Itta/309/2012 Of The Commissioner Of Income Tax-Iv v. Peninsular Investment Ltd

HONOURABLE SRI JUSTICE GODA RAGHURAM AND HONOURABLE SRI JUSTICE M.S.RAMACHANDRA RAO I.T.T.A.No.309 of 2012 JUDGMENT (per Hon’ble Sri Justice M.S.Ramachandra Rao): This appeal is filed by the Revenue under Section 260-A ofthe Income Tax Act, 1961 (for short “the Act”) challenging theorder dated 31-07-2008 in I.T.A.No.506/Hyd/2007 of the Income Tax AppellateTribunal, Bench “A”, Hyderabad. 2.The issues in this appeal are: a)whether the decision of the assessing officer in computingthe income of the assessee for the assessment year 2003-04 under the head “business income” is correct andthe income of the assessee for the assessment year 2003-04 under the head “business income” is correct and b) whether the assessee was entitled to claim a deduction ofinterest paid by it on loans taken by it amounting toRs.3,65,14,210/- under Section 36 (1) (iii) of the Act. interest paid by it on loans taken by it amounting toRs.3,65,14,210/- under Section 36 (1) (iii) of the Act. 3.The assessee is M/s.Peninsular Investments Limitedengaged in the business of investment in shares. It is a part of ITCgroup of Companies along with other companies such as M/s.Russel Credit Ltd and M/s. Russel Investments Ltd. In thefinancial year 2002-03 (relevant to the assessment year 2003-04),the assessee had taken a loan of Rs.60.19 crores from M/s.Russel Credit Ltd and M/s. Russel Investments Ltd and utilized Rs.23.78 crores from such loan for purchase 10,33,323 shares ofM/s.E.I.H Limited (another group company). It later sold 8,70,000shares of the said company. 4. It filed its return of income for the assessment year 2003-04 declaring nil income and an amount of Rs.3,28,614/- under theprovisions of Section 115 JB of the Act. As per the profit and lossaccount enclosed to the return of income, the assessee showedan amount of Rs.3,65,14,210/- as interest paid during the yeartowards loan taken for purchase of shares . A dividend ofRs.6,23,502/- was earned on 1,03,917 shares and this was shownas “dividend” income in the return filed by the assessee for theassessment year 2003-04. The return was processed underSection 143 (1) on 31-03-2004. The case was selected intoscrutiny and a notice under Section 143 (2) of the Act was issuedto the assessee on 18-10-2004. 5. The assessee contended that it was entitled to claim thesaid amount of Rs.3,65,14,210/- as a deduction under Section 36(1) (iii) of the Act as it was capital borrowed for the purpose of itsbusiness i.e. investment in shares. 6.The Revenue disputed the contention of the assessee andcontended that in the financial year relevant to the assessmentyear 2003-04, the assessee had taken a loan of Rs.60.19 crores ofwhich only Rs.23.78 crores was utilized for the purpose ofbusiness and the rest of the borrowed amount was repaid withinterest. It contended that this indicates the intention of theassessee to benefit the persons who granted the loan by payingthem the requisite interest and at the same time taking the benefit of claiming such interest against the taxable receipts and thusreducing the taxable income. 5. The assessee contended that it was entitled to claim thesaid amount of Rs.3,65,14,210/- as a deduction under Section 36(1) (iii) of the Act as it was capital borrowed for the purpose of itsbusiness i.e. investment in shares. 6.The Revenue disputed the contention of the assessee andcontended that in the financial year relevant to the assessmentyear 2003-04, the assessee had taken a loan of Rs.60.19 crores ofwhich only Rs.23.78 crores was utilized for the purpose ofbusiness and the rest of the borrowed amount was repaid withinterest. It contended that this indicates the intention of theassessee to benefit the persons who granted the loan by payingthem the requisite interest and at the same time taking the benefit of claiming such interest against the taxable receipts and thusreducing the taxable income. 7.The assessing officer by order dated 28-11-2005 agreedwith the Revenue and disallowed the deduction under Section 36(1) (iii) of the Act of the amount of Rs.3,65,14,210/- on the groundthat the amount was not borrowed for the purpose of business,that the assessee had not utilized the borrowed funds for earningany income and claiming interest on the unutilized borrowedamount is merely an attempt to reduce the taxable income and thatit was a colourable transaction. He held that parties who wereinvolved in the transactions were related as seen from theshareholding pattern i.e. M/s.Russel Credit Limited andM/s.Russel Investments Limited (who had granted loan to theassessee) held 25.57% and 24.04% shares in the assesseecompany. He held that if funds are kept idle only with a view topay interest to a related concern and thus reduce the incidence oftax, such interest is not allowable as a deduction against businessreceipts. So the proportionate amount of interest paid on theunutilized loan of Rs.36.41 crores (Rs.60.19-23.78) wasdisallowed and added back. He however accepted the dividendincome as “business income”. 8.Aggrieved thereby the assessee preferredI.T.A.No.263/DC-16(3)/CIT(A)-V/2005-2006 to the Commissionerof Income Tax (Appeals)-V, Hyderabad. By order dated 21-02-2007, the CIT (Appeals) held that during the earlier year i.efinancial year 2001-02 (relevant to assessment year 2002-03) theassessee had taken Rs.51.32 crores from 3 companies, namelyM/s Russel Credit Ltd, M/s Russel Investment Ltd and M/s Mimec Ltd and repaid it at the end of the said financial year , that again in2002-03 financial year (relevant to the subject assessment year2003-04) it had taken the loan of Rs.60.19 crores from M/sRussel Credit Ltd and M/s Russel Investment Ltd, that thisconstitutes a fresh loan in the hands of the appellant during theprevious year , that the assessee having shown the income fromsale of shares under the head “long term capital gains” and not as“income from business”, it follows that the assessee was notengaged in any business of purchase and sale of shares duringthe previous year relevant to the assessment year 2003-04. Healso held that the assessee had shown the shares and securitiespurchased by it as “investment” in the balance sheet and not as“stock-in -trade”, and so the dividend income should be treated as“income from other sources” taxable u/s.56 of the Act. So intereston funds borrowed for purchase of shares cannot be allowed asdeduction under S.36(1)(iii) of the Act. He partly allowed theappeal of the assessee. 9.Aggrieved thereby the assessee filedI.T.A.No.506/Hyd/2007 to the Income Tax Appellate Tribunal,Hyderabad Bench “A”, Hyderabad. The said appeal was allowedby the said Tribunal by order dated 31-07-2008. 10.The Tribunal noted that as per the Memorandum ofAssociation of the assessee-company, its main object inter aliawas to carry on the business of investment, financing, buying,selling, investing, transferring, disposing of and otherwise dealingin shares, stocks etc. and that it is also a non-banking financialcompany registered with the R.B.I. It held that in view of Section45-I (c) of the R.B.I. Act , the assessee company is entitled to do 9.Aggrieved thereby the assessee filedI.T.A.No.506/Hyd/2007 to the Income Tax Appellate Tribunal,Hyderabad Bench “A”, Hyderabad. The said appeal was allowedby the said Tribunal by order dated 31-07-2008. 10.The Tribunal noted that as per the Memorandum ofAssociation of the assessee-company, its main object inter aliawas to carry on the business of investment, financing, buying,selling, investing, transferring, disposing of and otherwise dealingin shares, stocks etc. and that it is also a non-banking financialcompany registered with the R.B.I. It held that in view of Section45-I (c) of the R.B.I. Act , the assessee company is entitled to do business in the acquisition of shares, stocks etc. or othermarketable securities . It held that pursuant to the above objectsof acquiring shares as part of its business, it had been borrowingfunds from its sister concerns and repaying the outstanding loanwith interest at the end of each financial year and as a part of thispolicy, it took back a loan at the beginning of the followingfinancial year. Thus every year there is a break of a few daysbetween the loans repaid and obtained back but in substance thereis no break in the policy and practically the same loan continues. Itrecorded a finding of fact that the assessee is in the business ofinvestment in shares and that the monies have been borrowed forthe purpose of business. It therefore held that the entire interestof Rs.3,65,14,210/- paid by the assessee towards loans taken by itis allowable as a deduction under Section 36 (1) (iii) of the Act.,that income earned from investment in shares has to be treated as“business income” as per the provisions of sec.28 – sec.44A ofthe Act. Consequently, it held that proceeds of sale of sharesshould also be treated as “business receipts/income” and not asper provisions of the Act pertaining to “capital gains”. 11.Aggrieved thereby, the present appeal is filed by theRevenue. 12.Heard Sri J.V. Prasad, Senior Standing Counsel for theRevenue. 13.The Revenue contends that the Tribunal erred in directingthe assessing officer to allow the above amount as a deductionunder Section 36 (1) (iii) of the Act, that the Tribunal’s view thatthe assessee is engaged in the business of investment in shares is perverse, that the Tribunal should have seen that the shareswere not held for the purpose of business, that the assessee hadnot declared any income from trading in shares during theprevious year and the receipts on the sale of part of the shareswere shown under the head “long term capital gains” and thereforethe said order of the Tribunal is liable to be set aside. 14.We have considered the above submissions. 15.Admittedly the Memorandum of Association of theassessee-company provided that the assessee can carry on thebusiness of investment, financing, buying, selling, investing,transferring, disposing off and otherwise dealing in shares, stocksetc. There is also no dispute that the assessee is registered withthe R.B.I. as a “non-banking financial company” and under Section45-I (c) of the R.B.I. Act, it can carry on the acquisition of shares,stocks etc. or other marketable securities as it is also a financialinstitution. Therefore from these facts, it is clear that it is theintention of the assessee to do business of investment in sharesand to sell them. 16. During the financial year 2001-02 (relevant to assessmentyear 2002-03), admittedly the assessee had borrowed Rs.51.32crores from 3 companies, namely M/s Russel Credit Ltd, M/sRussel Investment Ltd and M/s Mimec Ltd and repaid it at the endof the said financial year .Again in the financial year 2002-03(relevant to the subject assessment year 2003-04), it had takenthe loan of Rs.60.19 crores from M/s Russel Credit Ltd and M/sRussel Investment Ltd and utilized Rs.23,78,98,324/- out of thesaid loan for purchase of 10,33,323 shares of M/s.E.I.H Limited 16. During the financial year 2001-02 (relevant to assessmentyear 2002-03), admittedly the assessee had borrowed Rs.51.32crores from 3 companies, namely M/s Russel Credit Ltd, M/sRussel Investment Ltd and M/s Mimec Ltd and repaid it at the endof the said financial year .Again in the financial year 2002-03(relevant to the subject assessment year 2003-04), it had takenthe loan of Rs.60.19 crores from M/s Russel Credit Ltd and M/sRussel Investment Ltd and utilized Rs.23,78,98,324/- out of thesaid loan for purchase of 10,33,323 shares of M/s.E.I.H Limited (another group company). The assessee sold 8,70,000 shares ofthe said company during the financial year 2002-03. This showsthat in order to acquire the shares, the assessee has beenborrowing funds from its sister concerns and repaying theoutstanding loan with interest at the end of each financial year andagain taking a loan at the beginning of the following financial year. This policy was being followed without a break and the borrowingof funds by the assessee had assumed the characteristic of acontinuing loan. Thus, in our opinion, the Tribunal had rightly heldthat the assessee is in the business of investment in shares andthe loans borrowed by the assessee were utilized for the purposeof acquiring shares. 17.The material on record also shows that the assessee-company was a part of the I.T.C. group of companies, that itinvests in shares of group companies for acquiring andmaintaining controlling interest and that in the shares of M/s.E.I.H.Limited, which is also a group company, it holds 6% of the totalshare capital. Although the assessee was doing business ininvestment in shares that does not mean that there has to beregular/hectic trading activity. As rightly held by the Tribunal,“holding of shares” is also part of doing “investment in shares”. Itis common for group concerns to have share holding in a groupcompany so that the group can exercise control by puttingtogether all their holdings in such a group company. 18.The tax audit report filed by the assessee was as per FormNo.3 C A which was applicable to the assessees carrying onbusiness or profession. In the audit report, the nature of businesswas referred to as investment company and the method of valuation of closing stock was stated to be the lower of cost ormarket value which method is applicable in case of business stockonly. 19.Merely because the assessee had shown the receipts onsale of part of shares as “long term capital gains”, that is notconclusive and the Tribunal has rightly held that entries in thebooks or classification of a particular item in the annual accountsdoes not determine the character of income or asset. 20.In our view, the Tribunal has correctly appreciated theevidence on record and came to the conclusion that the businessof the assessee is to invest in shares, that the borrowing was forthe purpose of business and that the entire amount ofRs.3,65,14,210/- paid by the assessee on the loans taken by it isallowable as a deduction under Section 36 (1) (iii) of the Act . Thefindings of the Tribunal cannot be termed as perverse. There is nosubstantial question of law arising from the facts of the case. 21. We do not find any merit in the appeal and the same isdismissed without costs. ____________________________ JUSTICE GODA RAGHURAM Date: 27-09-2012kvr __________________________________ JUSTICE M.S.RAMACHANDRA RAO