2007 (7) TMI 252 - HC - Income Tax

Business of investment in shares and securities purchase of shares - Assessee had no intention to trade in shares so shares purchased could not be said business asset in hands of assessee and it had been rightly offered under head Capital gains it was only an investment activity that the interest paid for acquisition of shares would partake of the character of cost of the shares and therefore it was rightly capitalized along with the cost of acquisition of shares

Summary

Issues:
1. Whether profit/loss on purchase and sale of shares should be treated as capital gain/loss and allowing indexation benefit?
2. Whether interest liability incurred on borrowings to acquire shares should be allowed?

Analysis:

Issue 1:
The appellant, a Public Limited Company engaged in investment in shares and securities, declared a loss in the relevant assessment year. The case involved the purchase of shares of a company and subsequent restructuring. The Assessing Officer treated the entire share holdings as business assets, denying indexation benefit. The Commissioner of Income Tax (Appeals) upheld this decision. However, the Tribunal allowed the appeal, emphasizing the intention of the assessee and the nature of the transaction as investment activity. The Tribunal's decision was based on valid evidence, concluding that the profits from the sale of shares should be treated as capital gains. The High Court concurred with the Tribunal's findings, stating that no substantial question of law arose for consideration in this regard.

Issue 2:
Regarding the interest liability incurred on borrowed funds for share acquisition, the Revenue argued that no specific provision allowed for the inclusion of interest liability in the computation of capital gains. However, the Tribunal held that the interest paid for share acquisition should be added to the cost of acquisition of shares, thereby capitalizing it. The High Court agreed with the Tribunal's reasoning, finding no legal infirmity in the decision. Consequently, the Court dismissed the tax case, as no substantial question of law arose for consideration on this issue.

In conclusion, the High Court upheld the Tribunal's decision, ruling in favor of the assessee on both issues related to the treatment of profit/loss on share transactions and the inclusion of interest liability in the cost of share acquisition.