2005 (9) TMI 53 - HC - Income Tax

(1) Whether Tribunal was right in law in holding that where the assessee is a dealer in shares and holds certain shares as stock-in-trade the interest paid by the assessee on the funds borrowed for the purpose of investment in such shares is to be allowed as admissible deduction under section 36(1)(iii) and not u/s 57(1)(iii)? (2) Whether Tribunal was right in holding that where the assessee is a dealer in shares and holds certain shares as stock-in-trade the interest paid by the assessee on the funds borrowed for the purpose of investment in such shares is not to be reduced from the gross dividend while granting relief u/s 80M? - We answer both questions referred to us in the negative i.e. in favour of the Revenue and against the assessee

Summary

Issues:
1. Whether interest paid on funds borrowed for investment in shares should be allowed as a deduction under section 36(1)(iii) or section 57(1)(iii)Rs.
2. Whether the interest paid on funds borrowed for investment in shares should be reduced from gross dividend while granting relief under section 80MRs.

Analysis:

Issue 1:
The case involved determining the treatment of interest paid by an assessee on funds borrowed for investing in shares. The Income-tax Officer (ITO) adjusted the interest against dividend income, resulting in no positive income under the head "Dividend income," leading to denial of the claim under section 80M. The Commissioner of Income-tax (Appeals) allowed a portion of the interest under section 36(1)(iii) as a deduction for business purposes, relying on a decision of the Gujarat High Court. The Tribunal upheld this decision, distinguishing a Supreme Court judgment cited by the Revenue. The Revenue contended that a previous judgment by the High Court had settled the matter in a similar case. The respondent-assessee argued for the deduction of interest as a business expenditure related to trading in shares.

Issue 2:
The key consideration was whether the interest paid on borrowings for purchasing shares should be reduced from dividend income for the purpose of granting deduction under section 80M or treated as a business expenditure. The court noted that a previous judgment for the assessee in a different assessment year had established the method of calculating deduction under section 80M, following a Supreme Court decision. The court emphasized that the respondent's main business was manufacturing drums and barrels, not dealing in shares, unlike another case where deduction for interest was allowed as a business expenditure. Consequently, the court answered both questions in the negative, in favor of the Revenue and against the assessee.

In conclusion, the High Court of Bombay ruled in favor of the Revenue, determining that the interest paid on funds borrowed for investing in shares should not be reduced from dividend income for the purpose of granting deduction under section 80M. The decision was based on the distinction between the respondent's primary business activity and the nature of income derived from shares, following previous judgments and legal precedents.