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2020 (3) TMI 1022 - HC - Income TaxDeduction u/s 36(1)(iii) or 57(iii) - interest paid by the assessee on borrowed capital to the extent it was utilised for purchasing shares - ITAT disallowed interest under both i.e. Section 36(1)(iii) and Section 57(iii) - HELD THAT:- In order to grant deduction of interest paid by the assessee, it would be necessary to determine the dominant purpose for which the expenditure was incurred, meaning thereby that if the expenditure incurred is not to earn the income, then such expenditure would not be allowable as deduction under Section 57(iii) of the Act. In the facts of the case, the JCIT in the remand report as well as the CIT(A) found that the interest borrowed for the purchase of shares was allowable expenditure under Section 57(iii) of the Act without taking into consideration as to whether the capital borrowed for the purchase of shares by the assessee was for the purpose of business or for the purpose of earning income. Where the borrowings are made for the purchase of shares, a question that would often arise is whether the interest paid should be allowed as deduction under Section 36(1)(iii) or under Section 57(iii). At this stage, it is worthwhile to mention that the income by way of dividends on shares, whether held on investment portfolio or as stock-in-trade, is specifically assessable, under Section 56(2)(i), as the “Income from other sources”. Although the shares are held, on the investment portfolio, as an integral part of the business, yet the interest on such borrowings is allowable under Section 36(1)(iii). Thus, the qualifying factor in this case is to ascertain whether the borrowings for purchasing shares is an integral part of the business of the assessee. The appellant assessee had borrowed the capital to purchase the shares of the IHFC Ltd so as to have effective control of the IHFC Ltd in order to expand its real estate business. Thus, the investment in share was nothing but the expansion of business of the assessee. Therefore, all the conditions necessary for deduction under Section 36(1)(iii) were prima facie satisfied by the appellant assessee. The CIT(A) was, therefore, not justified to allow deduction under Section 57(iii) of the Act as the appellant assessee did not borrow the capital for earning dividend or for making profit and gains. The dominant purpose of the appellant assessee to borrow the capital was to acquire the shares to have effective control over the IHFC Ltd so as to expand the business of the assessee. In that view of the matter, the CIT(A) was not justified in granting deduction of interest paid by the assessee under Section 57(iii) of the Act. But the assessee is entitled to deduction of interest paid on capital borrowed for investment in the shares of IHFC for the purpose of expansion for its business under Section 36(1)(iii) of the Act. The Tribunal was, therefore, not justified in holding that the purpose of the assessee for purchase of shares of IHFC was not for the purpose of business of the assessee as the business of the assessee was only sale and purchase of land. Question of law as framed is answered in favour of the assessee and against the Revenue. The assessee is entitled to deduction of interest paid on borrowed capital to the extent it was utilized for purchasing shares of IHFC Ltd under Section 36(1)(iii)
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