Interest on borrowings for share investments not deductible; ad hoc expense disallowance for exempt dividend income deleted.

Interest on borrowings used to acquire shares as long-term investments was not deductible under section 36(1)(iii), because mere investment activity did not establish a real, substantial, systematic business of holding investments and the related income had to be computed under the appropriate head. The Tribunal upheld the disallowance of the interest claim and rejected any set-off against other income. An ad hoc disallowance linked to exempt dividend income was not justified on the facts and was deleted, granting the assessee partial relief.

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Issues: (i) Whether interest on borrowings used for acquiring shares as long-term investments was deductible under section 36(1)(iii) of the Income-tax Act, 1961, either as business expenditure or against other income; and (ii) whether an ad hoc disallowance of expenses attributable to exempt dividend income could be sustained.

Issue (i): Whether interest on borrowings used for acquiring shares as long-term investments was deductible under section 36(1)(iii) of the Income-tax Act, 1961, either as business expenditure or against other income.

Analysis: A company may, in law, be engaged in the business of holding investments, but that position applies only where the activity constitutes a real, substantial, systematic, and organised course of conduct with a set purpose. Mere authority to invest, or the fact of making investments in shares, is not enough. Even assuming such business existed, the receipts from sale of shares fall under capital gains and dividend income falls under income from other sources or is exempt under section 10(33); the scheme of the Act requires income to be computed under the appropriate head, and deductions under sections 30 to 43D cannot be claimed against a different head. The borrowed funds were used for shares and not for debenture income, so no set-off against interest income was permissible.

Conclusion: The claim for deduction of interest was not allowable, and the disallowance on this issue was upheld.

Issue (ii): Whether an ad hoc disallowance of expenses attributable to exempt dividend income could be sustained.

Analysis: An ad hoc disallowance of expenditure linked to exempt dividend income was not justified in the circumstances, and the matter was covered by the Special Bench view relied upon by the Tribunal.

Conclusion: The ad hoc disallowance was deleted.

Final Conclusion: The Tribunal upheld the disallowance of interest under section 36(1)(iii) but deleted the ad hoc disallowance relating to exempt dividend income, resulting in partial relief to the assessee.

Ratio Decidendi: Deduction of interest on borrowings is not allowable where the related receipts are required to be computed under a different head of income or are exempt, and an assessee must establish a real, substantial, systematic business activity before claiming business deduction on investments.

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