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TMI Blog2025 (5) TMI 1425X X X X Extracts X X X X X X X X Extracts X X X X ..... ctivities of a business need not be simultaneous? (ii) Whether in fact and circumstances of the case, the action of the authorities below, the impugned orders Annexure A-1 and A-3 are legally sustainable in the eyes of law? 3. Since substantial question of law involved in all three appeals for the Assessment Years 1998-1999, 1999-2000, 2000-2001, is the same and even the impugned order dated 31.07.2006 dealing with all the above referred to assessment years is the same, therefore, all the appeals are taken up together for adjudication and decision at request and with consent of learned counsel for the parties. BRIEF FACTS 4. The brief facts of the case are that appellant was engaged in the business of manufacture and trading of Yarn/Cloths. Upto the Assessment Year 1997-1998, the appellant was not doing any share trading activity and as per the memorandum and articles of association also, the appellant was not entitled to carry on such activity. On 13.03.1997, the memorandum of articles of association was amended. Object No.28 in the memorandum was amended as under:- "To deal, invest in and acquire and hold, sell, buy or otherwise deal in shares, debentures, debenture-stock, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... um which was approved by the Board of Directors in their meeting dated 10.03.1997. Further, the appellant had duly reflected shares as stock-in-trade and the balance sheet was duly audited by the auditors. Therefore, learned Assessing Officer as well as learned Tribunal totally ignored the fact that the appellant had duly reflected the shares as stock-in-trade and not as an asset and wrongly held that the appellant had purchased the shares of M/s Vardhman Polytex Ltd. not with the intention of trading in such shares but purely as an investment, therefore, is not entitled to deduction on account of the interest paid on money borrowed for acquisition of such shares. He further contended that the Assessing Officer has given different treatment to the shares of other companies by holding that sale of shares of other companies are meant for trading and of M/s Vardhman Polytex Ltd. as an investment. Therefore, he prayed that present appeals be allowed and order dated 31.07.2006 passed by learned Tribunal, while deciding appeals of the respondents for Assessment Years 1998-1999, 1999-2000 and 2000-2001 be set aside. 9. Per contra, learned counsel for the respondents contends that learne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urchased and some sold and, therefore, the activity of the assessee being engaged in the trading of shares has been accepted in assessment year 1999-2000 and 2000-2001. We therefore, do not find any justification for not treating the assessee as a trader even for assessment year 98-99 also, So, however, as pointed out earlier, it is not necessary that all the shares purchased by the assessee are for the purpose of trading. It is, therefore, necessary to consider the facts and circumstances of this case to record a finding regarding the nature of purchases in respect of specified shares. 14. Assessee has made substantial investment in the purchase of shares of M/s. Vardhman Polytex Ltd. We have reproduced the findings of the Assessing Officer relating to the shareholdings of the assessee group of companies. The holdings of the assessee company in M/s. Vardhman Polytex Ltd is about 25% and when the share of other group companies are included, it becomes abundantly clear that shareholdings of the assessee group companies is more than 50% by virtue of which the control of M/S Vardhman Polytex Ltd. vests with the assessee group of companies. The Assessee having purchased the shares of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee is carrying on business in various ventures and some among them yield taxable income and the others do not, the expenditure will be deductible under section 37 if all the ventures carried on by him constituted one indivisible business; but if they do not, the principle of apportionment of the expenditure will apply. It is evident from the principle laid down by the Hon'ble Supreme Court that if the income of the assessee is derived from various heads of income, he is entitled to claim deduction permissible under the respective heads, Deduction permissible under one head cannot be claimed under a different head. It is only if the income of an assessee arises under the head profits and gains of business from different ventures and income from one or more ventures is taxable whereas income from the other venture is exempt under the Act, the entire permissible expenditure in earning the income from the head was held to be deductible. In the present case, once it is held that the purchase of shares by the assessee of M/s Vardhman Polytex Ltd is not in the course of its activity of trading in shares, any income derived from the said shares is not assessable under the head ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purpose of shares. The estimation made by the CIT (A) of 15% is without any basis which is being discussed hereafter. 18. As a consequence of our decision it would be unnecessary to take aid of section 14A for making the disallowance. However, since the Assessing Officer has referred to the section to support the disallowance and the issue has also been argued before us by the parties, we consider it appropriate to deal with the issue without prejudice to our earlier view. 19. It is also pertinent to mention that in the event of our order getting reversed by any superior court, application of section 14A would be relevant. We accordingly proceed to consider the applicability of section 14A in this case. Section 14A which has been inserted by the Finance Act, 2001, w.e.f. 1.4.1962, reads as under:- "14A. For the purpose of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under Section 147 or pass an order enhancing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... invoking section 14A by resorting to section 154 or section 147 for any assessment year beginning or before Ist day of April, 2001. In this case, assessment for assessment year 98-99 was completed on 19.3.01 and, therefore, section 14A, if at all applicable, could not be invoked for this assessment year. So, however, as held earlier, the assessee is not entitled to deduction out of the exempted dividend income under the head 'income from other sources.' As such, the aid of section 14A for making the disallowance, in our view is unnecessary. 21. For assessment year 1999-2000 and 2000-01, the assessee has derived income from interest as well as dividend income. The AO has repeated his findings as recorded in assessment year 98-99 in regard to shares purchased by the assessee of M/S Vardhman Polytex Ltd. The CIT (A) has followed his order for assessment year 98-99. So, however, he has upheld the applicability of provisions of section 14A and has restricted the disallowance to 15% of the disallowance made by the AO. Proceeding on the basis on which the CIT (A) has dealt with the issue. We have no hesitation in expressing our surprise by the arbitrary yardstick applied by him ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ANALYSIS OF THE RECORD 15. A bare reading of Section 36 (1) (iii) of the Act shows that deduction of the amount of interest paid in respect of capital borrowed for the purpose of business or profession shall be allowed. Meaning thereby, if any amount in respect of capital is borrowed for the purpose of business, the amount of interest paid in respect of the same shall be deducted while computing the income as referred to in Section 28 of the Act. Section 28 of the Act deals with the profits and gains of business or profession which are chargeable to income tax. 16. Admittedly, appellant was doing the business of manufacture and trading of yarn/cloths upto the Assessment Year 1997-1998 and was not into any share trading activity. With the intention to carry on the business of trading in shares/securities certain amendments were made in the memorandum which was approved by the Board of Directors in their meeting held on 10.03.1997. 17. Thereafter, the appellant started trading in shares. Appellant duly reflected shares as stock-in-trade. The balance sheet was duly audited by the auditor. The appellant purchased/sold shares of about 24 various companies during the relevant assessm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat appellant was engaged in trading of shares and on that premise computed the profit and gains derived from trading of shares of other companies but in the case of shares of M/s Vardhman Polytex Ltd. a separate treatment is given by treating these shares as an asset and not stock-in-trade. 23. Therefore, action of the Assessing Officer in treating the sale of shares of other companies as trading and of M/s Vardhman Polytex Ltd. as investment shows total non-application of mind while framing the assessment. 24. Further, perusal of record shows that the appellant sold shares of different companies in all these years and Assessing Officer accepted the appellant to be trading in shares and allowed the deduction under Section 36 (1) (iii) on the amount of interest paid in respect of capital borrowed for the purpose of purchase of such shares whereas so far as the amount of interest paid in respect of the capital borrowed for the purpose of purchase of shares of M/s Vardhman Polytex Ltd. is concerned, the deduction under Section 36 (1) (iii) was disallowed on the ground that shares of M/s Vardhman Polytex Ltd. were not sold for long time and that some of the shares of M/s Vardhman Po ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... M/s Vardhman Polytex Limited mainly for the purpose of investment and not for trading and, therefore, it is held that shares of M/s Vardhman Polytex Ltd were not stock-in-trade, only on the ground that same were lying unsold for many years in their stock. Further, that controlling interest of the appellant over M/s Vardhman Polytex Ltd, solidify the conclusion that the said shares were purchased for investment and not for trading purpose. 30. The reasoning given by learned Tribunal is not sustainable since one can hold the purchased shares over a long time to earn more profit because of the escalation in prices of shares. Any prudent person in the business of trading in shares would wait for the best price before selling in order to gain more profit. This by itself cannot be presumed to be an intention to retain the shares as an investment and not for trading (selling). 31. Vide impugned order dated 31.07.2006, learned Tribunal remitted the matter to the Assessing Officer for the limited purpose of computation of disallowance on account of interest paid on borrowing utilised for the purchase of shares of M/s Vardhman Polytex Ltd. During the course of arguments, learned counsel fo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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