(Prayer: Memorandum of Grounds of Tax Case Appeal under Section 260A of the Income Tax Act, 1961 against the order of the Income Tax Appellate Tribunal, Chennai 'B' Bench dated 20.1.2005 made in ITA No.1657/Mds/97 for the assessment year 1994-95.)
(Judgment of the Court was delivered by D.MURUGESAN, J.)
1. This tax case appeal at the instance of the Revenue raises the following substantial question of law for consideration:
"1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the interest paid on loan taken for investment in zero interest bonds is a deductible expenditure, in the light of the decision in the case of Commissioner of Income Tax v. Sujani Textiles (P) Ltd., (1985) 151 ITR 653?"
2. The respondent-assessee is a company incorporated under the Companies Act in which the public are not substantially interested. It is engaged in the business of purchase and sale of shares besides deriving income by way of interest and dividend from shares held as investment. The relevant assessment year is 1994-95 and the corresponding accounting year ended on 31.3.94. The assessee filed its return on 30.11.94 declaring an income of Rs.4,16,450/- and the said return was processed under Section 143(1)(a). The assessing officer disallowed the expenditure on interest tax amounting to Rs.80,982/- under Section 40(a)(ii). Later there was a rectification allowing the expenditure and interest tax and also the assessee was granted refund of Rs.66,491/-. Subsequently, the assessment was taken up for scrutiny and a notice was issued under Section 143(2). Later the assessee filed a revised return declaring the total income at Rs.76,360/- and claimed refund of Rs.14,16,824/-. The said revised return was also processed under Section 143(1). Then the assessment was completed under Section 143(3) determining the total taxable income at Rs.24,88,920/-. While completing the assessment, the assessing officer noticed that the borrowed funds have been utilised for the purpose of investment. The assessing officer was of the view that Section 36(1)(iii) has no application and also Section 37 is not applicable since the funds have been utilised for the purpose of making a capital asset. Therefore, the assessing officer disallowed the interest paid on the borrowed money. On a challenge to the said order, the Commissioner of Income Tax (Appeals) allowed the appeal on the ground that a similar question was considered in ITA No.68/96-97 and by order dated 8.10.96, deleted the disallowance in the case of South India Corporation (Agencies) Limited, which is a sister concern of the assessee. This order was questioned by the Revenue before the Income Tax Appellate Tribunal unsuccessfully. Hence, the present tax case appeal.
3. Section 36 of the Income Tax Act relates to other deductions. Section 36(1)(iii) relates to the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession. The only condition for entitlement to the deduction is that the amount of the interest paid in respect of capital borrowed shall be for the purposes of business or profession. In paragraph-8 of the assessment order, the assessing officer has factually found that the borrowed funds have been utilised only for the purpose of investment. After holding so, the assessing officer has gone further to hold that for the purpose of availing the benefit of Section 36(1)(iii), such borrowed funds should have been utilised for the purpose of stock in trade of shares in which the assessee was dealing. The provisions of Section 36(1)(iii) contemplates only as to whether the borrowed funds have been utilised for the purpose of investment. Having regard to the above, the Tribunal has rightly held that the provisions of Section 36(1)(iii) would be applicable to the facts of this case. Though a similar question as to the entitlement of the assessee to the provisions of Section 36(1)(iii) while the loan availed by the assessee for the purpose of investment in Zero Interest Bonds was considered in a similar matter by the Tribunal and though we have given time to the learned counsel for the Revenue to verify as to the said order of the Tribunal which reached finality, the learned standing counsel is unable to get instructions. The finding of the Commissioner of Income Tax (Appeals) has been confirmed by the Tribunal. In our view, once a factual finding is rendered that the borrowed funds have been utilised for the purpose of investment, that would satisfy the requirement of Section 36(1)(iii) of the Act and for that reason, the orders of the Commissioner of Income Tax (Appeals) as well as the Tribunal require no interference. Accordingly, we answer the issue in favour of the assessee and against the Revenue.
4. However, the Revenue has raised the substantial question of law based upon the judgm
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ent of this Court in Commissioner of Income Tax v. Sujani Textiles (P) Ltd., (1985) 151 ITR 653. In our opinion, the said judgment is not applicable to the facts of this case. In that case, this Court was considering a case where the amount borrowed by the company had been utilised for non business purpose, namely, for investment in shares, whereas in the present case, it was invested for business purpose and there is no dispute in this regard. Hence, the said judgment is not applicable. The tax case appeal is dismissed with no order as to costs.