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TMI Blog2007 (8) TMI 640X X X X Extracts X X X X X X X X Extracts X X X X ..... L & T Ltd. The interest payable on such borrowing for the assessment year 1998-99 amounted to Rs. 3,74,13,520 vis-a-vis, the investment in the above shares. The same was claimed as deduction under section 36(1)(iii) of the Act. Paragraph 8 of the assessment order shows that the assessee had given a note to the effect that interest paid on borrowed funds utilized for acquiring shares had been added to the cost of purchases of shares and duly reflected in the balance- sheet. However, the claim under section 36(1)(iii) was made since borrowed funds were utilized for business purpose. In the course of assessment proceedings, it was found by the Assessing Officer that shares were not purchased as stock-in-trade but as long-term investment and the income arising from sale of shares was being offered under the head " Capital gains" . Thus, the contention of the assessee that borrowed funds were utilized for business purposes was rejected. 4. Further, it was noticed by the Assessing Officer that the assessee had earned dividend income of Rs. 3,60,86,902 which was exempt from tax under section 10(33) of the Act. According to the Assessing Officer the money was borrowed for the purpose of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f holding of investments can constitute business of an assessee and per se it cannot be said that such activity would never constitute business of an assessee. He drew our attention to the provisions of section 23A of the Indian Income-tax Act, 1922 (Act of 1922). He contended that the Legislature was well aware of the expression " Business of holding of investments" . Therefore, it would be incorrect to say that one cannot engage itself in business of holding of investments. In support of the same, he also relied on the judgment of the apex court in the case of Distributors (Baroda) P. Ltd. [1972] 83 ITR 377. Particular attention was drawn to page 383 where the apex court distinguished the earlier decision in the case of Bengal and Assam Investors Ltd. v. CIT [1966] 59 ITR 547. Further reliance was placed on the other decision of the apex court in the case of Amalgamations P. Ltd. [1997] 226 ITR 188 at page 207 to buttress his argument that a company can be said to be engaged in the business of holding investments. Further reliance was placed on the following Tribunal decisions : 1. Golak Investments Ltd. in I. T. A. No. 4050/M/98-order dated June 10, 2004 ; 2. Meghraj Financi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e head " Profits and gains of business or profession" did not arise. 11. Faced with such query, it was submitted that the assessee cannot lose the statutory deduction which is otherwise allowable under section 36(1)(iii) merely because receipts from such business are not assessable under the head " Profits and gains from business or profession". Reliance was placed on the judgment of the hon'ble Supreme Court in the case of CIT v. Rajendra Prasad Moody [1978] 115 ITR 519 wherein it was held that deduction under section 57 was allowable even where there was no dividend income. Proceeding further, it was submitted that the assessee had other incomes like interest on debentures and interest on loans and therefore such deduction could be allowed against such receipts. Reference was made to Schedule "J" to point out that interest on debentures was Rs. 239 lakhs for the assessment year 1998-99 and Rs. 787 lakhs for the assessment year 1999-2000. Proceeding further, it was also pointed out that the Assessing Officer had made mistake in observing that interest was added to the cost of purchase of shares. He drew our attention to page 56 of the paper book to show that such interest was not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omputing the income from that source if permitted by law but the same cannot be adopted against the receipts from another source of income. Further, no deduction is allowable where investment is made to have controlling interest in other company. Reliance was placed on the decision of the Tribunal in the case of Everplus Securities and Finance Ltd. v. Deputy CIT [2006] 285 ITR (AT) 112 (Delhi) ; 101 ITD 151(Del). Proceeding further, it was submitted that interest paid cannot be allowed to be added to the cost of shares as there is no such provisions to support the alternate plea of the assessee' s counsel. Reliance was also placed on the decision of the Tribunal in the case of Kamu Metals Pvt. Ltd., in I. T. A. No. 7211/M/03, copy of which has been placed on record for the proposition that in such cases no deduction under sections 30 to 43D can be allowed as the receipts are chargeable to tax either under the head "Capital gains" or under the head "Income from other sources". Proceeding further, it was submitted that even assuming that the assessee was in the business of holding of investment then dividend income arising from such business is exempt under section 10(33) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aged in the business of holding investments. On appeal to the hon'ble Supreme Court by the Commissioner of Income-tax, the apex court held that a company can be said to be engaged in the business of holding investment if such activity refers to real, substantial and systematic or organized course of activity carried on for a set purpose such as earning profits. Reference can be made to the following observations of their Lordships at page 383 of 83 ITR : " This court in Bengal and Assam Investors Ltd. v. CIT [1966] 59 ITR 547 (SC) came to the conclusion that an individual who merely invests in shares for the purpose of earning dividend, does not carry on a business and that the only way he can come under section 10 of the Act is by converting the shares acquired by him into stock-in trade, i.e., by carrying on the business of dealing in stocks and shares. In that case this court was considering whether the dividend income of the assessee-company therein could be considered as business income under section 10 of the Act. Therein this court was not considering the scope of section 23A. But all the same, in that case this court proceeded on the basis that no one can make a business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ]) observed that the High Court was right in pointing out that the business of the assessee-company was the holding of investments. However, on facts, it was held that deduction was not allowable since there was no nexus between the expenditure incurred and the activity carried on by the assessee. 18. The Tribunal, Mumbai Bench, in the case of Meghraj Financial Services (I) Pvt. Ltd. has also held that a company can be said to be engaged in the business of holding investments. This view was taken after considering the ratio of the judgments of the apex court in the cases of Distributors (Baroda) P. Ltd. [1972] 83 ITR 377 and CIT v. Amalgamations P. Ltd. [1997] 226 ITR 188. 19. In view of the above discussions, it is held that in law, a company can be said to be engaged in the business of holding investments if the test laid down by the apex court in the case of Narain Swadeshi Weaving Mills v. CEPT [1954] 26 ITR 765 is satisfied. 20. Having held as above, the next question for consideration is whether the assessee can be said to be engaged in the business of holding investments. The test laid down by the apex court in the case of Narain Swadeshi Weaving Mills [1954] 26 ITR 765 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ood shares are quoted in stock exchange at very high prices as compared to the face value and dividends declared in the past are most of the time insignificant. Still the investor invests the money considering the facts that (i) prices may rise and (ii) bonus shares may be issued in future in addition to the dividends received. So mere investment in shares by a company would not tantamount in business of holding investments. The assessee must prove the business considerations for making investment before claiming any deduction under section 36(1)(iii). Even the apex court in the case of Distributors (Baroda) P. Ltd. [1972] 83 ITR 377, has clearly held that the assessee must satisfy the test laid down by the apex court in the case of Narain Swadeshi Weaving Mills [1954] 26 ITR 765. Faced with the factual situation of the present case, two courses are open to us either to hold that the assessee was not engaged in the business of investment in the absence of any material on record or to restore the matter, in the interests of justice, to the file of the Assessing Officer for recording a finding in this regard. However, we need not take either of the above course since, in our humble o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce of income ; they are all specific and deal with the various heads in which an item of income, profits and gains of an assessee falls. These sections are mutually exclusive and where an item of income falls specifically under one head it has to be charged under that head and no other. Income from ' interest on securities' falls under section 8 of the Act and not under section 10 ; it cannot be brought under a different head of income, viz., ' profits and gains of business' under section 10, even though the securities are held by a banker as part of his trading assets in the course of his business." 23. The above view was reiterated by the hon'ble Supreme Court in the case of East India Housing and Land Development Trust Ltd. v. CIT [1961] 42 ITR 49 by observing as under (headnote) : " Income-tax is undoubtedly levied on the total taxable income of the taxpayer and the tax levied is a single tax on the aggregate taxable receipts from all the sources ; it is not a collection of taxes separately levied on distinct heads of income. But the distinct heads specified in section 6 of the Income-tax Act indicating the sources are mutually exclusive and income derived ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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. 25. It has been contended by learned counsel for the assessee that the assessee should not lose the statutory deductions under section 36(1)(iii) merely because its income is to be computed under other heads. We are unable to accept such contention. What is to be computed under section 28 is the profits and gains of business or profession, which also includes losses. As per the commercial or accounting principles, neither the profits nor the losses from a business can be computed unless the receipts and the expenditures having nexus with each other are taken into consideration. Further, the income under section 28 is to be computed in accordance with the provisions of sections 30 to 43D as provided in section 29. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... against the income from the other source assessable under the same head. Let us explain it through an example. A company may carry on business of dealing in shares as a broker as well as on its own account. In the eye of law, dealing in shares as a broker is one source of income while dealing in shares on its own account is another source of income. In such cases, the assessee may earn gross profit of Rs. 50,000 from purchase and sale of shares on its own account with the assistance of borrowed fund on which interest of Rs. 1,20,000 is paid. Thus there would be net loss of Rs. 70,000. On the other hand, income from the brokerage business may be computed at Rs. 1,00,000, After setting off the loss, the net income for business would be Rs. 30,000. However, such set off is not permissible as per the provisions of section 73 as loss on sale of shares will have to be considered as speculation loss, which can only be carried forward to next year. To avoid such situation, the assessee cannot plead that income from dealing in shares be taken at Rs. 50,000 and deduction on account of interest on borrowed funds be set off against brokerage income. Thus, it cannot declare loss from brokerage ..... 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