INCOME TAX ACT, 1961

--Income from other sources--Deduction under section 57(iii) Interest expenses on borrowed funds for acquiring shares--Assessee had taken loan of Rs. 46,12,514 and invested in a company where assessee was one of the director. He claimed interest payment of Rs. 6,24,613 against the interest income and dividend income under section 57(iii). Assessing officer noted that no dividend had been earned by the assessee from the company whose shares had been purchased. He was not satisfied with the explanation given by the assessee in acquiring shares of the company for acquiring the controlling interest in the company and, therefore, assessee had made/planning to reduce its taxability. Accordingly, he disallowed the interest claimed under section 57(iii). Commissioner (Appeals) confirmed the order of assessing officer. Held: On appeal to Tribunal. Not rightly so. In a similar case Supreme Court has observed that controlling interest forms an inalienable part of the share itself and cannot be treated separately unless otherwise provided by the statute. Contra is an interest arising from holding a particular number of shares and cannot be separately acquired or transferred. Controlling interest is not an identifiable or distinct capital asset independent of holding of shares. It is inherently a contractual right and not a property right and cannot be considered as a capital asset unless the statute stipulates otherwise. Acquisition of shares may carry the acquisition of controlling interest, which is purely a commercial concept and tax is levied on the transaction, not on its effect. Supreme Court also held that controlling interest cannot be said to be that any income offered is allowable or not allowable if they are not provided specifically on the statute. In the present case acquiring of controlling interest in the company does not bear any income or expenditure is to be assessed or not to be allowed. The interest paid on borrowed funds for acquiring the shares of a company and the dividend income was taxable during the year under consideration. Therefore, the interest expenditure was allowed as deduction under section 57(iii) or under section 36(1)(iii) and appeal of assessee was allowed.

Income Tax Act, 1961, Section 57(iii)

In The Itat, Mumbai c Bench

R. K. Gupta, J.m. & D. Karunakara Rao, A.m.