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TMI Blog1985 (6) TMI 53X X X X Extracts X X X X X X X X Extracts X X X X ..... r, that it had advanced a major part of the share capital to M/s Universal Ferro Allied Chemicals Ltd. In the year 1968 it had started mining dolomite and also purchased a truck for letting out on hire. It would appear, that, in 1971, the appellant decided to acquire the majority share interest in M/s Universal Ferro Allied Chemicals Ltd. hitherto held by the Nizam and other as nominees. In pursuance of this decision, a substantial block of shares, namely, 2,500 A-class 7 1/2 cum redeemable preference shares, another 2,500 B- C class cum. redeemable preference shares (both fully paid up) and 3,00,000 equity shares of Rs. 10 each (partly paid up namely, Rs. 5 per share were purchased from Nizam and others on 2nd March, 1971 from which date, M/s Universal Ferro Allied Chemicals Ltd. became the subsidiary of the appellant. At the relevant time of purchase, the appellant did not possess sufficient funds to meet the purchase price of these shares, namely, Rs. 35.31 lakhs. A portion of the same was met by the appellant and a sum of Rs. 30 lakhs was contracted as a loan payable to Nizam and other which was to be repaid in a stipulated manner. Out of this loan, a sum of Rs. 18 lakhs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther sources". In other words, the ITO held, that, the transaction of the acquisition of the majority interest shares in M/s Universal Ferro Allied Chemicals was pure and simple in the nature of investment and there absolutely no overtones of a business venture about the same. 3. On appeal, the CIT (A), after fairly detailed and factually high lighted discussion, came to the conclusion, that, there was no basis for disallowance of Rs. 27,609 being 50 per cent of the interest paid to share holders and directed the ITO to allow the same as a deduction in computing the business profits. As regards the interest paid to Nizam, his conclusions in this behalf may be summarised as under. He found a direct nexus between the loan contracted with the Nizam and other and the purchase of the majority interest in shares in the year 1971 of M/s Universal Ferro Allied Chemicals Ltd. According to him, this finding was not disputed. He did not agree, that the acquisition of the majority holding to the assessee was in pursuance of a business venture. No doubt, by acquiring the majority interest. the appellant might have been in a position to put the company's affairs and working on a better f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the appellant may be summarised briefly as under. The business of the assessee was mining of dolomite, besides purchase and sale of briquette inclusive of letting on hire a truck. The assessee had advanced certain money in the earlier years to M/s Universal Ferro Allied Chemicals Ltd. When the decision was taken to purchase the shares of the company, it was in a bad shape After the assessee had acquired majority share interest, it was able to bring back the company to a should condition, which incidentally resulted in the assessee receiving higher dividends. Dolomite was one of the raw materials for the manufacture of Ferro manganese, which was being produced by Universal Ferro Allied Chemicals Ltd. By acquiring the majority interest in this company, the assessee had obtained a captive market for the dolomite mined by it. Briqultte is manufactured out of the waste, which is a bye-product of manufacture of ferro manganese and the assessee had by means of acquiring the shares of the company, obtained a permanent supplier of this material, in which it had been dealing. The truck was also hired out to M/s Universal Ferro Allied Chemicals Ltd. Since the abolition of the system ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly in agreement with the conclusions of the CIT (A) in this behalf, namely that the acquisition of he shares of M/s Universal Ferro Allied Chemicals Ltd. had absolutely nothing to do with the business activities of the assessee and, therefore, the interest paid on the loan, with which the shares were acquired, cannot be allowed as a deduction in computing the business income of the assessee. A direct nexus between the loan contracted from the Nizam and the purchase of the shares in 1971 is not disputed by the assessee. The business activities of the assessee and the company are quite different. The assessee is not a dealer in shares. The business activities of the assessee-company consist of extraction of dolomite and purchase and sale of briquettes apart from letting out the truck on hire. It is a far fetched proposition to contend, that, the assessee had gone to the extent of investing Rs. 35 lakhs in the share of a company with a view to selling the dolomite mined by it to that company. A captive market does not appear to be the sole considerations for the acquisition of the shares. At the most, it may be incidental. But the main reason for the purchase of the shares must have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the assessee did not purchase the share for the purpose of dealing in them and that the apparent object of the assessee was to acquire the controlling interest in NCBM Ltd. either by NK and TK or by the assessee itself, and held that the interest paid on the amounts borrowed by the assessee could be allowed as business expenditure, but whatever might be the purpose in whatever might be the purpose in purchasing the share of NCBM Ltd. the expectation of dividend could not be denied and, therefore, the interest was a legitimate deductible expenses against dividend income and could be allowed under s. 57. On a reference: Held , that though the ultimate or ulterior motive of the assessee might have been to confer controlling interest either to itself or to NK and TN, the immediate purpose for acquisition of the shares was to earn income form the dividends thereof and the Tribunal was, therefore, right in holding that the interest was deductible under s. 57 against its income from other sources." In this case also loans were obtained for purchasing shares with the object of acquiring the controlling interest in the company concerned. It was held, that, thought the ultimate ..... X X X X Extracts X X X X X X X X Extracts X X X X
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