Commissioner of Income Tax vs Kanoria Investments (P.) Ltd.

Y.R. Meena, J.—By this reference application, the following questions are referred for our opinion :

"1. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the assessee was a financial company within the meaning of Sub-clauses (ii) and (iv) of Clause (c) of Explanation to Section 40A(8) of the Income Tax Act, 1961, and that no disallowance u/s 40A(8) of the said Act could be made in its case ?

Whether, on the facts and in the circumstances of the case, the Tribunal is correct in law in holding that the entire amount of interest paid by the assessee on money borrowed has to be deducted in arriving at the profit or loss under the head ''Profits and gains of business'' and no part should be apportioned and deducted against the income assessable as ''dividend'' ?

Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that relief u/s 80M of the Income Tax Act, 1961, should be allowed on the gross amount of dividend received by the assessee and not on the net amount computed after deducting the apportioned interest ?"

In the assessment made u/s 143(3)/151 of the Act in 1985, the Income Tax Officer disallowed Rs. 28,769, u/s 40A(8) at 15 per cent. of the interest on unsecured debentures and interest on unsecured loans, on the ground that the assessee is not a financial company. The Income Tax Officer found that the assessee''s main source of income was from speculation in shares and that out of the total profit of Rs. 3,94,533 the speculation profit comes to Rs. 2,30,349. On appeal, the Commissioner of Income Tax (Appeals) held that considering the memorandum and articles of association and the printed accounts of the assessee and in view of Sub-clauses (ii) and (iv) of Clause (c) of the Explanation to sub-section (8) of Section 40A of the Act, the assessee is a "financial company". The view taken by the Commissioner of Income Tax (Appeals) has been affirmed by the Tribunal.

In paragraph 3 of the order, the Commissioner of Income Tax (Appeals) has given the reasons as to how the assessee is a financial company. The relevant portion of the order passed by the Commissioner of Income Tax (Appeals) reads as under :

"I fully agree with the appellant''s contentions. For the purpose of deciding whether a company is a financial company or not, what is relevant is only the principal business carried on by the company and not the extent of the income earned by it. Thus, the position that the major part, of the income is from speculation in shares will not be of any relevance. It is worth noting that even this income from speculation from shares has arisen only out of the investment in shares by the appellant. Substantial part of the assets of the appellant was in the form of investment in shares and of loans and advances made to other parties. For the purpose of Sub-clause (ii) in Explanation (c) it is of no relevance whether the acquisition of shares, securities, etc., was made by the assessee as a dealer or as an investor. The appellant has satisfied the conditions mentioned in Sub-clauses (ii) and (iv) of Explanation (c) to Section 40A(8) and accordingly it is a financial company."

On the basis of the material facts, whether it is a financial company or not, basically is a question of fact. When there is a concurrent finding of fact both by the Commissioner of Income Tax (Appeals) and the Tribunal and also on the basis of material on record, it cannot be said to be perverse finding. It is a "financial company" within the meaning of Clause (c) of Sub-section (8) of Section 40A. Once it is a financial company, the assessee is entitled for the benefit available to a "financial company". Accordingly, we answer question No. 1 in the affirmative, that is, in favour of the assessee and against the Revenue.

For question No. 2 :

The Income Tax Officer pointed out that the assessee has paid total interest of Rs. 3,14,161 and the loans advanced by the assessee amounted to Rs. 6,29,952 and the share investment amounted to Rs. 9,91,629. The investment in the shares was only 60 per cent. Thus, only 60 per cent. of the interest paid by the appellant should be treated as relating to interest paid on the acquisition of shares and that interest be treated as paid for earning the dividend income, which amounted to Rs. 1,88,496 that is, 60 per cent. of Rs. 3,14,161. As it was more than the dividend received, the assessee is not entitled to any deduction u/s 80M of the Act.

The Commissioner has considered the decision of this court in Commissioner of Income Tax Vs. J.K. Industries (P.) Ltd., and the decision of the Gujarat High Court in Addl. Commissioner of Income Tax Vs. Laxmi Agents P. Ltd. and Commissioner of Income Tax, Gujarat-IV Vs. Cotton Fabrics Ltd., and taken the view that once the loan is taken for the purpose of business, the interest should be allowed without going into for what purpose the loan has been used and how much income is earned from which source.

In view of the above decisions that once the capital has been borrowed for the purpose of business, it is immaterial as to how the borrowed money was applied, the interest payment would be deductible u/s 36(1)(iii) of the Act. Therefore, the view that has been taken is that the entire interest payment should be allowed as a deduction for computing the profit or loss under the head "Profits and gains of business" without apportionment of interest, paid for the purpose of business.

Accordingly, we answer question No. 2 in the affirmative, i.e., in favour of the assessee and against the Revenue.

The third question relates to the deduction u/s 80M - whether deduction u/s 80M should be allowed on the gross amount of dividend or on the net amount of dividend.

For question No. 3 learned counsel for the assessee has brought to our notice the decision of this court in the case of Commissioner of Income Tax Vs. National and Grindlays Bank Ltd. (now known as Grindlays Bank Ltd.), , wherein the court has considered the question whether special deduction is admissible on gross or net dividend. This court has held that the relief u/s 80M will have to be allowed on the entire amount of dividend. Learned counsel for the Revenue has not controverted this fact that the issue is covered by the aforesaid decision of this court.

Following the view taken in Commissioner of Income Tax Vs. National and Grindlays Bank Ltd. (now known as Grindlays Bank Ltd.), , we answer question No. 3 in the affirmative, i.e., in favour of the assessee and against the Revenue.