed, if for the purpose of business of profession may be utilized for the purpose of acquisition of stock in trade or for the purpose of acquisition of capital asset. The learned court took a view that under Section 36(1)(3) there is no bar for allowance of interest paid in respect of capital borrowed which has been utilized for the purpose of acquisition of capital assets. Considering this the learned I.T.A.T. held that if the funds are borrowed by an investment company for making investment in shares which maybe 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 u/s. 36(1)(iii) of the Income Tax Act. After recording this finding, it held that the interest expenditure is allowable under Section 36(1)(3) and therefore, disallowance to the extent sustained by the C.I.T.(A) was directed tobe deleted.5. The tribunal also considered two other grounds namely denying to the appellant claim of loss under the head "business" on the ground that the shares of M/s. L.K. Pandey Shares and Securities were held as investment and not stock in trade. Similarly another ground raised and considered was whether the C.I.T. (A) erred in not accepting the appellants claim of loss on account of valuation of the stock of shares of M/s. Pandey Shares and Securities. Dealing with these grounds the tribunal noted that the shares in 1993-94 were acquired and shown as investment in the balance sheet as on 31.3.1994. However, in the subsequent balance sheet on 31.3.1995 and 31.3.1996 the shares were shown as stock in trade. It was also contended that the shares had been sold during the subsequent assessment years. The tribunal was of the opinion that the Revenue Authority has not properly examined the issues and accordingly restored the same to the A.O. with a direction that the assessees claim that the investment was converted into stock in trade with reference to the entries made in the books of account of the relevant year in which the alleged conversion took place should be verified. Directions were also issued that the claim can be considered with reference to the provisions of Section 45(2) of the Income Tax Act.6. Revenue is in appeal on the following questions:"(a) Whether in view of facts and circumstances of the case the Honble ITAT is justified in allowing the interest on the borrowed fund u/s. section 36(1)(iii) of the Income Tax Act, 1961, when the share of the group company which was acquired was not shown as stock in trade but as investment(b) Whether in view of facts and circumstances of the case the Honble ITAT is justified in allowing the interest on the borrowed fund u/s. section 36(1)(iii) of the Income Tax Act, 1961, when the money is not used for business purpose as held by the A.O. and confirmed by the C.I.T. said finding of fact was not justified by the I.T.A.T.(c) Whether in view of facts and circumstances of the case the Honble ITAT is justified in allowing the interest on the borrowed fund u/s. section 36(1)(iii) of the Income Tax Act, 1961, on the basis of the judgment of Calcutta High Court in case of Rajeeva Lochan Kanoria, without appreciating the factual position in the said case and the present case, the assesseee business in case of Rajeeva Lochan Kanoria was in the business of acquiring share for managing, controlling and rehabilitating different company where as in the present case it was not the business of the assessee as held by the authority below(d) Whether in the facts and circumstances of the case and in law, the Tribunal is right in restoring the issue of valuation of closing stock of the shares held by the respondent in LKP Merchant Financing Ltd. when the said shares were held as an investment and not as stock in trade"7. We may firstly consider the first three questions as to whether the interest of borrowed capital which was utilised in the business of purchase of shares both by way of investment and stock in trade is allowable deduction.In so far as first three questions are concerned, in our opinion a Coordinate Bench of this Court in C.I.T. Vs. Lokhandwala (supra) had addressed itself to this issue. Reliance was placed on India w Cements Ld. Vs. CIT (1966) 60 ITR 52 (SC) which was under Section 10(2)(3) of the Income Tax Act, 1922 which corresponds to section 36(1)(3) of the present Act. This court answered the issue in the following manner:"That, while adjudicating the claim for deduction under section 36(1)(iii) of the Act, the nature of the expense -whether the expense was on capital account or revenue account - was irrelevant as the section itself says that interest paid by the assessee on the capital borrowed by the assessee was an item of deduction. That the utilization of the capital was irrelevant for the purpose of adjudicating the claim for deduction under section 36(1)(iii) of the Act. (see the judgment of the Bombay High Court in the case of Calico Dying and Printing Works Vs. CIT (1958) 34 ITR 265 ). In that judgment, it has been laid down that where an assessee claims deduction of interest paid on capital borrowed, all that the assesee had to show was that the capital which was borrowed was used for business purpose in the relevant year of account and it did not matter whether the capital was borrowed in order to acquire a revenue asset or a capital asset. ..."It may be noted that in India Cements Ltd. (supra) the Apex Court was specifically pleased to observe that the object of the loan is an irrelevant consideration. In the State of Madras Vs. G.J. Coelho, 53 ITR 186 the Supreme Court was dealing with the deduction claimed under Section 5(e) of the Madras Plantations Agricultural Income Tax Act, 1955. While considering the issue the court was pleased to observe that in principle there is no distinction between interest paid on capital borrowed for the acquisition of a plantation and interest paid on capital borrowed for the purpose of an existing plantation. Both are for the purpose of the plantation. The court further observed that the payment of interest on the amount borrowed for the purpose of the plantations when the whole transaction of purchase and the working of the plantations was viewed as an integrated whole was so closely related to the plantations that the expenditure could be said to be laid out or expended wholly and exclusively for the purpose of the plantations.8. We may also gainfully refer to the judgment of the Calcutta High Court in Commissioner of Income Tax Vs. Rajeeva Lochan Kanoria, 208 ITR 616 . The learned Court was considering section 36(1)(iii) and was pleased to observe as under:"The only enquiry that is to be made is whether the payment of interest was in respect of capital borrowed for the purpose of the assessees business or profession. There is no dispute that the capital was borrowed in the instant case and interest was paid on the borrowed capital. It is to be established that the amount was borrowed for the purpose of business or profession. The amount borrowed may be utilized for the purpose of acquisition of stock in trade or for the purpose of acquisition of capital assets. But so long as the money is utilised for business purposes the interest will have to be allowed as deduction. It is well settled that business expenditure is not confirmed to expenses incurred on revenue account. Capital expenditure may not be allowed as a deduction under section 37 because the section specifically bars any deduction of expenditure of capital nature. But section 36 is differently worded. There is no bar in section 36(1)(iii) to allowance of interest paid in respect of capital borrowed which has been utilised for purchase of a capital asset. The position of law in this regard was explained by the Supreme Court in the cases of India Cements Ltd. Vs. CIT (1966) 60 ITR 52 and State of Madras Vs. G.J. Coelhi (1964) 53 ITR 186."

Decision reasoning: 1[ds]In so far as first three questions are concerned, in our opinion a Coordinate Bench of this Court in C.I.T. Vs. Lokhandwala (supra) had addressed itself to this issue. Reliance was placed on India w Cements Ld. Vs. CIT (1966) 60 ITR 52 (SC) which was under Section 10(2)(3) of the Income Tax Act, 1922 which corresponds to section 36(1)(3) of the present Act. This court answered the issue in the following manner:"That, while adjudicating the claim for deduction under section 36(1)(iii) of the Act, the nature of the expensewhether the expense was on capital account or revenue accountwas irrelevant as the section itself says that interest paid by the assessee on the capital borrowed by the assessee was an item of deduction. That the utilization of the capital was irrelevant for the purpose of adjudicating the claim for deduction under section 36(1)(iii) of the Act. (see the judgment of the Bombay High Court in the case of Calico Dying and Printing Works Vs. CIT (1958) 34 ITR 265  ). In that judgment, it has been laid down that where an assessee claims deduction of interest paid on capital borrowed, all that the assesee had to show was that the capital which was borrowed was used for business purpose in the relevant year of account and it did not matter whether the capital was borrowed in order to acquire a revenue asset or a capital asset. ..."It may be noted that in India Cements Ltd. (supra) the Apex Court was specifically pleased to observe that the object of the loan is an irrelevant consideration. In the State of Madras Vs. G.J. Coelho, 53 ITR 186   the Supreme Court was dealing with the deduction claimed under Section 5(e) of the Madras Plantations Agricultural Income Tax Act, 1955. While considering the issue the court was pleased to observe that in principle there is no distinction between interest paid on capital borrowed for the acquisition of a plantation and interest paid on capital borrowed for the purpose of an existing plantation. Both are for the purpose of the plantation. The court further observed that the payment of interest on the amount borrowed for the purpose of the plantations when the whole transaction of purchase and the working of the plantations was viewed as an integrated whole was so closely related to the plantations that the expenditure could be said to be laid out or expended wholly and exclusively for the purpose of the plantations.8. We may also gainfully refer to the judgment of the Calcutta High Court in Commissioner of Income Tax Vs. Rajeeva Lochan Kanoria, 208 ITR 616  . The learned Court was considering section 36(1)(iii) and was pleased to observe as under:"The only enquiry that is to be made is whether the payment of interest was in respect of capital borrowed for the purpose of the assessees business or profession. There is no dispute that the capital was borrowed in the instant case and interest was paid on the borrowed capital. It is to be established that the amount was borrowed for the purpose of business or profession. The amount borrowed may be utilized for the purpose of acquisition of stock in trade or for the purpose of acquisition of capital assets. But so long as the money is utilised for business purposes the interest will have to be allowed as deduction. It is well settled that business expenditure is not confirmed to expenses incurred on revenue account. Capital expenditure may not be allowed as a deduction under section 37 because the section specifically bars any deduction of expenditure of capital nature. But section 36 is differently worded. There is no bar in section 36(1)(iii) to allowance of interest paid in respect of capital borrowed which has been utilised for purchase of a capital asset. The position of law in this regard was explained by the Supreme Court in the cases of India Cements Ltd. Vs. CIT (1966) 60 ITR 52     and State of Madras Vs. G.J. Coelhi (1964) 53 ITR 186."