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Addl. Cit Vs. Ataku Holdings (P) Ltd. - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Ahmedabad
Decided On
Reported in(2004)87TTJ(Ahd.)293
AppellantAddl. Cit
RespondentAtaku Holdings (P) Ltd.
Excerpt:
.....thereby that for claiming deduction for interest under section 36(1) (iii) against the business income assessee need not prove that interest is paid wholly and exclusively for the purpose of business. it as enough to prove it to be for the purpose of business.23. thus, there is no justification for citing the hon'ble gujarat high court decision in sarabhai sons (p) ltd. v. cit (supra) for disallowing the claim of interest under section 36(i)(iii).24. it is further submitted that without prejudice to the assessee's basic claim that deduction is available under section 36(1) (iii) there is no justification for citing the hon'ble high court's decision in sarabhai sons (p) ltd. (supra) for rejecting assessee's claim for deduction under section 57(iii). in the cited decision the.....
Judgment:
This appeal by the revenue is directed against deletion of the disallowance of interest of Rs. 3,14,928 by the learned Commissioner (Appeals).

The assessee- company borrowed funds from Amosha Holdings (P) Ltd. (in short M/s AHPL) on interest at the rate of 21.26 per cent. The closing balance in the aforesaid account as at the end of the year was Rs. 65,49,928. The interest of Rs. 3,14,928 was paid by the assessee on the aforesaid borrowed funds. This amount was utilised by the assessee for investment in shares of Nachmo Knitex Ltd. (in short NKL) for Rs. 65,40,226. The assessee vide letter dated 21-1-1999, submitted to the assessing officer admitted that the investments in equity shares of NKL were directly made out of the funds borrowed on interest from M/s AHPL.

Thus, there was a direct nexus between the funds borrowed on interest from M/s AHPL and the investments made in shares of NKL. The assessing officer after giving show-cause notice to the assessee and after considering the elaborate reasons submitted on behalf of the assessee, disallowed interest expenditure of Rs. 3,14,928 on the ground that such interest expenditure has not been incurred for the business purpose by the assessee- company and, therefore, the same is not allowable under section 36(1) (iii) of the Income Tax Act, 1961. The assessing officer also placed reliance on the judgment of the Hon'ble Gujarat High Court in the case of Sarabhai Sons (P) Ltd. v. CIT The learned Commissioner (Appeals) passed the elaborate order and deleted the said disallowance. He also examined the applicability or ratio of all the judgments referred to in the assessment order. The learned Commissioner (Appeals) has carefully considered the principles of law laid down by the Hon'ble Gujarat High Court in the case of Sarabhai Sons (P) Ltd. (supra) in paras 19 to 25 of the order passed by him. It would be imperative to reproduced paras 19 to 25 of the,order passed by the learned Commissioner (Appeals) "19. The assessment order seeks to derive support from the Hon'ble Gujarat High Court decision in the case of Sarabhai Sons v. CIT (1993) 201 ITR 464 Qui). It is submitted that that decision is just not applicable to the facts of this case. The first and foremost aspect to be noted is that on pp. 469A and 469B of the Report (i.e., 201 ITR) there is an important observation of the High Court in the following terms : 'Mr. K.C. Patel, learned counsel appearing for the assessee, at the outset, stated that he was not pressing the claim for deduction under section 36 of the Act and the claim of the assessee is now confined to section 57(iii) only.' 20. Thus, in the cited decision claim was considered only under section 57(iii) while in the case of this assessee the claim is made under section 36(1) (iii). It is submitted that section 57(iii) allows deduction for : 'Any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income.' 21. On the other hand, deduction under section 36(1) (iii) is allowed for "amount of interest paid in respect of capital borrowed for the purposes of business or profession".

22. It is submitted that allowance under section 57(iii) is doubly restrictive (i.e., cumulatively for the important reasons) as compared to section 36(1) (iii). Firstly, section 57(iii) allows expenditure which is for the purpose of making or earning the relevant income while section 36(1) (iii) allows it even if it is for the -purposes of business. Undoubtedly, the phraseology purpose of making or earning such income is far more restrictive than the purpose of business or profession. Refer the Supreme Court decision in CIT v. Malayalam Plantations (1964) 53 ITR 140 (SC). The second factor is that in section 57(iii) it has to be wholly and exclusively for that purpose while in section 36(1) (iii) these crucial words 'wholly and exclusively' are completely missing meaning thereby that for claiming deduction for interest under section 36(1) (iii) against the business income assessee need not prove that interest is paid wholly and exclusively for the purpose of business. It as enough to prove it to be for the purpose of business.

23. Thus, there is no justification for citing the Hon'ble Gujarat High Court decision in Sarabhai Sons (P) Ltd. v. CIT (supra) for disallowing the claim of interest under section 36(i)(iii).

24. It is further submitted that without prejudice to the assessee's basic claim that deduction is available under section 36(1) (iii) there is no justification for citing the Hon'ble High Court's decision in Sarabhai Sons (P) Ltd. (supra) for rejecting assessee's claim for deduction under section 57(iii). In the cited decision the acquisition of shares attempted was for the clear purpose and object of getting 100 per cent control over another company viz., SUML. This factor of intention of obtaining full control really clinched the issue in that case against the assessee as is obvious from the concluding part of that decision on pp. 471-G to 472D of the Report (201 ITR). The following extracts from that decision would bear it out from p. 472A as follows : "The shares were purchased by the assessee with a clear purpose or object of getting 100 per cent control over SOML. If the purpose was to earn income only, or even if that was the dominant purpose, it would not have sold the shares again to KPPL as, by the time, it had already acquired more than 90 per cent shares, and that would have satisfied its object of earning more income by possessing more shares. The reason why the assessee sold the shares was that it was not able to get 100 per cent control by purchasing all the remaining shares. Thus, from the nature of the transactions, it becomes apparent that the expenditure which was incurred by the assessee was not for the purpose of earning income, but for the purpose of getting full control over SOML".

25. Thus, viewed from whatever angle the assessee's claim is valid and is in accordance with law and the binding decisions of the Hon'ble Supreme Court and the Gujarat High Court conversely the reasons given and the view propounded in the assessment order are contrary to law and the ratio decidendi of the apex court and the Gujarat High Court decisions." "2.3 1 have considered the assessment order and the above submissions made on behalf of the appellant. On consideration of the entire facts and circumstances of the appellant's case I agree with the arguments made on behalf of the appellant that the investment was made for the purpose of business. The main object of the memorandum of association is to carry on business of acquiring, holding and selling of shares and debentures, etc. In the course of this business the company has made investment in shares of Nachmo Knitex Ltd. as detailed hereinabove. For the purpose of making these investments the funds are arranged by borrowing from the two concerns, namely, Amosha Holdings (P) Ltd. In the subsequent year it is found that the assessee- company has also made transactions of purchase and sale of shares. As regards the assessing officer's arguments for acquiring controlling interest, it is found that one has to look into the individual case and percentage of interest of the appellant- company in the shares of the above company was very small. I agree with the authorised representative that the ratio of the decision of the case of CIT v.Dalmia Jain & Co. Ltd. & Ors. (1967) 65 ITR 432 (Pat) which has been approved in CIT v. Dalmia Jain Co. Ltd. (1972) 83 ITR 438 (SC) by the Supreme Court is applicable to the appellant's case. In particular I refer to the para 7 of the assessee's submission wherein the relevant portion is reproduced above, I have also found that the Supreme Court decision in CIT v. Karamchand Thapar & Bros. (P) Ltd. (1989) 176 ITR 535 (SC) is supporting the appellant's arguments. In view of the above decision of the Supreme Court in (1989) 176 ITR 535 (SC) (supra) though the shares were shown as investment, it was not conclusively and it is required to be treated as dealing in regular course of business in particular in view of the transactions in the subsequent period. On consideration of these arguments I hold that the interest liability with reference to the borrowings made from Amosha Holidings (P) Ltd., is admissible as business expenditure under section 36(1) (iii). Though the dividend income is taxable as income form other sources on account of specific provisions of the Act, the interest liability with reference to the investments made which is for the purpose of business has to be held as admissible under section 36(1) (iii). The diiallowance made by assessing officer is, therefore, deleted. In view of this findings, I do not go into the aspects of the admissibility of the said interest under section 57(iii) of the Act, although the authorised representative has argued on the basis of the Supreme Court judgment in the case of Rrjendra Prasad Moody.

The learned departmental Representative relied upon the elaborate reasons given in the assessment order and also relied upon the judgment of the Hon'ble Gujarat High Court in the case of Sarabhai Sons (P) Ltd. (supra).

Shri S.N. Soparkar, the learned counsel appearing for the assessee, contended that the judgment of the Hon'ble Gujarat High Court in the case of Sarabhai Sons (P) Ltd. (supra) is clearly distinguishable in view of the elaborate reasons given in the order of the Commissioner (Appeals). He pointed out that in the case of Sarabhai Sons (P) Ltd. (supra) the clear purpose of acquisition of shares was to acquire 100 per cent control over that company, viz., SOML while in the present case the assessee acquired only 2.83 per cent of the equity shares of NKL. These shares were also sold by the assessee in next year. The assessee also derived income by way of dividend from NKL in the year under consideration. The assessee is an investment company. The main object of the assessee is to deal in shares. The dividend income, irrespective of the fact that it is assessable as income from other sources as per provisions contained in the Income Tax Act, is clearly the income derived from business carried on by the assesseecompany. He placed reliance on the judgment of the Hon'ble Supreme Court in the case of CIT v. Cocanada Radhaswan2i Bank Ltd. (1965) 57 ER 306 (SC); the judgment of the Hon'ble Gujarat High Court in the cases of Addl.

CIT v. Lamni Agents Ltd. (1980) 125 ITR 227 (Gui) and CIT v. Cotton Fablics Ltd. (1981) 131 ITR 99 (Guj). The learned counsel submitted that detailed written submissions were given before the Commissioner (Appeals) which have aptly been incorporated in the order passed by him, which need not be reiterated. He however placed strong reliance on those elaborate submissions made before. the Commissioner (Appeals).

Shri Soparkar, then drew my attention to the judgment of the Hon'ble Bombay High Court in the case of Ormerods (India) (P) Ltd. v. CIT (1959) 36 ITR 329 (Bom), wherein the Hon'ble High Court allowed deduction in respect of interest on capital borrowed invested for purchase of shares under almost similar facts and circumstances. He contended that the Hon'ble Bombay High Court has held that the word "purpose" (similar expression used in section 37) cannot certainly mean a motive for a transaction. The investments in shares were made for the purposes of making or earning such income, profits or gains. In that case also the assessing officer had disallowed the interest paid on overdraft on the ground that the investment made in shares of Gannon Dunkerley & Co. Ltd. was not for a proper business consideration nor for sound investment consideration but was purely a transaction in which the company acquiesced in the personal financial transactions of Gupta and Morarka families. The headnote of the aforesaid judgment of the Hon'ble Bombay High Colirt is reproduced below : "In the accounting year, ending 30-11-1948, the assessee- company purchased shares to the tune of Rs. 524 lakhs and for this purpose took loans to the extent of Rs. 492 lakhs. During the accounting years relevant to the assessment years 1949-50 and 1950-51 the assessee paid the sums of Rs.1,69,085 and Rs. 2,04,333 as interest on capital borrowed for the purchase of the shares, but there was no income at all from those shares. The assessee claimed to set off these payments of interest against its other income in those years. The Tribunal held that the investment in the shares in question was not made with a view to trading in them and that the purchase of those shares was to serve one purpose, viz., the convenience of two persons who controlled the assesseecompany. The Tribunal, however, was of the view that the assessee was entitled in respect of the three subsequent years to set off the payment of interest against the dividend income : Held, (i) that the word "purpose" in the expression "expenditure incurred solely for the purpose of making or earning income, profits or gains" in section 12(2) of the Income Tax Act, did not mean motive for the ' transactions; much less could it mean the ulterior motive or the ultimate object of the purchase of the shares by the assessee, and, therefore, the finding of the Tribunal that the purchase was made to serve the convenience of two others was no more than a finding as to the ulterior motive in purchasing the shares, whereas the purpose of the purchase was an entirely different matter; (ii) that the only conclusion, on the facts, was that these investments were made for the purpose of earning income or dividend or for making profits or gains; (iii) that, therefore, the interest paid by the assessee on moneys borrowed for the purchase of shares could be set off against its other income under section 24(1) of the Act." The learned counsel contended that the aforesaid judgment of the Hon'ble Bombay High Court was delivered on 27-10-1958, when it had jurisdiction over Gujarat also. Therefore, the said decision is of a binding nature. He further pointed out that the aforesaid judgment of the Bombay High Court was approved by the Hon'ble Supreme Court in the case of Seth R. Dalmia v. CIT (1977) 110 IM 644 (SC). At p. 652 the Hon'ble Supreme Court has observed as under : "Apart from these decisions of this Court, a number of clecisions of the High Courts have also taken the same view. In Ormerods India (P) Ltd. v. CTF (1959) 36 ITR 329 (Bom), the Bombay High Court allowed certain sums of money paid as interest on borrowed capital for the purchase of shares and held that the word "purpose" in the expression "expenditure incurred solely for the purpose of making or earning such income, profits or gains" did not mean motive for the transaction, much less can it mean ulterior motive or ulterior object. The court held that as the investments were made for the purpose of earning income, the interest paid thereon would be deductible under section 12(2) of the Act." The learned counsel thus strongly supported the order of the Commissioner (Appeals).

I have considered the submissions made by the learned representatives of the parties and have gone through the orders of the learned departmental authorities. The facts relating to the aforesaid controversy have already been briefly stated hereinbefore. The learned Commissioner (Appeals) has given very elaborate and convincing reasons while deleting the disallowance of interest of Rs. 3,14,928.

He has also given convincing reasons to support his conclusion, that the facts in the case of Sarabhai Sons (P) Ltd. (supra) are clearly distinguishable as compared to the facts of the present case. The memorandum of association of the assessee- company clearly shows that the main object of the company was to carry on the business of acquiring, holding and selling of shares and debentures. The assessee acquired the shares of NKL out of funds borrowed from M/s AHPL, which was well covered within the main object clause of assessee's business as enumerated in the memorandum of association. These shares were also sold in the next year. The assessee received income from dividend on these shares in the year under consideration. It is true that the dividend has been assessed under the head "income from other sources" by virtue of a special provision contained in the Income Tax Act but such an income would still form part of income from the business carried on by the assessee. It may be relevant here to reproduce the extract from the headnote of the judgment of the Hon'ble Supreme Court in the case of CIT v. Cocanada Radhaswami Bank Ltd. (supra).

"The scheme of the Income Tax Act is that income-tax is one tax. Sec. 6 of the Income Tax Act, 1922, classifies the taxable income under different heads for the purpose of computation of the net income of the assessee. Though, for the purpose of computation of the income, interest on securities is separately classified. Income by way of interest from securities does not cease to be part of income from business if the securities are part of the trading assets. Whether a particular income is part of the income from a business falls to be decided not on the basis of the provisions of section 6 but on commercial principles;" A useful reference may also be made to the judgment of the Hon'ble Gujarat High Court in the case of CIT v. Cotton Fabrics Ltd. (supra), in which it was held as under: "Held, (i) that though the total income of the assessee was in the course of its business, it derived part of its income from dividends and computation of that income from dividends was to be done in accordance with the provisions of sections 56 and 57. But the computation having been so done, ultimately it still formed part of the income of the business of the assessee and it was assessable as such as profits and gains of business carried on by the assessee. Under section 36, interest paid by an assessee for the purpose of carrying on its business was deductible in its entirety while computing profits and gains of the business and, therefore, it was not possible to allocate a portion of that interest as against income from dividends.

(ii) That the entire amount of dividends earned by the assessee- company from inter-corporate dividends was the amount with reference to which relief under section 80M had to be worked out. Sec. 80AA made no difference because no expenditure was incurred for the purpose of earning the amount of dividends. The expenditure incurred by way of payment of interest was incurred for the purpose of carrying on the business of the assessee and that had to be deducted in its entirety under section 36(1) (iii) while computing the income of the assessee for the purpose of profits and gains from business."Ormerods (India) (P) Ltd. v. CIT (supra) are almost similar with the facts of the assessee's case, the Hon'ble Bombay High Court has held that the interest expenditure incurred on capital borrowed for purchase of shares was allowable as deduction under the corresponding provisions contained in the Income Tax Act, 1922. The said judgment of the Bombay High Court has been approved by the Hon'ble Supreme Court as already stated hereinbefore.

The view taken by the Commissioner (Appeals) is fully fortified by the aforesaid judgment of the Hon'ble Bombay High Court in the case of Ormerods (India) (P) Ltd. (supra).

In view of the aforesaid facts and discussion and in view of the elaborate reasons given in the order of the Commissioner (Appeals), I am of the considered opinion that the view taken by the Commissioner (Appeals) is perfectly valid and justified. I, therefore, do not find any justification to interfere with the view taken by him. The revenue's appeal, in my view, has no merit.

"In law and in the facts as well as circumstances of the respondent's case, the learned Commissioner (Appeals) has grossly erred in not adjudicating upon the claim of the respondent that deduction of interest of Rs. 3,14,928 is admissible under section 57(iii) of the Income Tax Act, when he ought to have adjudicated upon the same and allowed.

This Hon'ble Tribunal may, in case the ground or grounds raised in the appeal filed by the department before the Tribunal is/are allowed, be pleased to hold that the deduction of interest of Rs. 3,14,928 is admissible under section 57(iii) of the Income Tax Act. The assessing officer may be directed accordingly." This ground has not been decided by the Commissioner (Appeals), as per his findings reproduced hereinbefore. Since we have dismissed the revenue's appeal, the question relating to allowability of interest expenditure under section 57(iii) as an alternative claim, is now only of an academic nature. In case the order of the Tribunal confirming the order of the Commissioner (Appeals) of deleting the disallowance of interest is reversed by the Hon'ble High Court, the alternative question of its allowabihty under section 57(iii) will become necessary. I am, therefore, of the considered opinion that the ground raised by the assessee in its cross-objection is not required to be decided at this stage. If the order of the Tribunal is reversed by the Hon'ble High Court at any future point of time, the assessee will be entitled to submit an application to the Commissioner (Appeals) for deciding the alternative claim of considering its allowability under section 57(iii). With these observations, the cross-objection submitted by the assessee is dismissed.

In the result, both the revenue's appeal and cross-objection submitted by the assessee are dismissed.


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