2011 (1) TMI 737 - HC - Income Tax

Deduction - Interests on loan borrowed - Business expenditure or not - the assessee is dealing in shares - The department declined to allow the business expenditure and interest on the ground that the assessee has shown in the balance sheet the shares as an investment and not as stock-in-trade - looking into the volume, frequency and regularity of the transactions, it is clear that the assessee was in the business of sale and purchase of shares in each month apart from the family shares held by the assessee - As earlier, the department has, accepted the said case of the assessee -The Hon ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT (1997 -TMI - 5601 - SUPREME Court) has held that the principles of accountancy do not over-ride the provisions of the Income-tax Laws - Whether the assessee is carrying on a business or not is to be ascertained from the material placed before the Assessing Officer and not by a mere entry in the balance sheet - Therefore, the finding of the Tribunal is based on legal evidence and does not suffer from any legal infirmity which calls for interference.

Summary

Issues:
- Whether the assessee is entitled to claim deduction for business expenditure in relation to shares transactions.
- Whether the shares held by the assessee are to be considered as stock-in-trade or investment for tax purposes.

Analysis:
1. The primary issue in this case revolves around the deduction of business expenditure claimed by the assessee in relation to shares transactions. The Assessing Officer initially disallowed the deduction, considering the shares as capital assets rather than stock-in-trade. The Commissioner of Income-tax upheld this decision, leading the assessee to appeal to the Tribunal. The Tribunal, upon re-evaluation of the evidence, found that the transactions were conducted with a profit motive, indicating a business activity rather than mere investment. It emphasized that the principles of accountancy do not override Income-tax Laws, and a mere entry in the balance sheet does not determine the nature of the activity. The Tribunal allowed the deductions towards business expenditure, prompting the revenue to challenge this decision in the High Court.

2. The second issue concerns the characterization of shares held by the assessee as either stock-in-trade or investment. The revenue contended that since the shares were shown as an investment in the balance sheet for a specific assessment year, they should be considered capital assets, thereby disqualifying the assessee from claiming business expenditure deductions. Conversely, the assessee argued that historical practices and records demonstrated a consistent business pattern in shares trading, supported by regular transactions and profit motives. The High Court noted that the material on record clearly established the assessee's engagement in the business of shares, emphasizing the volume, frequency, and regularity of transactions as indicative of a business activity. It relied on legal precedents to assert that the determination of whether an assessee is conducting a business is a factual inquiry based on evidence presented, rather than a mere balance sheet entry.

3. Upon considering the substantial questions of law raised in the appeal, the High Court ruled in favor of the assessee, affirming the Tribunal's decision. It emphasized that the Tribunal's findings were based on legal evidence and did not exhibit any legal infirmity warranting interference. The Court highlighted the consistent business conduct of the assessee in shares trading, supported by documentary evidence and past acceptance by the department. Consequently, the appeal by the revenue was dismissed, upholding the assessee's entitlement to claim deductions for business expenditure related to shares transactions.