Appeal Partially Allowed: Deduction for Interest & Dividends Permitted, Section 80HHC & Depreciation Resolved Against Assessee.

The Tribunal partially allowed the appeal in ITA No. 718 and fully in ITA No. 3494, directing the AO to permit the deduction under section 36(1)(iii)/37 for interest on borrowings used to acquire Trumac shares and to allow the deduction under section 80M on gross dividend income from those shares. The issues concerning section 80HHC and depreciation were resolved against the assessee, with the Tribunal noting potential retrospective amendments and emphasizing the independence of penalty proceedings.

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Issues Involved:
1. Deduction under section 36(1)(iii) of the Income-tax Act, 1961 for interest paid on borrowings for acquiring shares.
2. Deduction under section 80HHC of the Act.
3. Disallowance of depreciation.

Issue-wise Detailed Analysis:

1. Deduction under section 36(1)(iii) of the Income-tax Act, 1961:
The central issue in these appeals is whether the interest paid on borrowings for acquiring shares of Trumac Engineering Co. Ltd. ('Trumac') can be claimed as a deduction under section 36(1)(iii) of the Income-tax Act, 1961. The assessee, engaged in the business of distribution of goods including textile machinery, borrowed Rs. 395 lakhs from Kotak Mahindra Finance Ltd. and paid interest, which it claimed as a deduction under section 36(1)(iii). The Assessing Officer disallowed this claim, suggesting that the interest should be allowed under section 57(iii) instead, as the borrowings were used for acquiring shares. The CIT(A) upheld this view, stating that the shares were purchased with the intention of earning dividend income, not for business purposes.

The Tribunal, however, found that the assessee's primary intention was to safeguard its selling agency with Trumac, not to earn dividends. The Tribunal referred to various judgments, including those of the Supreme Court and High Courts, to support the view that if the acquisition of shares is closely related to the business, the interest on borrowings should be allowed as a business expenditure. It concluded that the interest paid on borrowings for acquiring shares of Trumac was for business purposes and thus allowable under section 36(1)(iii) and section 37. Consequently, the deduction under section 80M should be allowed on the gross dividend income from Trumac shares.

2. Deduction under section 80HHC of the Act:
For the assessment year 1997-98, the assessee claimed a deduction under section 80HHC, which was disallowed by the Assessing Officer on the ground that there was negative income if export incentives were excluded. The assessee conceded that the issue was covered against it by the Supreme Court judgment in IPCA Laboratory Ltd. v. Dy. CIT [2004] 266 ITR 521. However, the Tribunal noted that the Government of India might bring a retrospective amendment to help exporters. Hence, the issue was decided against the assessee, with a provision that the assessee could move an application under section 254(2) if any retrospective amendment was enacted.

3. Disallowance of depreciation:
For the assessment year 1997-98, the assessee's claim for depreciation of Rs. 6,32,672 was disallowed. The CIT(A) noted that the assessee did not press this ground. The Tribunal held that the assessee could not be aggrieved by the CIT(A)'s order on this issue since it had conceded the disallowance. However, it observed that this concession would not affect penalty proceedings, as both proceedings are independent. The ground raised by the assessee was dismissed as not entertained.

Conclusion:
The Tribunal allowed the appeal partly in ITA No. 718 and fully in ITA No. 3494, directing the Assessing Officer to allow the deduction under section 36(1)(iii)/37 for the interest on borrowings used to acquire shares of Trumac and to allow the deduction under section 80M on the gross dividend income from Trumac shares. The issues regarding section 80HHC and depreciation were decided against the assessee, with specific observations regarding potential retrospective amendments and the independence of penalty proceedings.

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