Whether when assessee engaged in trading of shares incurs expenses on unsecured loan and utilises same for buying shares for investment, such expenses are allowable as per Sec 36(1)(iii) - YES: HC

THE issue before the Bench is - Whether when assessee engaged in trading of shares incurs expenses on unsecured loan and utilises same for buying shares for investment, such expenses are allowable as per Sec 36(1)(iii). YES is the answer.

Facts of the case

The assessee concern was dealing in trading of shares. It was depicted in the order of Tribunal that as per clauses of memorandum, the company was authorised for investment and dealing.

Clause-43, though entitles the assessee to carry on all that activities, does not mean it can carry on business or acquiring shares for the purpose of carrying the business. Its expenses were debited by the entry in the accounts and other attempting balances. Balance Sheet shows "Long Term Investment" and not "Stock-in-Trade". The Company for which the shares were acquired was a BIFR Company, the shares of which were hardly tradable. The assessee own version that intention was to acquire the company through BIFR shows that it was not with an intention to carry on business, nor to acquire the shares, but to acquire the company through BIFR. All these show that it was an activity other than business carried on by the assessee. On the facts and circumstances of the case, it was observed that it was an adventure in the nature of trade. Tribunal accordingly, vacate the order of the CIT(A) and restore that of the AO.

Before HC, assessee's counsel had relied on the decision of the SC in the case of DCIT vs. Core Health Care Ltd., 2008-TIOL-17-SC-IT, wherein, it was held that the assessee was entitled to deduction u/s 36(1)(iii) prior to its amendment by the Finance Act, 2003, in relation to money borrowed for purchase of machinery even though the assessee had not used the machinery in the year of borrowing. On the other hand, Revenue's counsel had contended that in view of section 43 and the observation made by the Tribunal in its order and in view of the decision of the Bombay High Court in the case of Crescent Organics (P.) Ltd. v. DCIT, Range-8(1), Mumbai 2014-TIOL-1263-HC-MUM-IT, the view taken by the Tribunal was just and proper.

Held that,

++ the CIT(A), while considering the issue, has given detailed reasons in para-3.2, in which it was observed that "I find that there is sufficient force in the contention put forth by the Authorised Representative of the appellant. The Supreme Court in the case of Madhav Prasad Jatia v. CIT 2002-TIOL-987-SC-IT, has held that at the time of allowing interest u/s 36, three conditions are required to be seen for allowing deduction in respect of the borrowed funds for the purpose of business. a) Capital should be borrowed by the assessee b) It must be borrowed for the purpose of business c) Interest must have been paid. In the instant case the appellant company has fulfilled all the above conditions. Further in the case of CIT vs. Rajiv Lochan Kanoria reported in 208 ITR 616, the Calcutta High Court has also observed that it is immaterial whether the borrowing is for the purpose of acquiring a capital asset or stock-in- trade. In the instant case the appellant has incurred interest expenditure in respect of unsecured loan taken from a body corporate and have been utilised for the purpose of acquisition of shares of India Polyfibres Ltd on which no dividend has been received. Further, the appellant company has also offered the interest income received on the investments made during the year as business income. The appellant company is engaged in the business of trading in shares and the interest payments are for the business purpose only. Therefore, I am of the view, that the expenditure relatable to such an investment is allowable business expenditure u/s 36(1)(iii). Having considered the facts of the case, I am of the view, that there is no justification for the disallowance made by the AO. The addition made by the Assessing Officer of Rs. 6,75,254/- is therefore deleted". Thus the CIT(A) has after discussing the law as well as facts, has come to the conclusion that the appeal deserves to be allowed and investment is allowable business expenditure under sec. 36(1)(iii);

++ however, the Tribunal, while considering the appeal has not given cogent reasons and has summarily allowed the appeal. In our view, since no detailed reasons are given by the Tribunal, the matter is required to be remitted back to the Tribunal for fresh consideration and the order passed by the Tribunal is required to be quashed and set. In that view of the matter, the order passed by the Tribunal is quashed and set aside. The matter is remitted back to the Tribunal for afresh consideration on all other aspects. This Tax Appeal is disposed of accordingly.