Kankhal Investment & Trading Co. (P) Ltd. v. Asstt. CIT

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The Tax Publishers2008 TaxPub(DT) 0870 (Mum-Trib) : (2008) 024 (II) ITCL 0530 : (2008) 301 ITR 0359 : (2009) 116 ITD 0492 : (2008) 006 DTR 0174 Kankhal Investments & Trading Co. (P) Ltd. v. Asstt. CIT INCOME TAX ACT, 1961 Business deduction under section 36(1)(iii) - Allowability -Interest on borrowed capital to invest in partneship firm Assessee had borrowed money that was utilized major for acquiring shares of a company. It claimed deduction of interest payable on such borrowing under section 36(1)(iii) on ground that borrowed funds were utilized for business purposes. AO disallowed assessee claim on ground that shares had not been purchased as stock-in-trade but as long-term investment as profit on sale of shares was being offered under head Capital gains. It further observed that money was borrowed by assessee for purpose of earning dividend income that was exempt from tax under section 10(33) and, consequently, assessee claim of deduction under section 36(1)(iii) could not be allowed. Assessee contended that as per MOA of company, it was authorize to engage in business of investment in shares and, thereupon, interest on borrowed fund would be allowed as deduction under section 36(1)(iii). *Held:* Authorisation by MOA would not be sufficient to hold that it was engaged in business of holding investments. Since, income from sale of shares had to be computed only under specific head Capital gains, and dividend income was to be computed under specific head Income from other sources, there being no other receipt arising or accruing to assessee from business of holding investment in shares, entire receipts from such business had to be excluded from head Profits and gains from business or profession and, consequently, assessee would not be entitled to claim deduction on interest borrowed under section 36(1)(iii). Income-tax Act, 1961, Section 36(1)(iii), read with section 28(i), A.Y. :1998-99 and 1999-2000 Decision: In favour of revenue. Case Law Analysis:CIT v. Distributors (Baroda) (P.) Ltd. [1972] 83 ITR 377 (SC) (para 6), Bengal & Assam Investors Ltd. v. CIT [1966] 59 ITR 547 (SC) (para 6), CIT v. Amalgamation (P.) Ltd. [1997] 226 ITR 188/ 92 Taxman 132 (SC) (para 6), Golak Investments Ltd. [IT Appeal No. 4050 (Mum.) of 1998, dated 10-6-2004] (para 6), Meghraj Financial Services (I) (P.) Ltd. [IT Appeal No. 6563 (Mum.) of 1997, dated 9-2-2004] (para 6), Velocity Trading (P.) Ltd. [IT Appeal No. 7719 (Mum.) of 2004, dated 8-2-2005] (para 6), CIT v. Rajendra Prasad Moody [1978] 115 ITR 519 (SC) (para 9), Everplus Securities & Finance Ltd. v. Dy. CIT [2006] 101 ITD 151 (Delhi) (para10), Kamu Metals (P.) Ltd. [IT Appeal No. 7211 (Mum.) of 2003] (para 10), Narain Swadeshi Wvg. Mills v. CEPT [1954] 26 ITR 765 (SC) (para 15), United Commercial Bank Ltd. v. CIT [1957] 32 ITR 688 (SC) (para 18), East India Housing & Land Development Trust Ltd. v. CIT [1961] 42 ITR 49 (SC) (para 18) and Punjab State Industrial Development Corpn. Ltd. v. Dy. CIT [2006] 102 ITD 1 (Chd.) (SB) (para 24). SUBSCRIBE FOR FULL CONTENT

The Tax Publishers2008 TaxPub(DT) 0870 (Mum-Trib) : (2008) 024 (II) ITCL 0530 : (2008) 301 ITR 0359 : (2009) 116 ITD 0492 : (2008) 006 DTR 0174

Kankhal Investments & Trading Co. (P) Ltd. v. Asstt. CIT

INCOME TAX ACT, 1961

Business deduction under section 36(1)(iii) - Allowability -Interest on borrowed capital to invest in partneship firm

Assessee had borrowed money that was utilized major for acquiring shares of a company. It claimed deduction of interest payable on such borrowing under section 36(1)(iii) on ground that borrowed funds were utilized for business purposes. AO disallowed assessee claim on ground that shares had not been purchased as stock-in-trade but as long-term investment as profit on sale of shares was being offered under head Capital gains. It further observed that money was borrowed by assessee for purpose of earning dividend income that was exempt from tax under section 10(33) and, consequently, assessee claim of deduction under section 36(1)(iii) could not be allowed. Assessee contended that as per MOA of company, it was authorize to engage in business of investment in shares and, thereupon, interest on borrowed fund would be allowed as deduction under section 36(1)(iii). Held: Authorisation by MOA would not be sufficient to hold that it was engaged in business of holding investments. Since, income from sale of shares had to be computed only under specific head Capital gains, and dividend income was to be computed under specific head Income from other sources, there being no other receipt arising or accruing to assessee from business of holding investment in shares, entire receipts from such business had to be excluded from head Profits and gains from business or profession and, consequently, assessee would not be entitled to claim deduction on interest borrowed under section 36(1)(iii).

Income-tax Act, 1961, Section 36(1)(iii), read with section 28(i),

A.Y. :1998-99 and 1999-2000
Decision: In favour of revenue.

Case Law Analysis:CIT v. Distributors (Baroda) (P.) Ltd. [1972] 83 ITR 377 (SC) (para 6), Bengal & Assam Investors Ltd. v. CIT [1966] 59 ITR 547 (SC) (para 6), CIT v. Amalgamation (P.) Ltd. [1997] 226 ITR 188/ 92 Taxman 132 (SC) (para 6), Golak Investments Ltd. [IT Appeal No. 4050 (Mum.) of 1998, dated 10-6-2004] (para 6), Meghraj Financial Services (I) (P.) Ltd. [IT Appeal No. 6563 (Mum.) of 1997, dated 9-2-2004] (para 6), Velocity Trading (P.) Ltd. [IT Appeal No. 7719 (Mum.) of 2004, dated 8-2-2005] (para 6), CIT v. Rajendra Prasad Moody [1978] 115 ITR 519 (SC) (para 9), Everplus Securities & Finance Ltd. v. Dy. CIT [2006] 101 ITD 151 (Delhi) (para10), Kamu Metals (P.) Ltd. [IT Appeal No. 7211 (Mum.) of 2003] (para 10), Narain Swadeshi Wvg. Mills v. CEPT [1954] 26 ITR 765 (SC) (para 15), United Commercial Bank Ltd. v. CIT [1957] 32 ITR 688 (SC) (para 18), East India Housing & Land Development Trust Ltd. v. CIT [1961] 42 ITR 49 (SC) (para 18) and Punjab State Industrial Development Corpn. Ltd. v. Dy. CIT [2006] 102 ITD 1 (Chd.) (SB) (para 24).