Commissioner Of Income-Tax, Chennai v. M/S.trishul Investments Ltd.,"Dhun Building",827, Anna Salai,Chennai-2

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED : 12.07.2007 CORAM : THE HONOURABLE MR.JUSTICE P.D.DINAKARAN AND THE HONOURABLE MR.JUSTICE P.P.S.JANARTHANA RAJA Tax Case (Appeal) No.1046 of 2007 Commissioner of Income-tax, Chennai. Vs. .. Appellant M/s.Trishul Investments Ltd.,"Dhun Building",827, Anna Salai,Chennai-2. .. Respondent Appeal under Section 260A of the Income-tax Act, 1961 against theorder of the Income Tax Appellate Tribunal, Chennai Bench 'C', Chennai inI.T.A. No.437/Mds/04 dated 25.01.2007 for the assessment year 2000-2001against the order of the Commissioner of Income Tax [A] III Chennai 34 inITA.No.16/2003-04 / A.III dated 14.11.2003 against the Order of the Asst.Commissioner of Income Tax, Company Circle III[2], Chennai 34, inPA.No./GIR No.32428 dated 6.3.2003 for the assessment year 2000-2001. For Appellant :Mr.J.Narayanaswamy, Standing Counsel forIncome-tax Department JUDGMENT (Judgment of the Court was delivered by P.P.S.Janarthana Raja, J.) This appeal is filed under Section 260A of the Income Tax Act, 1961 bythe Revenue, against the order of the Income Tax Appellate Tribunal,Chennai Bench 'C', Chennai in I.T.A. No.437/Mds/04 dated 25.01.2007,raising the following substantial questions of law:- "1. Whether in the facts and circumstances of the case,the Tribunal was right in holding that the profit /loss on purchase and sale of shares of Rasi CementsLtd. should be treated as capital gain / loss and alsoallowing indexation benefit? 2. Whether in the facts and circumstances of the case,the Tribunal was right in allowing the interest https://hcservices.ecourts.gov.in/hcservices/ liability incurred on borrowings to acquire theshares?" 2.The facts leading to the above substantial questions of law areas under:- This appeal is filed under Section 260A of the Income Tax Act, 1961 bythe Revenue, against the order of the Income Tax Appellate Tribunal,Chennai Bench 'C', Chennai in I.T.A. No.437/Mds/04 dated 25.01.2007,raising the following substantial questions of law:- "1. Whether in the facts and circumstances of the case,the Tribunal was right in holding that the profit /loss on purchase and sale of shares of Rasi CementsLtd. should be treated as capital gain / loss and alsoallowing indexation benefit? 2. Whether in the facts and circumstances of the case,the Tribunal was right in allowing the interest https://hcservices.ecourts.gov.in/hcservices/ liability incurred on borrowings to acquire theshares?" 2.The facts leading to the above substantial questions of law areas under:- The assessee is a Public Limited Company and is carrying on thebusiness of investment in shares and securities. The relevant assessmentyear is 2000-2001 and the corresponding accounting year ended on31.03.2000. The assessee filed its Return of income on 30.11.2000declaring loss of Rs.15,62,90,890/-. The Return was processed underSection 143(1) of the Income-tax Act ("Act" in short) on 18.01.2002.Subsequently the case was reopened under Section 147 of the Act afterissuing notice under Section 148 of the Act. One M/s.India Cements Ltd.("ICL" in short) is a leading manufacturer of cement in South India.M/s.Raasi Cements Ltd. ("RCL" in short) was also a cement manufacturer.RCL is having two other divisions of paper and ceramic. ICL wanted totake over the cement division of RCL and for this purpose, the ICL, inconcert with two of its subsidiaries and also with one of its associateconcerns, M/s.Trishul Investments Pvt. Ltd., decided to come out with anopen offer to the shareholders of RCL for purchase of its shares at aprice of Rs.300/- per share. The open offer was opened on 04.05.1998 andclosed on 02.06.1998. As the assessee company did not have sufficientfunds to purchase the shares of RCL, funds were provided by ICL eitherdirectly or by arranging bridge loans from ICICI Bank. The interestliability on these borrowed funds was debited in the books of the assesseecompany only. Under this scheme, for every share held in RCL, theshareholders were paid a sum of Rs.300/- per share by ICL and paid upvalue of shares of RCL was reduced to Rs.0.05 per share. The assesseeworked on capital gains which arose from restructuring by taking totalamount received as consideration and reducing therefrom the cost ofacquisition of shares. While doing so, it excluded the face value ofresiduary amount of share. It resulted in long term capital loss as wellas short term capital loss. The Assessing Officer did not accept the sameunder the head "capital gain" and held that the entire share holdingswould constitute business assets of the assessee company and henceindexation of cost of acquisition benefit could not be extended to theassessee. On the issue of interest liability, the Assessing Officerdisallowed the same on the ground that the entire transaction was carriedout on behalf of the ICL. Aggrieved by the order, the assessee filed anappeal to the Commissioner of Income-tax (Appeals) ("CIT(A)" in short).The CIT(A) dismissed the appeal and confirmed the order of the AssessingOfficer. Aggrieved, the assessee filed an appeal to the Income-taxAppellate Tribunal ("Tribunal" in short). The Tribunal allowed theappeal. Hence the present tax case by the Revenue. 3.Learned Standing Counsel appearing for the Revenue submitted thatthe Assessing Officer is right in holding that the assessee had engaged inan adventure in the nature of trade at the behest of the holding company,i.e, M/s.India Cements Ltd. It is also submitted that, as the intentionof the assessee is to do business, the Assessing Officer had correctlyassessed under the head "income from business". It is also further 3.Learned Standing Counsel appearing for the Revenue submitted thatthe Assessing Officer is right in holding that the assessee had engaged inan adventure in the nature of trade at the behest of the holding company,i.e, M/s.India Cements Ltd. It is also submitted that, as the intentionof the assessee is to do business, the Assessing Officer had correctlyassessed under the head "income from business". It is also further https://hcservices.ecourts.gov.in/hcservices/ submitted that the question of allowing interest liability will not ariseas there is no specific provision under the scheme of computation ofcapital gains under the Income-tax Act to allow any interest liability. 4.Heard the counsel. The assessee is in the business ofinvestments in shares and securities and it was never in the business oftrading in shares. The term "business" is defined in Section 2(13) of theAct. The "capital asset" is defined in Section 2(14) of the Act. Thetest to decide whether it was an investment or an adventure in the natureof trade, has a very thin line of demarcation. Even a single instance oftransaction can be regarded as business and even multiple transactionsometimes are deemed as investments. So, the criteria for decidingwhether it is investment or business is that of the intention of theassessee, viz. whether assesses's real intention is to invest or theintention was in the nature of trade. As per the Memorandum ofAssociation of the assessee company, it could be seen that the assesseecompany was incorporated on 24.01.1995 under the Companies Act, 1956 toengage in the business of investment. The Tribunal considered therelevant materials and evidences and held in Paragraph-8 of its order, asfollows:-"On a consideration of rival submission, we are of theview that the assessee's contention is justified inlaw. It is also a point for consideration that theDepartment never attempted to lift the corporate veilto see the real nature of the transaction. Right fromthe Memorandum of Association, the object of theassessee company is only to as an investment company.Particularly for the period ending 31.03.1996 &31.03.1997, the company did not carry on anyoperations. The purchase of shares of RCL by theassessee company was only with the intention of makinginvestment. The assessee had no intention to trade inshares. Hence it cannot be a business asset in thehands of the assessee company. The assessee companyoffered the same under the capital gain. Hence, byrespectfully following the decisions of the Hon'bleSupreme Court and Calcutta High Court cited supra, weset aside the orders of the authorities below byholding that it is only an investment activity and itcannot be termed as a business activity. Wetherefore, decide the first issue in favour of theassessee and against the Revenue."The finding given by the Tribunal is that the assessee had no intention totrade in shares. Hence the purchase of shares could not be business assetin the hands of the assessee. The assessee has rightly offered the sameunder the head "capital gain". The Tribunal also correctly arrived at aconclusion that it is only an investment activity and held that theprofits derived from the sale of shares is subject to capital gain. Thereasons given by the Tribunal are based on valid materials and evidenceand we do not find any error or legal infirmity in the order of theTribunal so as to warrant interference. Under the circumstances, no https://hcservices.ecourts.gov.in/hcservices/ substantial question of law arises for consideration of this Court inrespect of Question No.1. https://hcservices.ecourts.gov.in/hcservices/ substantial question of law arises for consideration of this Court inrespect of Question No.1. 5.In respect of Question No.2, the interest liability on theborrowed funds was debited in the books of the assessee company. TheTribunal correctly held that the interest paid for acquisition of shareswould partake character of cost of share and therefore the same wasrightly capitalised along with the cost of acquisition of shares. Thereis no denial regarding the borrowed money for the acquisition of shares bythe assessee. The Tribunal correctly held that the interest payablethereon should be added to the cost of acquisition of shares. The reasonsgiven by the Tribunal are based on valid materials and evidence. Underthese circumstances, we do not find any error or legal infirmity in theorder of the Tribunal so as to warrant interference. Hence no substantialquestion of law arises for consideration of this Court in respect ofQuestion No.2. 6.In the result, no substantial questions of law arise forconsideration of this Court and accordingly, the tax case is dismissed.No costs. Sd/- Asst. Registrar. /true copy/ km Sub Asst. Registrar. To1. The Assistant Registrar, Income-tax Appellate Tribunal, Chennai Bench 'C', Chennai. 2. The Secretary, Central Board of Direct Taxes, New Delhi. 3. The Commissioner of Income-tax (Appeals) III, Chennai-600 034. 4. The Assistant Commissioner of Income-tax, Company Circle III(2), Chennai-600 034. + 1 CC To Ms.Pushya Sitaraman, Advocate SR NO.42413 mrd[co]gp/1.8. T.C.(A) No.1046 of 2007