No tax relief on interest on loans taken for buying shares

No tax relief on interest on loans taken for buying shares Investors who buy shares with borrowed money from institutions cannot claim tax deduction on interest paid on such borrowings, a tax tribunal has ruled. Giving its ruling in a case where two companies had claimed tax deduction on interest paid over the sum borrowed from Reliance Capital, the Mumbai bench of the Income-Tax Appellate Tribunal had held that "no deduction is allowable to the assessee in respect of interest paid on borrowed funds". Nikhil Investments and Kankhal Investments and Trading borrowed funds from Reliance Capital and subsequently bought shares of construction major Larsen & Toubro. While Nikhil Investments borrowed about Rs 25 crore, Kankhal had borrowed about Rs 5.08 crore and later they claimed tax deduction under section 36(1)(iii) of the Income-Tax Act. Under the Income-Tax Act, a firm, or an individual can claim a tax deduction on the interest paid in respect of capital borrowed for the purposes of business or profession while the investment in shares could not be considered a business or profession, said the order. "The assessee could not be said to be engaged in the business of investments as shares were acquired as not stock in trade but as investments", said the tribunal. The tribunal in its order also underlined the rule for accounting that when income earned under one head, the related deduction has to be made in the same head. In line with the norm, the tribunal held that the "assessee is not entitled to deduct the interest payment from interest income from holding of debentures as there is no nexus between the borrowed funds and investment in debentures". Besides, the borrowing of funds in both the cases had no relation with investment in shares or debentures, it added. So the companies cannot deduct the interest payment from interest income. Giving its order in favour of the Commissioner of Income Tax (Appeals) and Assessing Officer the tribunal upheld the contentions of both of them. The issue had come earlier before the Commissioner of Income Tax (Appeal) who had ordered that interest paid on borrowings utilized for acquiring shares are not liable for deduction under the Income tax Act.

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