Deductibility of Interest on Share Borrowings Clarified by Tribunal

The Tribunal held that interest on borrowings for shares held as stock in trade is deductible under section 36(1)(iii) while computing business income, not against dividend income under section 57(iii). The Tribunal rejected the revenue's argument to adjust interest against dividend income, citing relevant court decisions. It distinguished cases where apportionment of interest was allowed and upheld the Commissioner of Income-tax (Appeals) decision to allow the entire interest amount as a deduction under section 80M. The revenue's appeal was dismissed, ruling in favor of the assessee.

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Issues:
Computation of deduction under section 80M of the Income-tax Act, 1961.

Analysis:
1. The only issue in this appeal pertains to the computation of deduction under section 80M of the Income-tax Act, 1961. The assessee, a dealer in shares, claimed deduction under section 80M for dividend income received, which was initially rejected by the Assessing Officer but allowed by the Commissioner of Income-tax (Appeals). The revenue appealed against this decision before the Tribunal.

2. The Assessing Officer rejected the claim under section 80M on the ground that the interest paid by the assessee was attributable to dividend income. However, the Commissioner of Income-tax (Appeals) allowed the claim, stating that the borrowings were for the purpose of business, specifically for the purchase and sale of shares. The interest paid on such borrowings was considered allowable expenditure against business income under section 36(1)(iii) rather than against dividend income under section 57(iii). The entire interest amount was allowed as a deduction under section 80M.

3. The Departmental Representative contended that the interest on borrowings should be adjusted against dividend income, citing the Distributors (Baroda) (P.) Ltd. v. Union of India judgment. An alternate argument was made for apportioning the interest between business income and dividend income. The assessee's counsel argued that the interest on borrowings for shares held as stock in trade is deductible under section 36(1)(iii) and not section 57(iii), supporting their claim with various High Court and Tribunal decisions.

4. The Tribunal considered the facts that the borrowed funds were utilized for the purchase of shares as stock in trade, concluding that the interest on such borrowings is deductible under section 36(1)(iii) while computing business income. The distinction between borrowing for trading assets and investments was highlighted, with relevant Supreme Court decisions supporting the treatment of dividend income from shares held as stock in trade as business income.

5. The Tribunal rejected the revenue's argument based on the Distributors (Baroda) (P.) Ltd. judgment, stating that interest on borrowings for shares held as stock in trade is deductible under section 36(1)(iii). The decision of the Gujarat High Court in Cotton Fabrics Ltd. was cited to support the deduction under section 80M on gross dividend income when shares are purchased as stock in trade with borrowed funds.

6. The Tribunal distinguished the H.K. (Investment) Co. (P.) Ltd. case, where apportionment of interest was allowed due to funds being utilized for both business and other income sources. In the present case, where funds were used for stock in trade, no apportionment was necessary. The decision was made in favor of the assessee, upholding the Commissioner of Income-tax (Appeals) order and dismissing the revenue's appeal.

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