2015 (4) TMI 843 - HC - Income Tax

Business of advancing money and cash - capital asset v/s stock-in-trade - Tribunal held that the assesse was not engaged in the business of advancing loans and that money and cash was not its stock-in-trade was perverse and contrary to materials on record and based on irrelevant materials and considerations - Held that - Copy of the 23rd Annual Report consisting of the statement of accounts of the financial year 1993-1994 from which it appears that the available funds of the company/assessee was about ₹ 11,23,00,000/- consisting of a sum of ₹ 5.56 crores on account of capital and reserve and the balance sum of ₹ 5.67 crores consisting of loans both secured and unsecured. Out of the aforesaid sum about ₹ 2.55 crores were invested in fixed assets comprising of furniture and fixture, office equipment, motor car, equipments given on lease, heavy vehicles given on lease, bottles given on lease and a scooter, about ₹ 52 lakhs were invested in shares and debentures, about ₹ 3.67 crores is invested in inventories consisting of investment in shares and hire purchase transactions; about a sum of ₹ 1.46 crores is receivable on account of lease, hire purchase and others, and a sum of ₹ 5.45 crores were invested in loans and advances both secured and unsecured, part of which has also been lent to the subsidiary referred in the judgment of the learned Tribunal. From the aforesaid application of funds it cannot be said that the principal business of the assessee is borrowing and lending money. Therefore, the view taken by the learned Tribunal is a possible view and by no means is perverse. - Decided in favour of assessee.

Issues:
1. Classification of cash as capital asset or stock-in-trade for business purposes.
2. Determining deductibility of expenses incurred in procuring cash through share capital issuance.
3. Assessing whether cash procured through share capital can be considered a conversion of capital into stock-in-trade.

Issue 1: Classification of cash as capital asset or stock-in-trade
The appeal challenged a judgment by the Income Tax Appellate Tribunal regarding the assessment year 1996-1997. The primary question was whether cash held by the assessee was to be classified as a capital asset or stock-in-trade for the business of advancing money. The Tribunal's finding, based on the balance sheet and annual report, indicated that the assessee's business involved investments in various assets, including fixed assets, shares, and loans. The Tribunal rejected the contention that the assessee's business was primarily about borrowing and lending money. The Court upheld this view, stating that the available funds and investments did not support the claim that the principal business was money lending. Therefore, the Tribunal's classification of cash as a capital asset was deemed reasonable, and the appeal on this issue was dismissed.

Issue 2: Deductibility of expenses incurred in procuring cash
The second question revolved around the deductibility of expenses related to procuring cash through the issuance of share capital. The Tribunal had ruled that such expenses were not deductible as business and revenue expenditure. The Court's decision on question two was crucial as it impacted the subsequent questions. The appellant argued that the Tribunal's decision was influenced by the subsidiary company's real estate business, which was not directly relevant to the assessee's operations. However, the Court found the Tribunal's reasoning valid, considering the nature of the assessee's investments and business activities. As a result, the Court upheld the Tribunal's decision on the deductibility of expenses incurred in procuring cash, leading to the dismissal of the appeal on this issue.

Issue 3: Conversion of capital into stock-in-trade
The final question related to whether the cash procured through the issuance of share capital could be considered a conversion of capital into stock-in-trade. This issue was contingent upon a favorable answer to question two. Since the Court upheld the Tribunal's decision on the deductibility of expenses, it did not delve into this question further. The Court's stance was that questions three and four were dependent on the outcome of question two, and as question two was answered in the negative, there was no need to address questions three and four. Consequently, the appeal was dismissed without a specific ruling on the conversion of capital into stock-in-trade.

In conclusion, the High Court of Calcutta upheld the Income Tax Appellate Tribunal's judgment regarding the classification of cash as a capital asset, the deductibility of expenses incurred in procuring cash, and the conversion of capital into stock-in-trade for the relevant business. The Court's decision was based on a thorough analysis of the assessee's financial activities and investments, ultimately leading to the dismissal of the appeal on all grounds raised.

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