B Nanji & Co. Vs DCIT (Gujarat High Court)
Gujarat High Court dealt with multiple tax appeals filed by B Nanji & Co. against a common judgment of the Income Tax Appellate Tribunal regarding assessment years 1996-97 and 1997-98. The case centered around whether the assessee could claim interest deductions under Section 36(1)(iii) of the Income Tax Act for funds borrowed to invest in the shares of International Housing Finance Corporation Ltd. (IHFC). B Nanji & Co., a real estate business, had established IHFC to ensure ready access to funds for real estate projects. They subscribed almost the entire equity of IHFC and later participated in a public issue to meet SEBI’s 40% promoter contribution requirement, funding this investment through borrowed capital.
The Revenue disputed the deduction of interest paid on the borrowed funds, arguing that the investment was not for business purposes but rather for earning dividends or capital gains. However, the Court observed that the primary intention behind the investment was to maintain control over IHFC and support business expansion in real estate activities. The Court found that the borrowing was directly linked to the business needs of the assessee, thus satisfying the conditions for deduction under Section 36(1)(iii) rather than Section 57(iii), which applies to income from other sources. Consequently, the Court allowed the assessee’s appeals, set aside the Tribunal’s order, and confirmed that the interest paid on the borrowed funds for acquiring IHFC shares was deductible as a business expense.
