2016 (6) TMI 1050 - HC - Income Tax

Revision u/s 263 - whether profit on sale of shares by the assessee company was rightly shown as Long Term Capital Gain? - Held that - As decided in COMMISSIONER OF INCOME TAX Versus N.K. ESTATE DEVELOPERS PVT. LTD. 2006 (2) TMI 659 - GUJARAT HIGH COURT merely because the assessee had acquired shares from the promoters quota that by itself would not be sufficient to come to the conclusion that the acquisition was for the purpose of having control of the company. That while deciding the case of a shareholder the principal requirement for determining whether the investment of the borrowed funds was for the purpose of making or earning income has to be judged in light of the facts of the case available on record, and therefore the Tribunal has come to the conclusion, on facts, that so far as the assessee was concerned it had not made the acquisition for the purpose of obtaining control of the company but was an investment simplicitor. Confirmation of allowing deduction of interest paid on borrowed funds which have been found to have direct nexus with the investment made for acquisition of shares - Decided in favour of assessee

Summary

Issues:
Challenge to order of Income Tax Appellate Tribunal setting aside original assessment and treating profit on sale of shares as Long Term Capital Gain.

Analysis:
The case involved the challenge against an order of the Income Tax Appellate Tribunal (ITAT) dated 19.01.2007 regarding the treatment of profit on the sale of shares by the assessee company as Long Term Capital Gain for the Assessment Year 2002-03. The Central Board of Direct Taxes (CBDT) preferred Tax Appeals against the ITAT's decision. The primary issue for consideration was whether the ITAT was correct in vacating the order of the Commissioner of Income Tax (CIT) under Section 263, which had set aside the original assessment by the Assessing Officer. The shares in question were initially shown as investments but were later converted into stock in trade. The CIT(A) reversed the Assessing Officer's finding, which was further challenged before the ITAT.

The revenue contended that the ITAT erred in vacating the CIT's order and confirming the treatment of profit on shares as Long Term Capital Gain. On the other hand, the assessee's representative supported the ITAT's decision, arguing that a similar issue had been addressed by the court previously, and the ITAT's reliance on that precedent was justified. The court examined the facts and the legal position, including the purpose of acquiring the shares and the source of funds used for the acquisition.

After considering the arguments and the precedent cited, the court found in favor of the assessee. It noted that the shares were acquired using borrowed funds, but the purpose was not for obtaining control of the company but for investment. The court highlighted that the Tribunal had correctly allowed the deduction of interest paid on borrowed funds directly related to the share acquisition. Therefore, the court dismissed the revenue's appeals and modified the ITAT's judgment accordingly. As a result, the Tax Appeals were allowed in favor of the assessee, affirming the treatment of profit on shares as Long Term Capital Gain.