TMI Blog2008 (7) TMI 457X X X X Extracts X X X X X X X X Extracts X X X X ..... "Profits and gains of business". A net loss of Rs. 2.57 crores was thus declared by the assessee-company for assessment year 1996-97 and the same was claimed to be carried forward. Similarly, the net loss of Rs. 2.85 crores and Rs. 1.32 crores was claimed in the return of income for assessment years 1997-98 and 1998-99 respectively. During the course of assessment proceedings for assessment year 1996-97, it was noted by the Assessing Officer that all the investments made by the assessee-company were in the shares of various companies of the Jindal group to which it belongs. He also noted that even the loans taken by the assessee-company were from companies of the same group and the loans given by the assessee-company were also to such companies. Moreover, almost the entire amount of borrowed money had been utilized in making investments in shares of the Jindal group. The Assessing Officer also noted that the assessee-company itself had treated the income from sale of shares as short-term capital gains. He was, therefore, of the view that the interest or Rs. 4.1 crores paid on funds borrowed for purchasing the shares shown as investment, could be allowed only under the head "Income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Jindal group is primarily as promoters, to acquire controlling interest, and for management of the group companies and the act of holding such investments was, therefore, itself a business activity. It was contended that since the interest had been paid on money borrowed for the purpose of such business, the entire amount of interest of Rs. 4.1 crores was deductible under section 36(1)(iii) and, consequently, the net loss computed by the Assessing Officer was a business loss which should be allowed to be carried forward. In support of this contention, the assessee-company relied upon the decision of the Calcutta High Court in the case of CIT v. Rajeev Lochan Kanoria [1994J 208 ITR 616 wherein it was held that acquiring controlling interest in companies with a view to manage, administer, finance and rehabilitate the companies under control, was a business activity, and any interest paid for investing in such companies was deductible under section 36. Lastly, the assessee-company submitted that there can be a business of holding properties without actually dealing in such properties. In this regard, the assessee-company cited the decisions of the Hon'ble Orissa High Court in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has not undertaken any activity in respect of the business of the companies invested in. The assessee-company has merely purchased shares of the companies and it also cannot be said that all such purchases led to the assessee-company acquiring a controlling interest in these companies. Thus, there is no systematic or organized activity in the matter of working for the companies invested in, and the ratio of the decision in the case of Amalgamation Limited is not applicable to the present case. Further, in the case of Rajeev Lochan Kanoria, the Calcutta High Court considered the case of an individual who had interest in various companies. The Tribunal had noted in that case that the assessee was engaged in the business of rehabilitating and financing the controlled companies. The financing as well as acquisition of shares of such companies were in the course of the assessee's activity of managing and rehabilitating controlled companies. It was on the basis of these facts that the Court held that the assessee had purchased shares of different companies for the purpose of acquiring controlling interest and managing, administering, financing and rehabilitating such companies. Since th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly two issues raised by the assessee which are common in all these three appeals. The main issue relates to the head under which the loss claimed by the assessee is to be assessed whereas the other issue relating to the claim of the assessee for carry forward of the said loss is consequential. 6. The ld. counsel for the assessee submitted before us that the assessee in the present case is admittedly an investment company and thus its business is that of making investment. He submitted that as a part of such business, the assessee-company had purchased shares of group companies mainly with the intention to hold the same in order to maintain the controlling interest. He also submitted that the said shares were sold by the assessee-company at least on two occasions and these two sale instances were sufficient to establish the trading of shares done by the assessee-company. According to him, the assessee-company thus had not only purchased and sold the shares during the relevant period but the same were also held by it in a systematic and organized manner as a part of its business activity. He contended that the said shares, no doubt, were shown by the assessee-company in its balance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee-company to show that by purchasing the said shares of the group companies, controlling interest was sought to be claimed by it in the said companies. He contended that the assessee-company no doubt has changed the treatment given to the said shares in assessment years 1997-98 and 1998-99 by claiming that the said shares have been converted into stock-in-trade. According to him, this change, however, has been shown to claim the loss arising from the sale of the said shares as business loss which cannot be accepted going by the treatment given by the assessee-company itself in its books of account for the earlier years and its intention to hold the said shares as investment which is clearly evident from its conduct. In this regard, he invited our attention to the auditors' report and notes on account placed at page Nos. 14 and 23 of the assessee's paper book to point out that the conversion of shares from investment to stock-in-trade was made only in order to claim the loss as business loss. 8. In the rejoinder, the ld. counsel for the assessee submitted that what view the assessee takes in the matter is not relevant and it is to be seen what exactly is the legal positi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ock in trade in the previous year relevant to assessment year 1997-98 as per the treatment given in its books of account and such treatment continued to remain the same in assessment year 1998-99, the same were valued at cost which as commented by the auditors in their report was not in accordance with accounting standard issued by the Institute of Chartered Accountants of India. Even in the notes to accounts for that year, a following note was given as note No. 4:- "...the company has during the year classified its investments to stock-in-trade at cost. Such reclassification at cost is not in consonance with the accounting standard on accounting for investment issued by the Institute of Chartered Accountants of India consequent to which loss for the year has been understated by Rs. 1014 lakhs". 10. As is clearly evident from the aforesaid note given in the notes to accounts of the assessee-company, the conversion of shares from investment into stock-in-trade was claimed to be made without complying with the mandatory accounting standard inasmuch as the valuation thereof was not done as per the said standard. This vital aspect of the matter clearly supports the case of the reve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re of trade is the intention to trade and such intention must be present at the time of purchase. It was also held that if, however, the subject of transaction is normally used for investment such as land, houses, shares etc., an admitted intention to sell such subject-matter on the arrival of suitable res elected time does not always warrant a definite conclusion that the transaction is in the nature of trade. As already observed by us, the intention of the assessee-company in the present case, having regard to all the facts and circumstances including the conduct of the assessee, was to purchase and hold the shares of group companies as investment and going by the static manner in which the said shares were held, it cannot be said that the transactions in the said shares constituted the business activity of the assessee-company. 12. Before us, the ld. counsel for the assessee has laid a great emphasis on the nature of the assessee-company being an investment company to contend that "holding of investments" itself was the business of the assessee-company. However, as held by Hon'ble Supreme Court in the case of Distributors (Baroda) (P) Ltd. the business of "holding of investmen ..... X X X X Extracts X X X X X X X X Extracts X X X X
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