TaxTMI 
TaxTMI 
2013 (6) TMI 69
X X X X Extracts X X X X
X X X X Extracts X X X X
....g it on interest to other parties. During the assessment year under consideration, the assessee has shown gross interest receipts from his business of financing to the extent of Rs.56,49,614/- against which he had paid interest on borrowed funds amounting to Rs.53,31,137/-. The Assessing Officer found that the assessee had invested an amount of Rs.2,01,33,605/- in shares including an investment of Rs.2 crores in the shares of Agmo Tex Ltd. He also noticed that the assessee has substantial interest in the above concern and no benefit or income has been derived or accrued in respect of investment of Rs.2 crores in the shares of Agmo Tex Ltd. The Assessing Officer after considering that the assessee had non interest bearing funds of Rs.85.5 lakhs and that the assessee was paying the interest on the borrowed fund ranging from 12% to 21%, considered the rate of interest of 18% and disallowed the proportionate interest on the remaining amount of Rs.1,14,50,000/- which comes to Rs.20.61 lakhs out of the interest expenses debited by the assessee. The assessment was completed u/s. 143(3) of the Income Tax Act, 1961 on 31.03.2004 on an income of Rs.24,12,6000/-. 3. Being aggrieved, the asse....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r of the Tribunal. He urged that admittedly, the assessee is carrying on business of financing and therefore investing borrowed funds in the shares of M/s. Agmo Tex Ltd. was in due course of business dealing and that it is not essential that there should be reasonable expectancy of receiving dividends in order to get benefit of section 36(1)(iii) of the Income Tax Ac, 1961. In this regard, he placed reliance on the judgements in CIT v Gorawar Plastics and General Industries (P) Ltd. 2007 (289) ITR 224, CIT v. Rajeeva Lochan Kanoria 1994 (208) ITR 616, Sarabhai Sons (P) Ltd. v. CIT 1993 (201)ITR 464, CIT v. Rajendra Prasad Moody 1978 (115) ITR 519 and CIT v. Radico Khaitan Ltd. 2005 (274) ITR 354. 8. Section 36 (1)(iii) of the Income Tax Act, 1961 is a follows :- 36(I) : The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28 - (iii) The amount of the interest paid in respect of capital borrowed for the purposes of the business or profession : This court after considering the aforesaid provision and the Apex Court's decisions in the case of Madhav Prasad Jatia vs. CIT [1....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ure incurred for business purposes and is thus outside the purview of section 57(iii) of the Income Tax Act, 1961. In (1994)208 ITR 616 Commissioner of Income Tax vs. Rajeev Lochan Kanoria, the asssessee was found to be engaged in the business of rehabilitating and financing various companies. It was further found that the acquisition of shares by the assessee to gain control over such companies, were the activities relating to the business of the assessee. It was held that since the assessee was carrying on business of promoting, monitoring, financing and controlling the companies and therefore, the investment in shares was in connection with the business of the assessee and was held to be allowable expenditure under section 36(1)(iii). In (2007) 289 ITR 224 Commissioner of Income Tax vs. Gorawara Plastics and General Industries (P) Ltd., the assessee was a company. It was found that its memorandum and article of association provides for investment in shares. The assessee company had taken term loan from Hongkong and Sanghai Banking Corporation but the project could not take off during the substantial part of the previous year therefore, the assessee company as a prudent busines....
X X X X Extracts X X X X
X X X X Extracts X X X X
....diture (vide Govan Bros. vs. CIT (1963) 48 ITR, 930 (All). 12. Similarly, interest paid on the money borrowed to the extent such borrowings were given to the sister concern was held not allowable under section 36(1)(iii) [vide Triveni Engineering Works Ltd. vs. CIT, ( 1987) 167 ITR 742 (All).] 13. From perusal of the aforesaid judgements, cited by both the sides, it is abundantly clear that in order to avail the allowance under section 36(1)(iii), the borrowed sum should be spent for the business purpose and if on the other hand, it has been utlised for private purpose or for purposes not connected with the business of the assessee , then the interest paid on the said borrowing cannot be allowed u/s. 36(1)(iii). Applying the aforesaid principle to the facts of the present case, we find that the assessing officer and CIT(A) after taking into consideration various factors, have recorded a specific finding that the investment of Rs.2 crores by the assessee in the shares of Agmo Tex Ltd. is not for business purpose but in order to extend financial support to the company Agmo Tex Ltd. While recording the said findings, the authorities have taken the following factors into considerati....
X X X X Extracts X X X X
X X X X Extracts X X X X
....estment in the shares of other companies, for business purposes, the interest payable on the borrowed amount is to be allowed as business expenditure u/s. 36(i)(iii) of the Income Tax Act, 1961." 15. A perusal of the entire order of the tribunal demonstrates that it had proceeded on wrong assumption of fact that the assessee is in the business of investment in shares and there is no dispute that the purchase of shares of Rs.2 crores of Agmo Tex Ltd. was for the purpose of its business. On the aforesaid wrong assumption of facts, the Tribunal had proceeded to place reliance on certain judgements of the Apex Court and of this court and had thereafter jumped to the conclusion that even if the investment in shares had not yielded any income, the interest payable on the borrowed amount is to be allowed as business expenditure u/s. 36(1)(iii). 16. It is clear that the entire approach of the tribunal is manifestly illegal. It had wrongly assumed that the assessee is in the business of investment in shares. It had not referred to any material in this regard. There is no finding that in the previous years, the assessee has ever made investments in shares of any company, or had earned prof....