1998 (2) TMI 97 - HC - Income Tax

Assessee's financial company status and dividend-related interest deduction: s.40A(8) benefit, full s.36(1)(iii) interest, s.80M on gross

Whether the assessee qualified as a 'financial company' for s.40A(8) was resolved on concurrent factual findings by CIT(A) and the Tribunal that were not ... Disallowance u/s 40A(8) - Financial Corporation - Speculation In Shares - Interest On Borrowed Capital - Intercorporate Dividends - relief u/s 80M - gross amount of dividend - loans advanced - Whether, the Tribunal is correct in law in holding that the entire amount of interest paid by the assessee on money borrowed has to be deducted in arriving at the profit or loss under the head 'Profits and gains of business' and no part should be apportioned and deducted against the income assessable as 'dividend' ? - HELD THAT:- When there is a concurrent finding of fact both by the Commissioner of Income-tax (Appeals) and the Tribunal and also on the basis of material on record, it cannot be said to be perverse finding. It is a 'financial company' within the meaning of clause (c) of sub-section (8) of section 40A. Once it is a financial company, the assessee is entitled for the benefit available to a 'financial company'. Accordingly, we answer question in the affirmative, that is, in favour of the assessee and against the Revenue. As it was more than the dividend received, the assessee is not entitled to any deduction under section 80M of the Act. - Without going into for what purpose the loan has been used and how much income is earned from which source. In view of the above decisions that once the capital has been borrowed for the purpose of business, it is immaterial as to how the borrowed money was applied, the interest payment would be deductible under section 36(1)(iii) of the Act. Therefore, the view that has been taken is that the entire interest payment should be allowed as a deduction for computing the profit or loss under the head 'Profits and gains of business' without apportionment of interest, paid for the purpose of business. Accordingly, we answer question in the affirmative, i.e., in favour of the assessee and against the Revenue. Whether deduction under section 80M should be allowed on the gross amount of dividend or on the net amount of dividend. - In the case of CIT v. National and Grindlays Bank Ltd. [1991 (5) TMI 4 - CALCUTTA HIGH COURT], wherein the court has considered the question whether special deduction is admissible on gross or net dividend. This court has held that the relief under section 80M will have to be allowed on the entire amount of dividend. Revenue has not controverted this fact that the issue is covered by the aforesaid decision of this court. Thus, we answer question in the affirmative, i.e., in favour of the assessee and against the Revenue. Issues:1. Interpretation of whether the assessee qualifies as a financial company under section 40A(8) of the Income-tax Act, 1961.2. Treatment of interest paid by the assessee on borrowed money for the purpose of calculating profit or loss under the head 'Profits and gains of business.'3. Determination of whether relief under section 80M of the Income-tax Act, 1961, should be allowed on the gross amount or net amount of dividend received by the assessee.Analysis:Issue 1:The primary issue in this case was whether the assessee could be classified as a financial company under sub-clauses (ii) and (iv) of clause (c) of Explanation to section 40A(8) of the Income-tax Act, 1961. The Income-tax Officer initially disallowed a portion of interest under section 40A(8) on the grounds that the assessee was not a financial company due to its income mainly arising from speculation in shares. However, the Commissioner of Income-tax (Appeals) and the Tribunal both held that the assessee satisfied the conditions to be considered a financial company based on the nature of its business activities, particularly its substantial investments in shares and loans. The court concurred with this finding, emphasizing that the principal business carried out by the company is crucial in determining its classification. As such, the court ruled in favor of the assessee on this issue.Issue 2:The second issue pertained to the treatment of interest paid by the assessee on borrowed money for calculating profit or loss under the head 'Profits and gains of business.' The Income-tax Officer argued that only a portion of the interest should be treated as related to share investments and deducted against dividend income. However, the Commissioner and the court held that once the capital is borrowed for business purposes, the entire interest payment should be allowed as a deduction for computing profit or loss without the need for apportionment. Citing relevant case law, the court supported the view that interest paid for business purposes should be deductible under section 36(1)(iii) of the Act. Consequently, the court ruled in favor of the assessee on this issue as well.Issue 3:The final issue revolved around the deduction under section 80M concerning whether it should be allowed on the gross amount or net amount of dividend received by the assessee. The court referred to a previous decision in the case of CIT v. National and Grindlays Bank Ltd., where it was held that relief under section 80M should be granted on the entire amount of dividend received. Given that the Revenue did not contest this interpretation, the court ruled in favor of the assessee on this issue, aligning with the precedent set in the aforementioned case.In conclusion, the court's judgment favored the assessee on all three issues raised in the reference application, affirming their status as a financial company, allowing the full deduction of interest paid for business purposes, and granting relief under section 80M on the gross amount of dividend received.