2003 (4) TMI 578 - AT - Income Tax

Tribunal allows interest deduction and share sale loss, dismisses deemed dividend and penalty claims.

Mafatlal Holdings Ltd. Versus Additional Commissioner of Income Tax

The Tribunal partially allowed the appeal, permitting the deduction of interest as a business expense and recognizing the loss on the sale of shares. The ... - Issues Involved:1. Disallowance of interest u/s 36(1)(iii).2. Disallowance of loss on sale of shares.3. Deemed dividend u/s 2(22)(e).4. Penalty proceedings.Summary:1. Disallowance of Interest u/s 36(1)(iii):The assessee claimed a deduction for interest paid on borrowed capital. The AO disallowed the interest, arguing that the assessee did not carry out any business activity during the relevant assessment year. The AO referenced s. 36(1)(iii) and the conditions laid down by the Supreme Court in Madhav Prasad Jatia vs. CIT, which require that the borrowed capital must be for business purposes. The CIT(A) upheld the AO's decision, stating that the shares were held as long-term investments, and the interest was not allowable under s. 36(1)(iii). The Tribunal, however, found that the assessee was indeed carrying on business activities, including the purchase and sale of shares, and incurred various business expenses. Therefore, the interest paid on borrowed capital was allowable as a business expense under s. 36(1)(iii) and s. 37(1).2. Disallowance of Loss on Sale of Shares:The assessee claimed a loss on the sale of shares of National Organic Chemical Industries Ltd. (NOCIL). The AO disallowed the loss, considering the transaction as sham and not genuine, citing that the shares were not transferred in the name of the purchaser and were pledged with financial institutions. The CIT(A) upheld the AO's decision, stating that the sale was not valid as per the Companies Act. The Tribunal, however, found that the shares were sold at market rates, and the transactions were genuine. The Tribunal held that the provisions of s. 45(3) were applicable, and the loss claimed by the assessee was allowable.3. Deemed Dividend u/s 2(22)(e):The grounds of appeal pertaining to deemed dividend u/s 2(22)(e) were not pressed by the learned counsel and were dismissed as not pressed.4. Penalty Proceedings:The ground of appeal pertaining to penalty proceedings was not the subject matter of the appeal and was dismissed as infructuous. The additional grounds filed by the assessee were also dismissed as not pressed.Conclusion:The Tribunal allowed the appeal partly, allowing the claim of interest as a business expense and the loss on the sale of shares, while dismissing the grounds related to deemed dividend and penalty proceedings.