2016 (10) TMI 213 - HC - Income Tax

Interest on money borrowed for investment in shares - whether the assessee purchased the shares for the purpose wholly and exclusively of making or earning income or whether she did so for the purpose of acquiring control of the company? - Held that - In the present case, as we noted earlier, the assessee had acquired about 28 per cent of the shares in the company M/s M. Gulab Singh & Sons Pvt. Ltd. That by itself would not establish that the shares were purchased for the purpose of acquiring control over the company. However, as we have also held, it is not an acquisition of over 50 per cent of the equity share capital alone that would allow gaining control over a company. The purpose of acquisition of shares must be ascertained after considering all the facts and circumstances of the case. In the present case, the assessee acquired about 28 per cent of the shares in the company. It is true that the Malhotra group owns the entire shareholding in the company. When a party buys shares in a company, it is reasonable to presume that it does so wholly and exclusively for the purpose of making or earning dividend income. If a party expects the company to do well presently or in future, it is but natural that it would seek to acquire as many shares as it can. This too would be wholly and exclusively for the purpose of making or earning income therefrom. Parties do not acquire control for control s sake. In the present case, the other members of the group held 72% of the equity shares. There is nothing to indicate that the assessee herself or in concert with others intended acquiring control for any reason. Our attention was not invited to anything that indicates any reason for the assessee acquiring the shares for the purpose of acquiring or even maintaining control. It is reasonable then to presume that the assessee acquired the shares wholly and exclusively for the purpose of making or earning income. The Tribunal appears to have proceeded only on the basis that the entire shareholding of the company is held by the appellant along with other members of the group including her husband and her husband s HUF and the fact that the dividend had not been declared. There could always be prospects of the company doing well in future. Indeed, if that was not the expectation, the appellant would not have invested in the company at all. There is merely a finding that the real intention appears to be to hold and acquire the control of the company, as otherwise the assessee and the other family concerns, in which she is also interested, would not have invested large amount by way of investment particularly when the company had not declared any dividend. We observed earlier, neither of these reasons by itself warrants the conclusion that the shares were acquired wholly and exclusively for the purpose of control and that they were not acquired wholly and exclusively for the purpose of making or earning income. In the facts and circumstances of this case, these two factors even taken together do not warrant the conclusion arrived at by the Tribunal. In the facts and circumstances of this case, it was held that the assessee was not entitled to a deduction under Section 57(iii). Even the judgments referred to in that case proceeded on the basis that the shares were purchased with a view to acquiring a controlling interest in the company and in prosecuting a share-holders litigation. The judgment does not militate against our view in Commissioner of Income-Tax vs. Amritaben R. Shah, 1999 (4) TMI 73 - BOMBAY High Court . The questions of law are, therefore, answered in favour of the assessee.

Summary

Issues Involved:
1. Admissibility of deduction for interest on money borrowed for investment in shares that did not yield any dividend.
2. Justification of the Tribunal's decision that shares were purchased to acquire controlling interest and hence not allowable for deduction.

Issue-wise Detailed Analysis:

1. Admissibility of deduction for interest on money borrowed for investment in shares that did not yield any dividend:

The Tribunal held that the assessee had not clarified that she was in the business of dealing in shares and that unless proven, it was difficult to accept that the shares were purchased for making or earning income. However, the court clarified that the deduction under Section 57(iii) is not limited to those dealing in shares as a business. The court emphasized that the purpose of the expenditure is relevant, not the actual earning of income. The court cited Supreme Court judgments in Eastern Investments Limited vs. Commissioner of Income Tax and Commissioner of Income-Tax, West Bengal-III vs. Rajendra Prasad Moody, which held that it is not necessary for the expenditure to result in income for it to be deductible. The court concluded that the lack of dividend does not indicate that the expenditure was not for making or earning income, thus answering the first question of law in favor of the appellant/assessee.

2. Justification of the Tribunal's decision that shares were purchased to acquire controlling interest and hence not allowable for deduction:

The Tribunal and CIT (A) had concluded that the assessee's real intention was to acquire control over the company, not to earn income. The court distinguished between the purpose of expenditure and the motive behind it, emphasizing that if the expenditure is for making or earning income, the motive is irrelevant. The court referred to several judgments, including Ormerods (India) Private Ltd. vs. Commissioner of Income-Tax and Seth R. Dalmia vs. The Commissioner of Income Tax, which supported the view that the purpose of expenditure should be considered separately from the motive.

The court analyzed the facts, noting that the assessee acquired about 28% of the shares, and there was no indication that the acquisition was for control purposes. The court found that the Tribunal's conclusion was based on the entire shareholding being held by the appellant's group and the lack of dividend declaration. However, these factors alone did not justify the conclusion that the shares were acquired for control. The court also referred to judgments in CIT vs. Model Manufacturing Co. (P) Ltd. and Sarabhai Sons (P.) Ltd. vs. Commissioner of Income-Tax, which differentiated between the purpose of earning income and acquiring control.

The court concluded that the acquisition of shares was for the purpose of making or earning income, and the incidental acquisition of control did not change this purpose. Thus, the second question of law was also answered in favor of the assessee.

Conclusion:

The court answered both questions of law in favor of the appellant/assessee, allowing the appeal and setting aside the Tribunal's order. The court held that the interest on money borrowed for investment in shares is an admissible deduction under Section 57(iii) and that the shares were not purchased solely for acquiring control of the company.