IN HIGH COURT OF JUDICATURE AT MADRAS DATED: 17.9.2014 CORAM HON'BLE MR.JUSTICE R.SUDHAKAR AND HON'BLE MR.JUSTICE G.M.AKBAR ALI T.C.(A).Nos.2657 of 2006 and 1017 and 1018 of 2007 Commissioner of Income Tax Chennai. .. Appellant Vs. Shriram Investments (firm) Moogambika Complex, IV Floor No.4, Lady Desigachari Road Mylapore, Chennai 600 004. Respondent PRAYER: Appeals under Section 260A of Income Tax Act, 1961 against order of Income Tax Appellate Tribunal 'B' Bench, Chennai, dated 27.1.2006 made in I.T.A.Nos.550, 551 and 552/Mds/1997 for assessment years 1992-1993, 1993-1994 and 1994-1995 respectively. For Appellant : Mr.M.Swaminathan Standing Counsel assisted by Mr.K.Suresh Kumar For Respondent : Mr.R.Sivaraman JUDGMENT (Delivered by R.SUDHAKAR, J.) Revenue is appellant. assessment years involved are 1992-1993 to 1994-1995. (2) 2. These appeals are filed challenging order of Income Tax Appellate Tribunal 'B' Bench, Chennai, dated 27.1.2006 made in I.T.A.Nos.550, 551 and 552/Mds/1997 for assessment years 1992-1993, 1993-1994 and 1994-1995 respectively. 3.1. facts in nutshell are as under: assessee is partnership firm engaged in business of advancing loans and earning income from hire purchase financing, besides investments in shares and debentures. assessee borrowed funds and invested same in shares and debentures. assessee treated interest arising out of such investments as income from business and claimed deduction under Section 36(1)(iii) of Income Tax Act, 1961 (for brevity, Act ). 3.2. Assessing Officer, however, held that investments were not held as trading assets and they can only be treated as capital assets and, therefore, interest income has to be assessed under head other sources and not under head business income . 3.3. Assailing said order, assessee preferred appeals before Commissioner of Income Tax (Appeals), who held that activity of assessee in investing in shares and debentures should be treated as conscious and deliberate business activity forming part of its finance business and, therefore, interest arising thereon should be assessed under head business income and not under head other sources . Thus, (3) disallowance made by Assessing Officer was deleted. 3.4. Calling in question said order passed by Commissioner of Income Tax (Appeals), department filed appeals before Tribunal. Tribunal, while upholding order of Commissioner of Income Tax (Appeals), held that investments made by assessee are business investments and interest on borrowings made for these investments have to be allowed under head business income . 3.5. Impugning said order passed by Tribunal, present appeals are filed and same were admitted on following question of law: Whether in facts and circumstances of case, Tribunal was right in holding that interest on borrowed funds utilised for investment in shares can be treated as business expenditure? 4. We have heard Mr.M.Swaminathan, learned Standing Counsel appearing for Revenue and Mr.R.Sivaraman, learned counsel for assessee. 4. Before adverting to merits of case, it would be apposite to refer to Section 36(1)(iii) of Income Tax Act, which reads as under: Section 36. Other deductions. - (1) deductions provided for in following clauses (4) shall be allowed in respect of matters dealt with therein, in computing income referred to in section 28 (i) to (ii) *** (iii) amount of interest paid in respect of capital borrowed for purposes of business or profession. (emphasis supplied) 5. From bare reading of Section 36(1)(iii) of Act, it is clear that deduction shall be allowed in respect of amount of interest paid if capital is borrowed for purpose of business or profession. language employed in said provision is plain and unambiguous. intendment of said provision is that so long as assessee has utilized capital borrowed for purpose of business, amount of interest paid in respect of such capital borrowed should be allowed as deduction. 6. In case on hand, it is beyond any cavil that capital was borrowed by assessee and interest was paid on borrowed capital. amount so borrowed was invested in shares and debentures for purpose of business. When amount is thus utilized for business purpose, in our considered opinion, interest paid will have to be allowed as deduction in terms of Section 36(1)(iii) of Act. 7. scope and ambit of Section 36(1)(iii) of Act was considered by Calcutta High Court in CIT v. Rajeeva Lochan Kanoria, [1994] 208 ITR (5) 616 (Cal.). said decision was relied on by Bombay High Court in CIT v. Srishti Securities (P) Ltd., [2010] 321 ITR 498 (Bom.), and it was held as under: 4. This order was in appeal before Income-tax Appellate Tribunal. learned Tribunal addressed itself to question, as to whether assessee is entitled to deduction in respect of interest liability either under section 36(1)(iii) or under section 57(iii) of Income-tax Act. Reliance was placed on judgment of this court in case of CIT v. Lokhandwala Construction Inds. Ltd. [2003] 260 ITR 579 for proposition that when assessee claims deduction of interest paid on capital borrowed, all that assessee has to show is that capital which was borrowed was used for business purpose in relevant year of account and it does not matter whether capital was borrowed or not to acquire revenue asset or capital asset. learned Tribunal also relied on judgment of Calcutta High Court in case of CIT v. Rajeeva Lochan Kanoria [1994] 208 ITR 616 where Calcutta High Court took view that under provisions of section 36(1)(iii) of Income-tax Act, only enquiry to be made is whether payment of interest was in respect of capital borrowed for purpose of assessee's business or profession. Such amount borrowed, if for purpose of business or profession may be utilised for purpose of acquisition of stock-in-trade or for purpose of acquisition of capital asset. learned court took view that under section 36(1)(iii) there is no bar for allowance of interest paid in respect of capital borrowed which (6) has been utilized for purpose of acquisition of capital assets. Considering this learned Income-tax Appellate Tribunal held that if funds are borrowed by investment company for making investment in shares which may be held as investment or as stock-in-trade or for purpose of controlling interest in other companies, interest paid on such borrowed funds will be deductible under section 36(1)(iii) of Income-tax Act. After recording this finding, it held that interest expenditure is allowable under section 36(1)(iii) and therefore, disallowance to extent sustained by Commissioner of Income-tax (Appeals) was directed to be deleted. .... 7. We may firstly consider first three questions as to whether interest of borrowed capital which was utilised in business of purchase of shares both by way of investment and stock-in-trade is allowable deduction. In so far as first three questions are concerned, in our opinion co-ordinate Bench of this court in Lokhandwala [2003] 260 ITR 579 had addressed itself to this issue. Reliance was placed on India Cements Ltd. v. CIT [1966] 60 ITR 52 (SC) which was under section 10(2)(iii) of Income-tax Act, 1922 which corresponds to section 36(1)(iii) of present Act. This court answered issue in following manner (page 581) : 'That, while adjudicating claim for deduction under section 36(1)(iii) of Act, nature of expense-whether expense was on capital account or revenue account-was irrelevant as section itself says that interest paid by (7) assessee on capital borrowed by assessee was item of deduction. That utilization of capital was irrelevant for purpose of adjudicating claim for deduction under section 36(1)(iii) of Act. (see judgment of Bombay High Court in case of Calico Dyeing and Printing Works v. CIT [1958] 34 ITR 265). In that judgment, it has been laid down that where assessee claims deduction of interest paid on capital borrowed, all that assessee had to show was that capital which was borrowed was used for business purpose in relevant year of account and it did not matter whether capital was borrowed in order to acquire revenue asset or capital asset.' It may be noted that in India Cements Ltd. [1966] 60 ITR 52 apex court was specifically pleased to observe that object of loan is irrelevant consideration. In State of Madras v. G. J. Coelho [1964] 53 ITR 186 (SC) Supreme Court was dealing with deduction claimed under section 5(e) of Madras Plantations Agricultural Income-tax Act, 1955. While considering issue court was pleased to observe that in principle there is no distinction between interest paid on capital borrowed for acquisition of plantation and interest paid on capital borrowed for purpose of existing plantation. Both are for purpose of plantation. court further observed that payment of interest on amount borrowed for purpose of plantations when whole transaction of purchase and working of plantations was viewed (8) as integrated whole was so closely related to plantations that expenditure could be said to be laid out or expended wholly and exclusively for purpose of plantations. 8. We may also gainfully refer to judgment of Calcutta High Court in CIT v. Rajeeva Lochan Kanoria [1994] 208 ITR 616. learned court was considering section 36(1)(iii) and was pleased to observe as under (page 620) : 'The only enquiry that is to be made is whether payment of interest was in respect of capital borrowed for purpose of assessee's business or profession. There is no dispute that capital was borrowed in instant case and interest was paid on borrowed capital. It is to be established that amount was borrowed for purpose of business or profession. amount borrowed may be utilized for purpose of acquisition of stock-in trade or for purpose of acquisition of capital assets. But so long as money is utilised for business purposes interest will have to be allowed as deduction. It is well settled that business expenditure is not confirmed to expenses incurred on revenue account. Capital expenditure may not be allowed as deduction under section 37 because section specifically bars any deduction of expenditure of capital nature. But section 36 is differently worded. There is no bar in section 36(1)(iii) to allowance of interest (9) paid in respect of capital borrowed which has been utilised for purchase of capital asset. position of law in this regard was explained by Supreme Court in cases of India Cements Ltd. v. CIT [1966] 60 ITR 52 (SC) and State of Madras v. G.J. Coelho [1964] 53 ITR 186 (SC).' (emphasis supplied) 8. We have considered reasoning given in decisions referred to supra and are in respectful agreement with view expressed in said decisions, for reason already given by us that there is nothing in Section 36(1)(iii) of Act that would dis-entitle assessee to claim deduction in respect of interest paid on capital borrowed for purposes of business. 9. For foregoing reasons, we uphold concurrent findings rendered by Commissioner of Income Tax (Appeals) and Tribunal and answer substantial question of law against Revenue and in favour of assessee. These appeals are dismissed. No costs. (R.S.J.) (G.M.A.J.) 17.9.2014 Index : Yes Internet : Yes sasi To: (10) 1. Assistant Registrar, Income Tax Appellate Tribunal Chennai Bench "B", Chennai. 2. Secretary, Central Board of Direct Taxes, New Delhi. 3. Commissioner of Income Tax (Appeals) - II Chennai. 4. Assistant Commissioner of Income Tax Central Circle II(6), Chennai. (11) R.SUDHAKAR,J. and G.M.AKBAR ALI,J. (sasi) T.C.(A).Nos.2657 of 2006 and 1017 and 1018 of 2007 17.9.2014 Commissioner of Income-tax, Chennai v. Shriram Investments (firm)