Madras High Court
The Commissioner Of Income Tax vs Shriram Investments (Firm) on 17 September, 2014
Bench: R.Sudhakar, G.M.Akbar Ali
IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 17.9.2014 CORAM THE HON'BLE MR.JUSTICE R.SUDHAKAR AND THE HON'BLE MR.JUSTICE G.M.AKBAR ALI T.C.(A).Nos.2657 of 2006 and 1017 and 1018 of 2007 The Commissioner of Income Tax Chennai. .. Appellant Vs. Shriram Investments (firm) Moogambika Complex, IV Floor No.4, Lady Desigachari Road Mylapore, Chennai 600 004. .. Respondent PRAYER: Appeals under Section 260A of the Income Tax Act, 1961 against the order of the Income Tax Appellate Tribunal 'B' Bench, Chennai, dated 27.1.2006 made in I.T.A.Nos.550, 551 and 552/Mds/1997 for the assessment years 1992-1993, 1993-1994 and 1994-1995 respectively. For Appellant : Mr.M.Swaminathan Standing Counsel assisted by Mr.K.Suresh Kumar For Respondent : Mr.R.Sivaraman J U D G M E N T
(Delivered by R.SUDHAKAR, J.) The Revenue is the appellant. The assessment years involved are 1992-1993 to 1994-1995.
2. These appeals are filed challenging the order of the Income Tax Appellate Tribunal 'B' Bench, Chennai, dated 27.1.2006 made in I.T.A.Nos.550, 551 and 552/Mds/1997 for the assessment years 1992-1993, 1993-1994 and 1994-1995 respectively.
3.1. The facts in a nutshell are as under: The assessee is a partnership firm engaged in the business of advancing loans and earning income from hire purchase financing, besides investments in shares and debentures. The assessee borrowed funds and invested the same in shares and debentures. The assessee treated the interest arising out of such investments as income from business and claimed deduction under Section 36(1)(iii) of the Income Tax Act, 1961 (for brevity, the Act).
3.2. The Assessing Officer, however, held that the investments were not held as trading assets and they can only be treated as capital assets and, therefore, the interest income has to be assessed under the head other sources and not under the head business income.
3.3. Assailing the said order, the assessee preferred appeals before the Commissioner of Income Tax (Appeals), who held that the activity of the assessee in investing in shares and debentures should be treated as conscious and deliberate business activity forming part of its finance business and, therefore, interest arising thereon should be assessed under the head business income and not under the head other sources. Thus, the disallowance made by the Assessing Officer was deleted.
3.4. Calling in question the said order passed by the Commissioner of Income Tax (Appeals), the department filed appeals before the Tribunal. The Tribunal, while upholding the order of the Commissioner of Income Tax (Appeals), held that the investments made by the assessee are business investments and the interest on borrowings made for these investments have to be allowed under the head business income.
3.5. Impugning the said order passed by the Tribunal, the present appeals are filed and the same were admitted on the following question of law:
Whether in the facts and circumstances of the case, the Tribunal was right in holding that the interest on borrowed funds utilised for investment in shares can be treated as a business expenditure?
4. We have heard Mr.M.Swaminathan, learned Standing Counsel appearing for the Revenue and Mr.R.Sivaraman, learned counsel for the assessee.
4. Before adverting to the merits of the case, it would be apposite to refer to Section 36(1)(iii) of the Income Tax Act, which reads as under:
Section 36. Other deductions. -
(1) 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
(i) to (ii) ***
(iii) the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession. (emphasis supplied)
5. From a bare reading of Section 36(1)(iii) of the Act, it is clear that deduction shall be allowed in respect of the amount of interest paid if the capital is borrowed for the purpose of business or profession. The language employed in the said provision is plain and unambiguous. The intendment of the said provision is that so long as the assessee has utilized the capital borrowed for the purpose of business, the amount of interest paid in respect of such capital borrowed should be allowed as deduction.
6. In the case on hand, it is beyond any cavil that capital was borrowed by the assessee and interest was paid on the borrowed capital. The amount so borrowed was invested in shares and debentures for the purpose of business. When the amount is thus utilized for business purpose, in our considered opinion, the interest paid will have to be allowed as deduction in terms of Section 36(1)(iii) of the Act.
7. The scope and ambit of Section 36(1)(iii) of the Act was considered by the Calcutta High Court in CIT v. Rajeeva Lochan Kanoria, [1994] 208 ITR 616 (Cal.). The said decision was relied on by the Bombay High Court in CIT v. Srishti Securities (P) Ltd., [2010] 321 ITR 498 (Bom.), and it was held as under:
4. This order was in appeal before the Income-tax Appellate Tribunal. The learned Tribunal addressed itself to the question, as to whether the assessee is entitled to deduction in respect of interest liability either under section 36(1)(iii) or under section 57(iii) of the Income-tax Act. Reliance was placed on the judgment of this court in the case of CIT v. Lokhandwala Construction Inds. Ltd. [2003] 260 ITR 579 for the proposition that when the assessee claims deduction of interest paid on capital borrowed, all that the assessee has to show is that the capital which was borrowed was used for the business purpose in the relevant year of account and it does not matter whether the capital was borrowed or not to acquire revenue asset or capital asset. The learned Tribunal also relied on the judgment of the Calcutta High Court in the case of CIT v. Rajeeva Lochan Kanoria [1994] 208 ITR 616 where the Calcutta High Court took a view that under the provisions of section 36(1)(iii) of the Income-tax Act, the only enquiry to be made is whether the payment of interest was in respect of capital borrowed for the purpose of the assessee's business or profession. Such amount borrowed, if for the purpose of business or profession may be utilised for the purpose of acquisition of stock-in-trade or for the purpose of acquisition of capital asset. The learned court took a view that under section 36(1)(iii) there is no bar for allowance of interest paid in respect of capital borrowed which has been utilized for the purpose of acquisition of capital assets. Considering this the learned Income-tax Appellate Tribunal held that if the funds are borrowed by an investment company for making investment in shares which may be held as investment or as stock-in-trade or for the purpose of controlling interest in other companies, interest paid on such borrowed funds will be deductible under section 36(1)(iii) of the Income-tax Act. After recording this finding, it held that the interest expenditure is allowable under section 36(1)(iii) and therefore, disallowance to the extent sustained by the Commissioner of Income-tax (Appeals) was directed to be deleted.
....
7. We may firstly consider the first three questions as to whether the interest of borrowed capital which was utilised in the business of purchase of shares both by way of investment and stock-in-trade is allowable deduction.
In so far as first three questions are concerned, in our opinion a co-ordinate Bench of this court in Lokhandwala [2003] 260 ITR 579 had addressed itself to this issue. Reliance was placed on India Cements Ltd. v. CIT [1966] 60 ITR 52 (SC) which was under section 10(2)(iii) of the Income-tax Act, 1922 which corresponds to section 36(1)(iii) of the present Act. This court answered the issue in the following manner (page 581) :
'That, while adjudicating the claim for deduction under section 36(1)(iii) of the Act, the nature of the expense-whether the expense was on capital account or revenue account-was irrelevant as the section itself says that interest paid by the assessee on the capital borrowed by the assessee was an item of deduction. That the utilization of the capital was irrelevant for the purpose of adjudicating the claim for deduction under section 36(1)(iii) of the Act. (see the judgment of the Bombay High Court in the case of Calico Dyeing and Printing Works v. CIT [1958] 34 ITR 265). In that judgment, it has been laid down that where an assessee claims deduction of interest paid on capital borrowed, all that the assessee had to show was that the capital which was borrowed was used for business purpose in the relevant year of account and it did not matter whether the capital was borrowed in order to acquire a revenue asset or a capital asset.' It may be noted that in India Cements Ltd. [1966] 60 ITR 52 the apex court was specifically pleased to observe that the object of the loan is an irrelevant consideration. In the State of Madras v. G. J. Coelho [1964] 53 ITR 186 (SC) the Supreme Court was dealing with the deduction claimed under section 5(e) of the Madras Plantations Agricultural Income-tax Act, 1955. While considering the issue the court was pleased to observe that in principle there is no distinction between interest paid on capital borrowed for the acquisition of a plantation and interest paid on capital borrowed for the purpose of an existing plantation. Both are for the purpose of the plantation. The court further observed that the payment of interest on the amount borrowed for the purpose of the plantations when the whole transaction of purchase and the working of the plantations was viewed as an integrated whole was so closely related to the plantations that the expenditure could be said to be laid out or expended wholly and exclusively for the purpose of the plantations.
8. We may also gainfully refer to the judgment of the Calcutta High Court in CIT v. Rajeeva Lochan Kanoria [1994] 208 ITR 616. The learned court was considering section 36(1)(iii) and was pleased to observe as under (page 620) :
'The only enquiry that is to be made is whether the payment of interest was in respect of capital borrowed for the purpose of the assessee's business or profession. There is no dispute that the capital was borrowed in the instant case and interest was paid on the borrowed capital. It is to be established that the amount was borrowed for the purpose of business or profession. The amount borrowed may be utilized for the purpose of acquisition of stock-in trade or for the purpose of acquisition of capital assets. But so long as the money is utilised for business purposes the interest will have to be allowed as deduction. It is well settled that business expenditure is not confirmed to expenses incurred on revenue account. Capital expenditure may not be allowed as a deduction under section 37 because the section specifically bars any deduction of expenditure of capital nature. But section 36 is differently worded. There is no bar in section 36(1)(iii) to allowance of interest paid in respect of capital borrowed which has been utilised for purchase of a capital asset. The position of law in this regard was explained by the Supreme Court in the cases of India Cements Ltd. v. CIT [1966] 60 ITR 52 (SC) and State of Madras v. G.J. Coelho [1964] 53 ITR 186 (SC).' (emphasis supplied)
8. We have considered the reasoning given in the decisions referred to supra and are in respectful agreement with the view expressed in the said decisions, for the reason already given by us that there is nothing in Section 36(1)(iii) of the Act that would dis-entitle the assessee to claim deduction in respect of interest paid on the capital borrowed for the purposes of business.
9. For the foregoing reasons, we uphold the concurrent findings rendered by the Commissioner of Income Tax (Appeals) and the Tribunal and answer substantial question of law against the Revenue and in favour of the assessee. These appeals are dismissed. No costs.
(R.S.J.) (G.M.A.J.)
17.9.2014
Index : Yes
Internet : Yes
sasi
To:
1. The Assistant Registrar,
Income Tax Appellate Tribunal
Chennai Bench "B", Chennai.
2. The Secretary, Central Board
of Direct Taxes, New Delhi.
3. The Commissioner of Income Tax (Appeals) - II
Chennai.
4. The Assistant Commissioner of Income Tax
Central Circle II(6), Chennai.
R.SUDHAKAR,J.
and
G.M.AKBAR ALI,J.
(sasi)
T.C.(A).Nos.2657 of 2006 and 1017 and 1018 of 2007
17.9.2014