2005 (1) TMI 329 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of interest of Rs. 27,30,600.
2. Utilization of borrowed funds for purchasing shares of sister concerns.
3. Allowability of interest under Section 36(1)(iii) of the IT Act.
4. Alternative claim of interest deduction under Section 57(iii) of the IT Act.

Issue-Wise Detailed Analysis:

1. Disallowance of Interest of Rs. 27,30,600:
The primary issue revolves around the disallowance of interest amounting to Rs. 27,30,600 by the Assessing Officer (AO). The AO contended that the borrowed funds from HSBC Bank were used to purchase shares of sister concerns, Samtel India Ltd. and Teletube Electronics Ltd., which were not connected to the assessee's business. Consequently, the AO disallowed the interest claimed as a deduction.

2. Utilization of Borrowed Funds for Purchasing Shares of Sister Concerns:
The AO observed that the term loan from the bank was intended for infrastructure development and plant and machinery for the assessee's business. However, the funds were diverted to acquire shares of sister concerns. The AO concluded that the internal accruals and own funds were insufficient for the purchase of shares, implying that the borrowings were utilized for this purpose. The AO estimated the interest disallowance at 15%, amounting to Rs. 27,30,600.

3. Allowability of Interest under Section 36(1)(iii) of the IT Act:
On appeal, the CIT(A) deleted the disallowance, following the Tribunal's order for the assessment year 1988-89, which concluded that the investment in shares of sister concerns was for the assessee's business. The Tribunal reiterated that the funds must be deployed for the purpose of the assessee's business, which was satisfied as substantial sales were made to the sister concerns. The Tribunal held that the acquisition of shares helped the assessee influence the purchase decisions of the sister concerns, thereby satisfying the condition of Section 36(1)(iii).

4. Alternative Claim of Interest Deduction under Section 57(iii) of the IT Act:
The assessee's alternative claim was that the interest is allowable under Section 57(iii) if not under Section 36(1)(iii). The Tribunal, in its order for the assessment year 1988-89, had accepted this claim, following the Supreme Court's judgment in CIT vs. Rajendra Prasad Moody, which allowed interest deduction under Section 57(iii) even if no dividend income was derived. The Tribunal accepted this alternative contention, allowing the interest deduction under Section 57(iii).

Conclusion:
The Tribunal confirmed the CIT(A)'s decision, holding that the investment in the shares of sister concerns was for the assessee's business, thereby allowing the interest deduction under Section 36(1)(iii). Alternatively, the interest was also allowable under Section 57(iii). The appeal by the Revenue was dismissed.