2007 (11) TMI 439 - AT - Income Tax

Summary

Issues Involved:
1. Deduction of interest paid u/s 36(1)(iii) vs. u/s 57(iii) of the Income-tax Act.
2. Taxability of income from the sale of shares as capital gains vs. business income.
3. Application of section 263 of the Income-tax Act.

Summary:

Issue 1: Deduction of Interest Paid u/s 36(1)(iii) vs. u/s 57(iii)

In ITA No. 4331/Mum./2000 for AY 1995-96, the assessee contested the CIT's decision that interest paid should be allowed as a deduction u/s 57(iii) and not u/s 36(1)(iii). The CIT had issued a notice u/s 263, arguing that the interest expenses incurred for purchasing shares, shown as investments, should be deducted u/s 57(iii). The CIT also opined that income from the sale of shares should be taxed as capital gains, not business income. The Tribunal found that the Assessing Officer (AO) had considered all relevant details and allowed the interest deduction u/s 36(1)(iii). The Tribunal held that the AO's view was one of the possible views in law and not erroneous, thus quashing the CIT's order u/s 263.

In ITA No. 3069/Mum./2001 for AY 1997-98, the issue was identical. The AO had allowed interest expenditure u/s 57(iii), but the Tribunal reiterated that the assessee's dominant intention was to deal in shares as a trader. Therefore, interest on borrowed capital was allowable u/s 36(1)(iii), not u/s 57(iii).

Issue 2: Taxability of Income from Sale of Shares as Capital Gains vs. Business Income

The Tribunal noted that the assessee had consistently offered income from the sale of shares as business income, which had been accepted by the department in other years. The Tribunal emphasized that the presentation of shares as investments in the balance sheet was not conclusive. The Tribunal held that the profit from the sale of shares should be treated as business income, considering the assessee's intention and activities.

Issue 3: Application of Section 263 of the Income-tax Act

The Tribunal found that the AO had made proper inquiries and considered all relevant details while passing the assessment order. The Tribunal held that the CIT's action u/s 263 was not justified as the AO's order was neither erroneous nor prejudicial to the interests of the revenue. The Tribunal quashed the CIT's order u/s 263, allowing the assessee's appeal.

Conclusion:

Assessee's appeals in ITA No. 4331/Mum./2000 and ITA No. 3069/Mum./2001 were allowed, and the revenue's appeal in ITA No. 7754/Mum./2003 was dismissed. The Tribunal held that interest on borrowed capital for purchasing shares should be allowed u/s 36(1)(iii), and income from the sale of shares should be treated as business income.