TMI Blog2008 (7) TMI 461X X X X Extracts X X X X X X X X Extracts X X X X ..... s. According to the AO, this amount should have been capitalised. When put to the assessee, it was explained that the capital was borrowed for the purpose of business and hence interest was allowable under s. 36(1)(iii) of the Act. The judgments in the case of India Cements Ltd. vs. CIT (1966) 60 ITR 52 (SC) and in the case of CIT vs. Alembic Glass Industries Ltd. (1976) 103 ITR 715 (Guj) were relied upon. The AO noted that during the year under consideration, the assessee had obtained loans of Rs. 43.35 crores from Russell Credit Ltd. (RCL) and of Rs. 16.84 crores from Russell Investments Ltd. (RIL). Out of the total loan of Rs. 60.19 crores, Rs, 23,78,98,324 were utilised for purchase of 10,33,323 shares of EIH Ltd. It had also shown Rs. 6,23,502 as dividend received during the year on these shares. The actual total dividend received during the year amounted to Rs. 1,81,74,948. The AO was of the view that since Rs. 36.21 crores of the total loans borrowed remained unutilized and since dividend of Rs. 6,23,502 only was received on the shares purchased during the year, only proportionate interest to that extent could be allowed. He also observed that the loan was not borrowed for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to how the investments were represented in the books of account. After considering the contentions of the assessee and the comments of the AO, the CIT(A) held that since the assessee itself had shown the income from sale of shares as long-term capital gains, it was clear that the shares were not held for the purpose of trading and hence it was not a business income. Thus, he confirmed the disallowance of interest made by the AO. However, adjudicating on the alternative ground of the assessee, he directed the AO to tax the dividend receipt as income from other sources instead of business income and directed him to allow interest on utilised borrowed funds under s. 57(iii) of the Act. 4. The contention of the learned counsel was that the assessee company was a part of the ITC Group of companies and was an NBFC as per the registration with the RBI. it was consistently assessed as NBFC and the company deals in investments in shares of group companies for acquiring and maintaining controlling interest. In the shares of EIH Ltd. also, which is a group company, the assessee holds 6 per cent of the total share capital. It was contended that in effect, it was the continuation of the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the company was to acquire controlling interest. It was pointed out that this was not borne out of the memorandum of association. According to him, the activity of the assessee was only to invest in group companies as investments and not to acquire controlling interest. The conditions for allowability under s. 36(1)(iii) were not fulfilled. Alternatively, it was contended that the assessee cannot have the cake and eat it too. If it was held that assessee did carry on business and that interest was allowable under s. 36(1)(iii) of the Act, then the assessee cannot claim the benefit of indexation and it was appropriate to tax the entire receipts of Rs. 1.99 crores as business receipts. 6. In his reply, the learned counsel submitted that the Department has not refuted the NBFC status of the assessee. As per RBI, the business of the assessee is to invest in shares and the Department has also not refuted the claim of the assessee that the acquisitions are to have controlling interest. It was reiterated that in asst. yr. 1997-98, the issue was fully examined, investment was proved and the whole object of the assessee was to run its associate ventures profitably which were under the sam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also certified the company to be in the business of acquisition of shares, stocks, etc. 8. With this background, let us consider the facts in the present case. Pursuant to its objects as mentioned above, the assessee has been acquiring as well as disposing of the shares, stocks, etc. In order to acquire the shares as a part of its business, the assessee has been borrowing funds from its sister concerns. For whatever reason, but as a matter of consistent business policy, the assessee has been repaying the outstanding loan with interest at the end of each financial year. Also, as a part of this policy, it takes back the loan at the beginning of the following financial year. Thus, every year there is a break of a few days between the loans repaid and obtained back, but, in substance, there is no break in the policy and practically the same loan continues, may be at a revised rate of interest, the revision being either upward or downward. Undisputedly, the loan has been utilised for the purpose of acquiring shares. At times, the entire loan may not have been utilised but as indicated above, the loan continues for the purpose of business, albeit with a break of a few days as mentioned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... audit report is in Form No. 3CA which is applicable for assessees carrying on business or profession and the nature of business has been mentioned as investment company in the tax audit report. Though the shares have not been shown as stock-in-trade in the balance sheet, the method of valuation has been shown to be lower of cost or market value. This method is applicable in case of business stock only. It is quite trite that the entries in the books or classification of a particular item in the annual accounts do not determine the character of the income or asset. One has to consider the basic intention and conduct of the assessee. The intention to carry on the business of investment in shares is evident from the objects in the memorandum of association and by the registration with the RBI as NBFC. The conduct is also evident that it acquired the shares not only as per the mandate in the memorandum of association but also with a view to acquire controlling interest in associate concerns. None of these facts has been disputed or refuted by the Department. 10. So far as acquiring controlling interest is concerned, the learned Departmental Representative has relied on the decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the assessee to decide as a businessman as to how much number of shares would be sufficient to control its stake. Another observation of the Delhi Bench in the case of Everplus Securities Finance Ltd. was that earning of profit should be by the company itself and not by the other group company. This observation was in continuation of the earlier observation that the motive of the company cannot be to earn profit if, it was to acquire controlling interest. However, besides the fact in the present case that the assessee itself has earned profit by off loading certain shares, according to the Supreme Court, it is not material when it comes to commercial expediency. This was observed by the Court in the case of S.A. Builders Ltd. vs. CIT(A) Anr., The Court opined that the decisions relating to s. 37 of the Act are applicable to s. 36(1)(iii) because in s. 37 also the expression used is "for the purpose of business". The Court also observed that it has been consistently held in the decisions relating to s. 37 that the expression "for the purpose of business" includes expenditure voluntarily incurred for commercial expediency, and it is immaterial if a third party also benefits the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons of the Act and not as per the provisions pertaining to the computation of capital gains. If this stand of the assessee is allowed, that is, to compute the income as capital gains after taking the benefit of indexation and also claiming interest under s. 36(1)(iii), it would tantamount to twisting the law making a mockery of the entire scheme of the Act. If investing in the shares is the business of the assessee, income earned therefrom has to be computed as business income as per the provisions from ss. 28 to 44A of the Act. Secs. 45 to 55 cannot come into play at all. Accordingly, we direct the AO to compute the total income of the assessee under the head business income as per the normal provisions of the Act and to allow deduction of Rs. 3,65,14,210 under s. 36(1)(iii) of the Act. 12. In the result, the appeal of the assessee is partly allowed. (II) ITA No. 632/Hyd2007 (Departmental appeal): 13. The grievance of the Department is against the direction of the CIT(A) to allow proportionate deduction of interest under s. 57(iii) of the Act. In the assessee's appeal above, we have already held that entire interest has to be allowed as business expenditure under s. 36(1)( ..... X X X X Extracts X X X X X X X X Extracts X X X X
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