Interest on borrowed funds : Deduction u/s.36(1)(iii) of I. T. Act, 1961: A. Y. 1997-98 : Borrowed funds used for purchase of shares held partly as investment and partly as stock in trade : Shares purchased for acquiring controlling interest in company :

Interest on borrowed funds : Deduction u/s.36(1)(iii) of
I. T. Act, 1961: A. Y. 1997-98 : Borrowed funds used for purchase of shares
held partly as investment and partly as stock in trade : Shares purchased for
acquiring controlling interest in company : Interest on borrowed funds
allowable as deduction u/s. 36(1)(iii).

[CIT vs. Srishti Securities Pvt. Ltd. (Bom); ITA No.
71 of 2006: Dated 22.01.2009].

The assessee had purchased shares out of borrowed funds.
The shares were held partly as investment and partly as stock in trade. The
assessee’s claim for deduction of interest was rejected by the Assessing
Officer on the ground that the primary object of acquiring shares was not to
earn dividend but to acquire controlling interest in the company. The CIT(A)
bifurcated interest on pro rata basis between investment and stock in
trade and allowed the interest attributable to stock in trade. The Tribunal
allowed the assessee’s claim, holding that the interest is allowable u/s.
36(1)(iii).

On appeal by Revenue, the Bombay High Court followed the
judgment in the case of CIT vs. Lokhandwala Construction Industries Ltd.
260 ITR 579 (Bom), concurred with the judgment of the Calcutta High Court
in CIT vs. Rajeeva Lohana Kanoria 208 ITR 616 (Cal) and upheld the
decision of the Tribunal. The High Court held that the interest which was
disallowed to the extent of investment will have to be allowed as held by the
Tribunal.

Editor’s Note :

This related to an assessment year prior to insertion of
S.14A.