Section 36(1)(iii) of the Income-tax Act, 1961

HIGH COURT OF KARNATAKA Commissioner of Income-tax, Bangalore v. L.K. Trust V. GOPALA GOWDA AND ARALI NAGARAJ, JJ IT APPEAL NO. 175 OF 2001 August 28, 2007 Section 36(1)(iii) of the Income-tax Act, 1961 - Deductions - Interest on borrowed capital - Assessment Year 1989-90 - Assessee claimed deduction of interest paid on loan obtained for purchase of shares - Admittedly, there was no full acquisition of shares during relevant assessment year - Whether on facts, Assessing Officer rightly disallowed part of interest claimed by assessee on pro rata basis - Held, yes FACTS The assessee was a private family trust, inter alia, carrying on film business. One of the clause of the trust deed of the assessee provided for acquisition of stock, shares debentures, annuities and securities, etc. In its return of income for the assessment year 1989-90, the assessee claimed deduction of interest paid on the loan amount borrowed form the bank for the purchase of shares. As per the assessee, the entire loan amount was transferred to GHPL which in turn advanced it to ‘G’ group of companies for the purchase of shares. The Assessing Officer noticed that as on 31-3-1980 (Sic.), the said group transferred certain shares and retained the balance amount with it. Accordingly, the Assessing Officer disallowed a part of the interest claimed on pro rata basis. On appeal, the Commissioner (Appeals) upheld the impugned disallowance. On second appeal, the Tribunal held that the assessee had fulfilled all the three conditions of section 36(1)(iii) and, therefore, it was entitled to claim deduction of interest paid out of the income derived. On revenue’s appeal : HELD From the proviso to section 36(1)(iii), it is clear that where the interest is paid in respect of the amount borrowed for acquisition of asset, deduction shall not be allowed till such asset was first put to use. In the instant case, the loan borrowed by the assessee was for the purpose of acquisition of shares. Since there was no full acquisition of shares, the Assessing Officer had rightly disallowed the claim on pro rata basis and the Commissioner (Appeals) rightly confirmed the same. The Tribunal committed an error in not applying its mind to the said aspects of the matter. [Para 5] Unless asset was acquired and put to use, deduction for the interest could not be claimed. Allowing such deduction would be contrary to the proviso to section 36(1)(iii). Therefore, the order passed by the Tribunal was in blatant violation of the said provision. [Para 6] Accordingly, the order of the Tribunal was to be set aside. CASE REVIEW : S.A. Builders Ltd. v. CIT (Appeals) [2007] 288 ITR 1 - Distinguished.