2009 (8) TMI 93 - HC - Income Tax

Loss of sale of shares expenditure on acquisition of shares business profit held that - purchase of shares by the assessee-company on April 4, 1995, at a price of Rs. 220 per share against the market price of Rs. 70 per share was definitely not either as a normal business transaction of the assessee nor for any exigency of the business requirement of the assessee-company - need of the individual directors cannot be elevated to the status of the need of the company - an acquisition of share, at a value far higher than the market value when the shares otherwise were available at Rs. 70 per share, but paying Rs. 220 per share to purchase them only from a particular seller cannot be construed as any part of the business transaction loss on sale of shares is not a business loss it is short term capital loss The issue that whether interest on amount borrowed for the purpose of acquisition of shares is allowed as deduction or not, matter remanded to AO

Summary

Issues Involved:
1. Allowability of loss incurred by the assessee in the sale of shares as a business deduction.
2. Allowability of interest payments made towards the acquisition of shares as a business expenditure.
3. Consideration of the nature of the share purchase transaction and its business benefit to the assessee-company.

Issue-wise Detailed Analysis:

1. Allowability of Loss Incurred by the Assessee in the Sale of Shares as a Business Deduction:

The Revenue challenged the Tribunal's decision to allow the loss incurred by the assessee in the sale of shares of M/s. ICDS Limited as a business deduction. The Tribunal had allowed this loss on the grounds that the assessee was engaged in the business of investment and trading in shares and stocks. The shares were purchased at Rs. 220 per share against a market value of Rs. 70 and sold at Rs. 129 per share, leading to a loss of Rs. 90,92,800. The Tribunal treated this loss as part of the business activities of the assessee-company.

However, the High Court found that the purchase of shares was not a normal business transaction but was due to a private settlement among the directors of the company, influenced by the Ambani award. The Court emphasized that the needs of individual directors cannot be elevated to the status of the company's needs. The transaction was not necessitated by any business exigency or prospects but was to fulfill the obligations of the individual directors. Therefore, the Tribunal erred in treating the loss as a business loss. The Court answered this issue in the negative, in favor of the Revenue.

2. Allowability of Interest Payments Made Towards the Acquisition of Shares as a Business Expenditure:

The Tribunal had also allowed the deduction of Rs. 63,85,464 as interest paid on borrowings for the purpose of investment in the assessee's business. The Revenue contended that this interest payment should not be allowed as the transaction was not in the normal course of business.

The High Court noted that the interest payment issue is consequential to the first issue. However, the Court acknowledged the argument that the assessee should not be deprived of the interest claim if it is otherwise eligible under the law. The Court directed the Assessing Officer to reexamine the extent to which the interest payment could be allowed as attributable to the borrowing for the purchase of shares. The matter was sent back to the Assessing Officer for fresh computation of the assessee's tax liability, considering the interest payment.

3. Consideration of the Nature of the Share Purchase Transaction and its Business Benefit to the Assessee-Company:

The third issue was intertwined with the first two issues and pertained to whether the share purchase transaction had any business benefit for the assessee-company. The Tribunal's logic in treating the transaction as part of the business activity was questioned. The High Court found that the purchase of shares at an inflated price was not for any business requirement of the assessee-company but to fulfill the obligations of the directors under the Ambani award. The Court held that such transactions cannot be considered business transactions of the company.

Conclusion:

The High Court allowed the appeal in favor of the Revenue, holding that the loss incurred by the assessee in the sale of shares should not be treated as a business loss. The interest payment issue was sent back to the Assessing Officer for reexamination. The questions raised were answered in favor of the Revenue, and the Tribunal's order was reversed to the extent indicated.