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2005 (11) TMI 178 - AT - Income TaxInterest On Borrowed Capital - Treatment of expenditure "Capital Or Revenue" - interest paid on borrowings for acquisition of shares can be allowed as deduction u/s 36(1)(iii)? - HELD THAT:- Admittedly 'Trumac' was a joint venture of assessee and Mafatlal Group of companies. In its reply to show-cause notice, the assessee had stated that promoters of assessee-company as well as of Mafatlal group had good business relationships having close association with Indian Textile Industry. This fact has not been disputed by the revenue at any stage. It is because of these facts, the Chairman of assessee-company was on the Board of Trumac' as non-executive Chairman and could get sole-selling agency for the distribution of the products manufactured by Trumac. Since it was main source of income, it was natural for a prudent man to safeguard its business interest. Therefore, if the assessee decided to increase its holding in 'Trumac', in our opinion, the assessee was guided by business consideration to safeguard its selling agency. If shares are purchased by outsiders then there is possibility that outsider may jeopardize the business interest of assessee-company. Therefore, in our opinion, act of borrowing money for the acquisition of shares was closely connected with or incidental to the carrying on of the business. Consequently, the conditions of allowing deduction u/s 36(1)(iii) stood satisfied. Thus, we hold that the assessee is entitled to claim the deduction not only u/s 36(1)(iii) but also u/s 37 of the Act, 1961 to the extent interest is attributable to the amount borrowed and utilized for acquisition of share of 'Trumac'. However, the interest on money borrowed utilized for acquisition of shares of other companies would be deductible u/s 57(iii) against the dividend income. Accordingly, we set aside the order of the CIT(A) and direct the Assessing Officer to allow deduction u/s 36(1)(iii)/37 of the Act and consequently allow the deduction u/s 80M with reference to gross dividend income received against the shares of Trumac' and net dividend income received against the shares of other companies. In the result, appeal is partly allowed.
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