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

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 (1 = appeal accepted, 0 = rejected): 1

Explanation:
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."