Facts of the Case:

RBG Investment & Finance Ltd. (the assessee) engaged in finance and investment activities, earned income both from share dealing and loans/advances. The Assessing Officer (AO) bifurcated interest and financial charges between speculative share dealing and lending, applying an 85:15 ratio based on share dealing being speculative under Explanation to Section 73 of the Income Tax Act. This allocation resulted in a loss in speculative income and taxable income in the loan/advance activity.

The assessee argued before the CIT (Appeals) that both activities constituted “business” and interest should not be bifurcated. The CIT (Appeals) accepted this, deleting the apportionment and allowing full deduction under Section 36(1)(iii) for business-related interest.

The Revenue appealed to the Tribunal, which referred to a Special Bench decision in Venkateshwara Investment & Finance Pvt. Ltd. (93 ITD 177), remanding the case for fresh allocation of interest but instructing AO to “keep in view” the Special Bench ratio.

Issues Involved:

  1. Whether the Tribunal was correct in directing the AO to follow guidelines of the Special Bench while remanding the issue of interest allocation.
  2. Whether interest on borrowed capital for business purposes should be bifurcated between speculative and non-speculative business activities.

Petitioner’s (Revenue) Arguments:

  • Tribunal erred by instructing AO to “keep in view” Special Bench guidelines rather than leaving remand entirely open.
  • Direction could unduly influence AO, limiting discretion.

Respondent’s (Assessee) Arguments:

  • AO wrongly used Section 73 to treat share dealing as speculative to disallow interest.
  • Apportionment was artificial; both activities are business and should allow full deduction.
  • Tribunal’s reference to Special Bench merely provides general guidelines, not binding instructions.

Court Findings / Order:

  • Tribunal remand direction is permissible; AO may consider Special Bench guidelines but is not confined to them.
  • Clarified that principal business determination may require wider inquiry than Special Bench guidelines suggest.
  • Substantial question of law answered in favor of Revenue, allowing AO discretion without being strictly bound by previous ratios.
  • No costs awarded.

Important Clarification:

While remanding interest allocation issues, the Tribunal can provide guidance based on previous decisions (Venkateshwara Investment & Finance Pvt. Ltd.) but AO must retain discretion to consider facts beyond those guidelines. Interest on borrowed capital for business purposes under Section 36(1)(iii) is deductible without rigid bifurcation unless justified.

Sections Involved:

  • Section 36(1)(iii) – Deduction of interest on borrowed capital used for business purposes
  • Section 73 (Explanation) – Treatment of speculative transactions for tax purpose

Link to download the order -  https://delhihighcourt.nic.in/app/case_number_pdf/2012:DHC:6600-DB/RVE30102012ITA3232010.pdf

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