In The ITAT Mumbai Bench ‘C’

S.G. Chemicals & Dyes Trading Ltd.

v.

Deputy Commissioner of Income-tax, Circle 2(3), Mumbai

D. K. SRIVASTAVA, ACCOUNTANT MEMBER

AND K. C. SINGHAL, JUDICIAL MEMBER

IT APPEAL Nos. 2908 & 3905 (MUM.) OF 2004

[Assessment year 1998-99]

November 13, 2007

Section 37 of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessment year 1998-99 - Whether where income from sale of debentures had been offered by assessee under head ‘capital gains’, assessee was not entitled to deduction under section 37 in respect of payment made on redemption of debentures - Held, yes

FACTS

The assessee was engaged in the business of holding of investments in shares as well as leasing of plant and machinery and other properties. In order to raise the funds the assessee issued debentures on 30-6-1996, which were redeemed on 28-2-1998 by paying the redemption money. The assessee had also issued 10 lakh zero interest debentures on 1-4-1997 out of which 5 lakh debenture were redeemed on 31-3-1998 by paying the redemption money. The total amount paid by the assessee on redemption of debentures was claimed as business expenditure. The claim of the assessee for deduction as business expenditure was disallowed by the Assessing Officer on the grounds (i) that investment in debentures was not a business activity as was apparent from the fact that income from the sale of debentures was shown by the assessee itself under the head ‘capital gains’. (ii) there was no actual payment at the time of redemption since as per books of account only journal entries were passed, and (iii) that the transactions were nothing but a colourable devise to reduce the tax liability as the assessee company, the companies to whom debentures were issued and the company in whose debentures the assessee invested the money were all companies promoted by its group companies. The Commissioner (Appeals) while holding that the assessee was entitled to deduction under section 37(1) allowed part of deductions claim by the assessee and remitted back the matter in respect of balance of the claim.

On cross appeal:

HELD

The Tribunal vide its order dated 4-6-2007 in assessee’s own case for the assessment year 1997-98 had held that the assessee was engaged in the business of holding of investments. However, it was undisputed fact that income from sale of such investments had been considered under the head ‘capital gains’ by the assessee itself. This fact had been noted by the Assessing Officer at page 11 of his order. The computation of income prepared by the assessee had also been placed. Though the assessee had stated the head ‘income from business’ yet income from sale of debentures had been shown as ‘capital gains’. Therefore, the question was whether deduction under section 37 could be allowed even where income from business receipts was considered in computing the income under the head ‘capital gains’ or under the head ‘income from other sources’ and not under the head ‘profits and gains from business or profession’.

This very issue arose before the Tribunal in a case wherein it had been held that if the income from the business receipt is to be computed under a specific head and not under the head ‘Profits and gains from business or profession’, then deduction under section 30 to 43D cannot be claimed. Instead thereof, only those deductions would be allowable as are prescribed under the specific head under which the receipts are to be considered. [Para 8]

Therefore, the assessee would not be entitled to deduction under section 37 even assuming that the assessee was engaged in the business of holding investments. In the instant case the Assessing Officer had given a finding a fact that the amounts raised on the issue of debentures were utilized for purchase of debentures issued by the group company and not for the regular business of leasing. It was also not in dispute that income from sale of debentures had been offered by the assessee under the head ‘capital gains’. Considering the above finding of fact, it was held that the assessee is not entitled to deduction in respect of payment made on redemption of debentures. The order of the Commissioner (Appeals) was, therefore, reversed and consequently the disallowance made by the Assessing Officer was restored.