TMI Blog2005 (11) TMI 178X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the following effect: "A joint venture company was formed in 1971 by the assessee-company and Mafatlal Group of Companies to manufacture machinery for textile industry in the name and style of Trumac Engineering Co. Ltd. The shareholding pattern was to the following effect: (a) Foreign Collaborators 36% (b) Assessee Company 15% (c) Mafatlal Industries Other Indian Associates 49% ------ Total 100% ------ The Chairman of the assessee-company was on the Board of Trumac as non-executive Chairman. However, in the year 1996, he was appointed as Managing Director as per obligatory provisions of Companies Act. Mafatlal Group of Industries continued to hold investment for more than 15 years, but in 1994, the financial problems compelled the group to disinvest their entire holding in Trumac. In Oct, 1994, Kotak Mahindra, a group having a long established presence in Indian money market and vast experience in mercantile banking was persuaded to take over the holding of Mafatlal group as an interim investor. Consequently, two companies of Kotak Mahindra group agreed to take over 28 per cent holding out of 35 per cent holding of Mafatlal in Trumac and the balance 7 per cent was taken over b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of Maganlal Chhaganlal (P.) (Ltd.), the assessee had acquired shares by using borrowed funds and held the shares as trading asset. Despite this fact, the claim of the assessee under section 36(1)(iii) was not allowed and on contrary such interest was allowed under section 51(iii) to arrive at the net dividend income under the head 'Income from other sources'. Accordingly, he disallowed the claim under section 36(1)(iii) but allowed the same under section 57(iii). As a necessary corollary, the Assessing Officer reduced the claim of the assessee under section 80M i.e. equal to the net dividend income. 7. The matter was carried in appeal before the CIT(A) before whom it was reiterated that the assessee had not invested in the shares of Trumac for the purpose of earning of dividend income but the investment was made for the purpose of safeguarding its selling agency. Thus, the decision of the assessee was commercial decision and, therefore, the deduction was allowable under section 36(1)(iii). Reliance was also placed on the decision of the Gujarat High Court in the case of Laxmi Agent (P.) Ltd. as well as the decision of the Bombay High Court in the case of CIT v. Mahendra So ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us judgments. CIT v. Modi (P.) Ltd. [1994] 208 ITR 31 (Bom.) CIT v. Rajeeva Lochan Kanoria [1994] 208 ITR 616 (Cal.) CIT v. Jardine Henderson Ltd. [1994] 210 ITR 981 (Cal.) Addl. CIT v. Laxmi Agents (P.) Ltd. [1980] 125 ITR 227 (Guj.) 10. On the other hand, the ld. DR has relied on the reasoning given by the Assessing Officer as well as the CIT(A) and, therefore, need not be repeated. 11. Rival submissions of the parties have been considered carefully. The question for consideration is whether interest paid by assessee on borrowings for acquisition of shares of Trumac can be allowed as deduction under section 36(1)(iii) considering the facts of the case and case law available on this point. There is no dispute between the parties that deduction is allowable if money is borrowed for the purpose of business. The expression 'for the purpose of business' is much wider than the expression 'for the purpose of earning profits' as held by Hon'ble Supreme Court in the case of India Cements Ltd. v. CIT [1966] 60 ITR 52. Thus, for the purpose of allowing deduction under section 36(1)(iii), it would be irrelevant to consider whether borrowed money was utilized for meeting day-to-day expenses o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iring tea estate since such act was in connection with carrying on business. This decision was followed subsequently by the Hon'ble Supreme Court in the case of Bombay Steam Navigation Co. (1953) (P.) Ltd. v. CIT [1965] 56 ITR 52. In the later case, the assessee, under the scheme of amalgamation, took over certain passenger and ferry services valued at Rs. 81.55 lakhs which was to be satisfied partly by allotment of shares and balance to be treated as loan bearing interest at the rate of 6 per cent per annum. The question arose whether interest on such unpaid price (loan) could be allowed as deduction neither under section 10(2)(iii) or section 10(2)(xv)of 1922 Act corresponding to section 36(1)(iii) or section 37 of 1961 Act. The Supreme Court held that provisions of section 10(2)(iii) were not attracted as money was not borrowed. However, the claim was allowed under section 10(2)(xv) since payment of interest was for the purpose of business. It would be appropriate to refer to the following observations of Their Lordships: "(i) that the expression 'capital' used in section 10(2)(iii), in the context in which it occurred, meant money and not any other asset; there was in truth no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents Ltd., the judgment of Bombay High Court in the case of Calico Dyeing Printing Works and its earlier judgment in the case of CIT v. Alembic Glass Industries Ltd. [1976] 103 ITR 715 (Guj.). This judgment is squarely applicable to the facts of the present case. 15. It would also be advantageous to refer to the binding judgment of jurisdictional High Court in the case of Modi (P.) Ltd. In that case the assessee purchased shares of managed company as well as of assessee-company with the help of borrowed money and claimed deduction under section 37(1). The said claim was disallowed by the Assessing Officer. However, the Tribunal held that acquisition of shares of managed company was closely related to the carrying on of business of assessee and, therefore, claim was allowable under section 37(1). On the other hand, interest payable in respect of shares of other company was deductible under section 57(iii). This judgment is also an authority for the proposition that if acquisition of shares is related to carrying on of assessee's business then such claim can be allowed. Thus this judgment directly supports the case of assessee. 16. We may also refer to the judgment of Calcutta High C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laim the deduction not only under section 36(1)(iii) but also under section 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 under section 57(iii) against the dividend income. Accordingly, we set aside the order of the CIT(A) and direct the Assessing Officer to allow deduction under section 36(1)(iii)/37 of the Act and consequently allow the deduction under section 80M with reference to gross dividend income received against the shares of Trumac' and net dividend income received against the shares of other companies. 20. The next issue arising from the appeal for assessment year 1997-98 relates to the deduction under section 80HHC of the Act. This claim was disallowed by the Assessing Officer on the ground that there was negative income if export incentives are excluded. The ld. counsel for the assessee has agreed that the issue is covered against the assessee by Supreme Court judgment in the case of IPCA Laboratory Ltd. v. Dy. CIT [2004] 266 ITR 521. However, it has been contended that ..... X X X X Extracts X X X X X X X X Extracts X X X X
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