TMI Blog2007 (8) TMI 640X X X X Extracts X X X X X X X X Extracts X X X X ..... s to hold the investments. Since income arising from sale of investment has to be computed under the head Capital gains , the deduction has to be allowed only in accordance with the provisions specified under the head Capital gains . The Legislature was aware of the aspect of inflation of price and therefore, it made provisions to determine the indexed cost of acquisition, which would take care of interest cost also. No separate deduction is allowable under this head in respect of interest paid on borrowed funds. Thus, in our opinion, no deduction is allowable to the assessee in respect of interest paid on borrowed funds. All the provisions contained in sections 30 to 43D provide that deduction shall be allowed in respect of the expenditure or allowance mentioned therein. The deduction pre-supposes the existence of receipts chargeable under this head. If the receipts are to be considered under other heads then, question of deduction under the head Profits and gains from business or profession would not arise. As already pointed out, receipts and expenditure must go together. We may clarify that the receipt may be actual or to be received in future. The receipt may be on a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this issue subject to the rider that the Assessing Officer shall rectify the mistake if the assessee s contention is found to be correct after verification. Disallowed the exemption income of dividend - Held that:- This issue is covered in favour of the assessee by the decision of the Special Bench in the case of Punjab State Industrial Development Corporation Ltd. v. Deputy CIT [2007] 292 ITR (AT) 268 (Chandigarh) [SB], wherein it has been held no ad hoc disallowance can be made in such cases. Respectfully, following the same, the orders of the Commissioner of Income-tax (Appeals) are set aside on this issue and consequently, the disallowance sustained by him are hereby deleted. - K. C. Singhal Judicial Member And Shamim Yahya Accountant Member For the Appellant : J. D. Mistri For the Respondent : Ravindra Kumar ORDER K. C. SINGHAL (JUDICIAL MEMBER) . 1. Since common issues are involved in all these appeals, the same are being disposed of by the common order for the sake of convenience. 2. The main issue arising from these appeals is whether lower authorities were justified in disallowing deduction under section 36(1)(iii) of the Income-ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1997, from Reliance Capital Ltd. was of Rs. 5,08,00,800 which was utilized for acquiring 2,44,000 shares of L T Ltd. The interest on borrowing was of Rs. 76,20,116 which was claimed as deductions under section 36(1)(iii) of the Act but the same was disallowed for both the years for the reasons given in the preceding paragraph of this order. 6. The matter was carried in appeal before the learned Commissioner of Income-tax (Appeals) before whom it was contended that the assessee was engaged in the business of investment in shares and therefore interest on borrowed funds was allowable as deduction under section 36(1)(iii) of the Act. It was further submitted that investment was not made for earning of dividend income. Merely because investment in shares resulted into dividend income would not render the interest paid on borrowing as having been incurred for earning of dividend income, which was exempt from tax under section 10(33) of the Act. 7. The contention of the assessee was rejected by the learned Commissioner of Income-tax (Appeals) by holding the assessee could not be said to be engaged in the business of investments as shares were acquired not as stock-in-trade but a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 3.6 crores and therefore, the Assessing Officer has wrongly assumed that the entire interest related to the entire dividends. It was further submitted that investments was not made to earn dividend income but to have controlling interest in Larsen Toubro Ltd. so that it may have its say in the policies of that company. The dividend declared by L T Ltd. was always meagre one and therefore there was no question of investing the money for earning dividend income. He placed on record the chart showing dividends received from various companies to point out that the dividend income in the case of L T Ltd. was much less than 3 per cent. of the investment. According to him, no prudent man would invest the borrowed funds at higher rate of interest for earning nominal rate of dividend. In fact, the investment was only made to earn profits in future by investing money as a prudent business man and therefore, lower authorities were not justified, in holding that interest paid related to earning of dividend income alone. 10. In the course of hearing, a query was raised from the Bench as to how the deduction could be allowed under the head Profits and gains from business or profe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Commissioner of Income-tax (Appeals) by contending that the assessee cannot be said to carry on the business of holding of investments in view of the Supreme Court judgment in the case of Bengal and Assam Investors Ltd. v. CIT [1966] 59 ITR 547 wherein, it was held that no one could make a business of investing. According to him, but for section 23A of the Act of 1922, there cannot be any business of holding investments. Under the Act of 1961, there is no such provision and therefore, the concept of business of holding investment is no more available under the Act. The object clause of memorandum of association by itself is not relevant. Proceeding further, it was submitted that merely because the earning of dividend was lower than the interest paid, it cannot be said that the provisions of section 28 of the Act would apply. The investment is not made only for earning dividend income but also is made with the object of earning income on sale of shares in future. He tried to convince us by giving an example of investment in immovable property where return by way of rent is always lesser than the Interest rate prevailing in the market. The object of an investor is to make profits whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 226 ITR 188 (SC) the provisions of section 23A of the 1922 Act were not considered and yet it was held that the assessee was engaged in the business of holding of investments. Regarding section 14A, it was submitted that onus is on the Department to prove that expenditure related to exempted income. No such onus has been discharged. Regarding the decisions of the Tribunal in the case of Everplus Securities and Finance Ltd. [2006] 285 ITR (AT) 112 (Delhi), it was submitted that the decision of the Supreme Court relied on by him were not cited before the Bench. Regarding the decision of the Tribunal in the case of Kamu Metal (supra), it was submitted that no finding was given regarding the business of holding investments. 14. Rival submissions of the parties have been considered carefully. At the outset, we are in agreement with the legal contention that in appropriate case, a company can be said to be engaged in the business of holding investments inasmuch as the Legislature itself recognized such legal position by enacting section 23A of the Act of 1922. This aspect got judicial recognition from the apex court in the case of Distributors (Baroda) P. Ltd. [1972] 83 ITR 377. In t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e enacted the same not knowing what it was saying. We must assume that the Legislature deliberately used that expression and it intended to convey some meaning thereby. The expression ' business' is a well-known expression in the income-tax law. It means, as observed by this court in Narain Swadeshi Weaving Mills v. CEPT [1954] 26 ITR 765 (SC) : ' some real, substantial and systematic or organized course of activity or conduct with a set purpose'. This is also the meaning given to that expression in the earlier decisions of the High Courts and the Judicial Committee. We must, therefore, proceed on the basis that the Legislature was aware of the meaning given by courts to that expression when it incorporated section 23A into the Act in 1957. Hence, we must hold that when the Legislature speaks of the business of ' holding of investments', it refers to real, substantial and systematic or organized course of activity of investment carried on by an assessee for a set purpose such as earning profits. 16. However, on the facts it was held that the assessee was not engaged in the business of holding of investments. It is also clear from the above observations ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y on the ground that shares were purchased as long-term investment out of borrowed funds. Even the assessee nowhere raised such plea before the Assessing Officer. It simply explained before the Assessing Officer that the borrowed funds were utilized for the purpose of business. Further, neither the statement of facts nor the grounds of appeal before the Commissioner of Income-tax (Appeals) suggests that such plea was raised by the assessee. Paragraph 3.2 of the order of the learned Commissioner of Income-tax (Appeals) in the case of Nikhil Investment Pvt. Ltd. shows that the assessee merely submitted that the assessee was in the business of investments. However, no material was filed before the Commissioner of Income-tax (Appeals) to record such finding. Even before us, there is no material to prove that the assessee was engaged in the business of holding investment on the touchstone of the test laid down by the apex court. The only information filed in the paper book at page 47 is that the assessee had invested in shares of around 25 companies. But this fact alone does not establish the fact that the assessee was engaged in the business of holding investments. The only arguments a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act and then income is to be computed under these very heads in accordance with the provisions contained under these very heads. If the receipt falls under a particular head then, in our opinion, the income from such receipt must be computed in accordance with the provisions under that very head irrespective of the nature of receipts. It would be incongruous to contend that the income from a receipt is computed under one head and the connected expenditure is considered under some other head. In our view, the receipts and the expenditure having nexus with each other must be considered under one head only. If the expenditure incurred by the assessee is not allowable under that head then it cannot be allowed even if incurred by the assessee. Normally, income from the business receipt is computed under the head Profits and gains from business or profession but where a particular receipt, even though business receipt, falls under any of the other heads described in section 14 of the Act then, in our humble opinion, the receipts and the connected expenditure must be taken out from the purview of the head Profits and gains from business or profession and compute the income unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res is disposed of then income therefrom has to be computed only under the specific head Capital gains and this legal position is not even disputed by the assessee' s counsel and the assessee itself has also declared the income under the head Capital gains . Further dividend income is also to be computed under the specific head Income from other sources if such income is taxable. Since dividend income is exempt under section 10(33) of the Act, the question of computing such income does not arise. There is no other receipt arising or accruing to the assessee from the business of holding investment in shares. Therefore, the entire receipts from such business has to be excluded from the head Profits and gains from business or profession since such receipts falls under the specific heads. Income can be computed only after allowing deductions as provided under the head under which income is to be computed. No other deduction is permissible except provided under that head. The interest paid on the borrowed funds, at the most, could be allowed against the dividend income if investment is made to earn the dividend income. The contention of the assessee is that investment wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ived in the next year. In such cases, the loss may be computed because receipts may be expected in next year. The crux of the matter is that there must be receipts either actual or on accrual basis before a deduction can be allowed therefrom. Consequently, if receipts, in respect of which expenditures are incurred, are considered under other heads, then the question of determining any income under the head Profits or gains from business or profession does not arise. Hence, the contention of the assessee is rejected. 26. Another contention of learned counsel for the assessee is that interest paid should be allowed as deduction against the income by way of interest on debentures, which has been assessed on business income. We are unable to accept this contention too. One may carry on various businesses but under the scheme of the Act, the income from each source has to be computed independently though assessable under the same head. It is only for convenience that consolidated accounts are maintained. Reference can be made to the provisions of section 70 of the Act, which reads as under : 70. Set off of loss from one source against income from another source under the sam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income from holding of debentures as there is no nexus between the borrowed funds and investment in debentures. Admittedly, the borrowed funds were utilized for the purchase of shares of L T Ltd. and therefore interest paid cannot be set off against income by way of interest on debentures. 28. It has also been submitted by learned counsel for the assessee that in the case of Nikhil Investment Co., the Assessing Officer has disallowed the interest at the same amount in both the years which is factually incorrect. This may be by way of inadvertent mistake and therefore need verification. 29. In view of the above discussion, the orders of the learned Commissioner of Income-tax (Appeals) in all the cases are upheld on this issue subject to the rider that the Assessing Officer shall rectify the mistake if the assessee' s contention is found to be correct after verification. 30. The next issue relates to the ad hoc disallowance of expenses being attributable to exempted income by way of dividend. After hearing both the parties, we find that this issue is covered in favour of the assessee by the decision of the Special Bench in the case of Punjab State Industrial Developme ..... X X X X Extracts X X X X X X X X Extracts X X X X
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