2013 (3) TMI 217 - HC - Income Tax

Computation of income - under the head business income OR capital gains - whether assessee entitled to a deduction of interest paid by it on loans under Section 36(1)(iii) - Held that - Admittedly the Memorandum of Association of the assessee-company provided that the assessee can carry on the business of investment, financing, buying, selling, investing, transferring, disposing off and otherwise dealing in shares, stocks etc. There is also no dispute that the assessee is registered with the R.B.I. as a non-banking financial company allowed to carry on the acquisition of shares, stocks etc. or other marketable securities as it is also a financial institution. Therefore from these facts, it is clear that it is the intention of the assessee to do business of investment in shares and to sell them. As during the financial year 2001-02 admittedly the assessee had borrowed Rs. 51.32 crores from 3 companies and repaid it at the end of the said financial year. Again in the financial year 2002-03 it had taken the loan & out of the said loan purchase of 10,33,323 shares of another group company. The assessee sold 8,70,000 shares of the said company during the financial year 2002-03. This shows that in order to acquire the shares, the assessee has been borrowing funds from its sister concerns and repaying the outstanding loan with interest at the end of each financial year and again taking a loan at the beginning of the following financial year. This policy was being followed without a break and the borrowing of funds by the assessee had assumed the characteristic of a continuing loan. Merely because the assessee had shown the receipts on sale of part of shares as long term capital gains , that is not conclusive and the Tribunal has rightly held that entries in the books or classification of a particular item in the annual accounts does not determine the character of income or asset. Tribunal has correctly appreciated the evidence to conclude that the business of the assessee is to invest in shares, that the borrowing was for the purpose of business and that the entire amount paid by the assessee on the loans taken by it is allowable as a deduction under Section 36(1)(iii) - no substantial question of law arises - in favour of assessee.

Summary

Issues:
1. Correctness of assessing officer's decision on computing the income under "business income" for assessment year 2003-04.
2. Entitlement of the assessee to claim deduction of interest paid on loans under Section 36(1)(iii) of the Income Tax Act.

Analysis:
1. The appeal filed by the Revenue challenged the order of the Income Tax Appellate Tribunal regarding the correctness of the assessing officer's decision on computing the income of the assessee under the head "business income" for the assessment year 2003-04. The assessee, a company engaged in investment in shares, had taken a loan and utilized part of it for purchasing shares. The assessing officer disallowed the deduction of interest paid on the loan, considering it a colorable transaction to reduce taxable income. The Commissioner of Income Tax (Appeals) partly allowed the appeal, and the Tribunal eventually allowed the appeal, considering the assessee's business activity and the purpose of borrowing funds for shares acquisition.

2. The second issue revolved around the entitlement of the assessee to claim a deduction of interest paid on loans under Section 36(1)(iii) of the Act. The Revenue contended that the Tribunal erred in considering the assessee engaged in the business of investment in shares, as the shares were not held for business purposes. However, the High Court upheld the Tribunal's decision, emphasizing the company's business objectives, registration as a non-banking financial company, and borrowing patterns for share acquisitions. The Court noted the consistent policy of borrowing and repaying loans for share investments, supporting the Tribunal's findings on the business nature of the assessee's activities.

3. The High Court analyzed the evidence, including the company's association with the I.T.C. group, investment patterns, and tax audit reports indicating the nature of business as an investment company. The Court emphasized that the classification of receipts as long-term capital gains did not conclusively determine the character of income or assets. It upheld the Tribunal's decision, stating that the assessee's business was investing in shares, the borrowing was for business purposes, and the interest paid on loans was deductible under Section 36(1)(iii) of the Act. The Court dismissed the appeal, finding no merit and no substantial question of law arising from the case.