The Commissioner Of Income Tax Chennai v. Shriram Investments (Firm) Moogambika Complex, Iv Floor

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 17.9.2014 CORAM THE HON'BLE MR.JUSTICE R.SUDHAKARANDTHE 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 in all the appeals/Appellant.Vs. Shriram Investments (firm)Moogambika Complex, IV FloorNo.4, Lady Desigachari RoadMylapore, Chennai – 600 004... Respondent in all the appeals/Respondent PRAYER: Appeals under Section 260A of the Income Tax Act, 1961against 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/1997for the assessment years 1992-1993, 1993-1994 and 1994-1995respectively against the order of the Assistant Commissioner ofIncome Tax, Central Circle II [6], Madras 34 dated 15/3/95,18/3/1996 & 20/03/1996 and made in PAN.No./GIR.No.47-066-FT-1391 andagainst the order of the Commissioner of Income Tax [A] II, Madras34, in ITA.Nos.26/95-96, ITA.No.75/96-97 & ITA.No.109/96-97, dated16.12.96. (Delivered by R.SUDHAKAR, J.) The Revenue is the appellant. The assessment years involved are1992-1993 to 1994-1995. https://hcservices.ecourts.gov.in/hcservices/ 2. These appeals are filed challenging the order of the IncomeTax Appellate Tribunal 'B' Bench, Chennai, dated 27.1.2006 made inI.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 apartnership firm engaged in the business of advancing loans andearning income from hire purchase financing, besides investments inshares and debentures. The assessee borrowed funds and invested thesame in shares and debentures. The assessee treated the interestarising out of such investments as income from business and claimeddeduction under Section 36(1)(iii) of the Income Tax Act, 1961 (forbrevity, “the Act”). 3.2. The Assessing Officer, however, held that the investmentswere not held as trading assets and they can only be treated ascapital assets and, therefore, the interest income has to be assessedunder the head “other sources” and not under the head “businessincome”. 3.3. Assailing the said order, the assessee preferred appealsbefore the Commissioner of Income Tax (Appeals), who held that theactivity of the assessee in investing in shares and debentures shouldbe treated as conscious and deliberate business activity forming partof its finance business and, therefore, interest arising thereonshould be assessed under the head “business income” and not underthe head “other sources”. Thus, the disallowance made by theAssessing Officer was deleted. 3.4. Calling in question the said order passed by theCommissioner of Income Tax (Appeals), the department filed appealsbefore the Tribunal. The Tribunal, while upholding the order of theCommissioner of Income Tax (Appeals), held that the investments madeby the assessee are business investments and the interest onborrowings made for these investments have to be allowed under thehead “business income”. 3.5. Impugning the said order passed by the Tribunal, the presentappeals are filed and the same were admitted on the followingquestion of law:“Whether in the facts and circumstances of the case, theTribunal was right in holding that the interest onborrowed funds utilised for investment in shares can betreated as a business expenditure?” 4. We have heard Mr.M.Swaminathan, learned Standing Counselappearing for the Revenue and Mr.R.Sivaraman, learned counsel for theassessee. https://hcservices.ecourts.gov.in/hcservices/ 3.5. Impugning the said order passed by the Tribunal, the presentappeals are filed and the same were admitted on the followingquestion of law:“Whether in the facts and circumstances of the case, theTribunal was right in holding that the interest onborrowed funds utilised for investment in shares can betreated as a business expenditure?” 4. We have heard Mr.M.Swaminathan, learned Standing Counselappearing for the Revenue and Mr.R.Sivaraman, learned counsel for theassessee. https://hcservices.ecourts.gov.in/hcservices/ 4. Before adverting to the merits of the case, it would beapposite to refer to Section 36(1)(iii) of the Income Tax Act, whichreads as under:“Section 36. Other deductions. - (1) The deductions provided for in the followingclauses shall be allowed in respect of the matters dealtwith therein, in computing the income referred to insection 28 – (i) to (ii) *** (iii) the amount of the interest paid in respectof capital borrowed for the purposes of thebusiness or profession.” (emphasis supplied) 5. From a bare reading of Section 36(1)(iii) of the Act, it isclear that deduction shall be allowed in respect of the amount ofinterest paid if the capital is borrowed for the purpose of businessor profession. The language employed in the said provision is plainand unambiguous. The intendment of the said provision is that solong as the assessee has utilized the capital borrowed for thepurpose of business, the amount of interest paid in respect of suchcapital borrowed should be allowed as deduction. 6. In the case on hand, it is beyond any cavil that capital wasborrowed by the assessee and interest was paid on the borrowedcapital. The amount so borrowed was invested in shares anddebentures for the purpose of business. When the amount is thusutilized for business purpose, in our considered opinion, theinterest paid will have to be allowed as deduction in terms ofSection 36(1)(iii) of the Act. 7. The scope and ambit of Section 36(1)(iii) of the Act wasconsidered by the Calcutta High Court in CIT v. Rajeeva LochanKanoria, [1994] 208 ITR 616 (Cal.). The said decision was relied onby 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-taxAppellate Tribunal. The learned Tribunal addresseditself to the question, as to whether the assessee isentitled to deduction in respect of interest liabilityeither under section 36(1)(iii) or under section 57(iii)of the Income-tax Act. Reliance was placed on thejudgment of this court in the case of CIT v. LokhandwalaConstruction Inds. Ltd. [2003] 260 ITR 579 for theproposition that when the assessee claims deduction ofinterest paid on capital borrowed, all that theassessee has to show is that the capital which wasborrowed was used for the business purpose in therelevant year of account and it does not matter whetherthe capital was borrowed or not to acquire revenue asset or capital asset. The learned Tribunal also relied onthe judgment of the Calcutta High Court in the case ofCIT v. Rajeeva Lochan Kanoria [1994] 208 ITR 616 wherethe Calcutta High Court took a view that under theprovisions of section 36(1)(iii) of the Income-tax Act,the only enquiry to be made is whether the payment ofinterest was in respect of capital borrowed for thepurpose of the assessee's business or profession. Suchamount borrowed, if for the purpose of business orprofession may be utilised for the purpose ofacquisition of stock-in-trade or for the purpose ofacquisition of capital asset. The learned court took aview that under section 36(1)(iii) there is no bar forallowance of interest paid in respect of capitalborrowed which has been utilized for the purpose ofacquisition of capital assets. Considering this thelearned Income-tax Appellate Tribunal held that if thefunds are borrowed by an investment company for makinginvestment in shares which may be held as investment oras stock-in-trade or for the purpose of controllinginterest in other companies, interest paid on suchborrowed funds will be deductible under section 36(1)(iii) of the Income-tax Act. After recording thisfinding, it held that the interest expenditure isallowable under section 36(1)(iii) and therefore,disallowance to the extent sustained by the Commissionerof Income-tax (Appeals) was directed to be deleted.....7. We may firstly consider the first three questions asto whether the interest of borrowed capital which wasutilised in the business of purchase of shares both byway of investment and stock-in-trade is allowablededuction. In so far as first three questions are concerned, in ouropinion 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 theIncome-tax Act, 1922 which corresponds to section 36(1)(iii) of the present Act. This court answered the issuein the following manner (page 581) :'That, while adjudicating the claim for deductionunder section 36(1)(iii) of the Act, the natureof the expense-whether the expense was oncapital account or revenue account-was irrelevantas the section itself says that interest paid bythe assessee on the capital borrowed by theassessee was an item of deduction. That theutilization of the capital was irrelevant for the https://hcservices.ecourts.gov.in/hcservices/ purpose of adjudicating the claim for deductionunder section 36(1)(iii) of the Act. (see thejudgment of the Bombay High Court in the case ofCalico Dyeing and Printing Works v. CIT [1958]34 ITR 265). In that judgment, it has been laiddown that where an assessee claims deduction ofinterest paid on capital borrowed, all that theassessee had to show was that the capital whichwas borrowed was used for business purpose in therelevant year of account and it did not matterwhether the capital was borrowed in order toacquire a revenue asset or a capital asset.' https://hcservices.ecourts.gov.in/hcservices/ purpose of adjudicating the claim for deductionunder section 36(1)(iii) of the Act. (see thejudgment of the Bombay High Court in the case ofCalico Dyeing and Printing Works v. CIT [1958]34 ITR 265). In that judgment, it has been laiddown that where an assessee claims deduction ofinterest paid on capital borrowed, all that theassessee had to show was that the capital whichwas borrowed was used for business purpose in therelevant year of account and it did not matterwhether the capital was borrowed in order toacquire a revenue asset or a capital asset.' It may be noted that in India Cements Ltd. [1966] 60 ITR52 the apex court was specifically pleased to observethat the object of the loan is an irrelevantconsideration. In the State of Madras v. G. J. Coelho[1964] 53 ITR 186 (SC) the Supreme Court was dealingwith the deduction claimed under section 5(e) of theMadras Plantations Agricultural Income-tax Act, 1955.While considering the issue the court was pleased toobserve that in principle there is no distinctionbetween interest paid on capital borrowed for theacquisition of a plantation and interest paid on capitalborrowed for the purpose of an existing plantation.Both are for the purpose of the plantation. The courtfurther observed that the payment of interest on theamount borrowed for the purpose of the plantations whenthe whole transaction of purchase and the working ofthe plantations was viewed as an integrated whole wasso closely related to the plantations that theexpenditure could be said to be laid out or expendedwholly and exclusively for the purpose of theplantations. 8. We may also gainfully refer to the judgment of theCalcutta High Court in CIT v. Rajeeva Lochan Kanoria[1994] 208 ITR 616. The learned court was consideringsection 36(1)(iii) and was pleased to observe as under(page 620) :'The only enquiry that is to be made is whetherthe payment of interest was in respect ofcapital borrowed for the purpose of theassessee's business or profession. There is nodispute that the capital was borrowed in theinstant case and interest was paid on theborrowed capital. It is to be established thatthe amount was borrowed for the purpose ofbusiness or profession. The amount borrowed maybe utilized for the purpose of acquisition of https://hcservices.ecourts.gov.in/hcservices/ stock-in trade or for the purpose of acquisitionof capital assets. But so long as the money isutilised for business purposes the interest willhave to be allowed as deduction. It is wellsettled that business expenditure is notconfirmed to expenses incurred on revenueaccount. Capital expenditure may not be allowedas a deduction under section 37 because thesection specifically bars any deduction ofexpenditure of capital nature. But section 36 isdifferently worded. There is no bar in section36(1)(iii) to allowance of interest paid inrespect of capital borrowed which has beenutilised for purchase of a capital asset. Theposition of law in this regard was explained bythe Supreme Court in the cases of India CementsLtd. v. CIT [1966] 60 ITR 52 (SC) and State ofMadras v. G.J. Coelho [1964] 53 ITR 186 (SC).'”(emphasis supplied) 8. We have considered the reasoning given in the decisionsreferred to supra and are in respectful agreement with the viewexpressed in the said decisions, for the reason already given by usthat there is nothing in Section 36(1)(iii) of the Act that woulddis-entitle the assessee to claim deduction in respect of interestpaid on the capital borrowed for the purposes of business. 8. We have considered the reasoning given in the decisionsreferred to supra and are in respectful agreement with the viewexpressed in the said decisions, for the reason already given by usthat there is nothing in Section 36(1)(iii) of the Act that woulddis-entitle the assessee to claim deduction in respect of interestpaid on the capital borrowed for the purposes of business. 9. For the foregoing reasons, we uphold the concurrent findingsrendered by the Commissioner of Income Tax (Appeals) and the Tribunaland answer substantial question of law against the Revenue and infavour of the assessee. These appeals are dismissed. No costs. Sd/-Deputy Registrar. /true copy/ sasi To: 1. The Assistant Registrar,Income Tax Appellate Tribunal,Income Tax Appellate Tribunal, III Floor, Rajaji Bhavan, Besant Nagar,Chennai Bench "B", Chennai 90.Chennai Bench "B", Chennai 90. 2. The Secretary, Central Board of Direct Taxes, New Delhi.of Direct Taxes, New Delhi. 3. The Commissioner of Income Tax (Appeals) - IIChennai 34.Chennai 34. 4. The Assistant Commissioner of Income Tax Central Circle II(6), Chennai 34. 1 CC To Mr.M.Swaminathan, Advocate SR NO.44634 ug[co]gp/17.11. T.C.(A).Nos.2657 of 2006 and 1017 and 1018 of 2007