IN THE ITAT MUMBAI BENCH ‘I’
Ecd Electronics & Electrolysis (P.) Ltd.
v.
Commissioner of Income-tax, Mumbai
SHAILENDRA KUMAR YADAV, JUDICIAL MEMBER
AND V.K. GUPTA, ACCOUNTANT MEMBER
IT APPEAL NOS. 4331 (MUM.) OF 2000, 3069 (MUM.) OF 2001 AND
7754 (MUM.) OF 2003
[Assessment year 1995-96, 1997-98 and 1998-99]
November 30, 2007
Section 36(1)(iii), read with sections 57 and 263 of the
Income-tax Act, 1961 - Interest on borrowed capital - Assessment year 1995-96 -
Assessee was dealing in shares and investment - It claimed deduction under
section 36(1)(iii) in respect of interest on borrowed capital by which shares
were purchased - Assessing Officer allowed said claim - However, Commissioner (Appeals)
acting under section 263 found that assessment was prejudicial to interest of
revenue for reasons that since assessee had shown shares as investment in its
books of account, interest expenses incurred in connection with purchase of
shares was not allowable under section 36(1)(iii) but was allowable under
section 57 - Accordingly assessment was set aside and matter was remanded to Assessing
Officer - It was found from record that though assessee had shown shares as investment,
however sale of shares had always been offered as income from business, which
had been accepted by department also and, therefore, intention of assessee was
always to deal in shares - Held, yes - Whether since profit on sale of shares
being accepted by department as business profit assessment order could not be
said as both erroneous and prejudicial to interest of revenue - Held, yes - Whether, therefore,
order of Commissioner (Appeals) could not be sustained - Held, yes
FACTS
The assessee
derived income from the sale of shares. It had filed loss return for the
relevant assessment year wherein it had claimed deduction under section
36(1)(iii) in respect of capital borrowed for purchase of the shares. The Assessing
Officer allowed said claim. The Commissioner (Appeals), however, found that
assessment order was prejudicial to interest of the revenue inasmuch as the
interest expenses incurred in connection with purchase of shares was deductible
under section 57 and not under section 36(1)(iii). He was also of the opinion that the income from sale of
shares was to be taxed as capital gain and not as income from business as shown
by the assessee. Accordingly, acting under section 263 the Commissioner (Appeals)
set aside the assessment order and remanded the matter to the Assessing Officer
for fresh assessment.
On second appeal:
HELD
Admittedly, the assessee had claimed interest on borrowed capital
utilized for purchase of shares under section 36(1)(iii). It was also not in dispute that these
shares had been presented by the assessee as investment in the year under
consideration. Form the perusal of various details submitted by the assessee,
it was also noted that the Assessing Officer while framing assessment order had
considered all the related aspects and material with regard to the claim of the
assessee for allowance of interest though the Assessing Officer had not dealt
with this issue in an elaborate manner in the assessment order, hence, merely
for this reason, the assessment order would not be considered as erroneous and
prejudicial to the interests of the revenue because generally the Assessing
Officer do not give any positive finding in the assessment order. Now, coming
to the other aspects of the issue, it was found that the Commissioner (Appeals)
had passed order under section 263 only on the basis of presentation of these
shares as investment in the balance sheet whereas in the year of sale of these
very shares in financial year relevant to the assessment year 2000-01, the
profit thereon had been treated as business profit. The department had raised a
contention that the same was treated as business profit because the assessee
had changed its method of presentation in the Assessment Year 1998-99, however,
the department had not invoked the provisions of section 45(2) so as to follow
the stand taken by the department. It is also a settled principle that entries
made in the books of account are not conclusive as regards to exact nature of
income and in the instant case though the assessee had shown certain shares as
investment, however, sale of certain shares had always been offered as income from
business and which had been accepted by the department also. Hence, both these
facts taken together led to a situation where the intention of the assessee was
always to deal in the shares. Further the ld. Commissioner (Appeals) for the
assessment year 1996-97 had allowed the claim of the assessee as a business
loss and the Assessing Officer also subsequently accepted the claim of the
assessee as a business loss in other the assessment year which had been passed
subsequent to the order of the Commissioner (Appeals) under section 263, hence,
there was a force in the contention of the assessee that the view taken by the Assessing
Officer was one of the possible views in law even though it may be prejudicial
to the interests of the revenue, however, the other condition of order being
erroneous was not satisfied, hence, there was no justification for action under
section 263. Further when a transaction is a continuing one, then, the
transaction should be considered from the beginning till the end and for the intervening
period, the different treatment cannot be given as suitable to the department,
hence, the subsequent event of profit on sale of shares, being accepted by the
department as business profit, could not be de-lined from the beginning of the
transaction and on this count also assessment order could not be said as both
erroneous and prejudicial to the interests of the revenue. Thus, taking into
consideration the entire facts and circumstances of the case, order of the Commissioner
(Appeals) was not correct in law, accordingly the same was quashed. [
EDITOR’S
NOTE
Where the dominate intention of the assessee company was to deal in
shares and it had borrowed capital for purchase of shares then, the dividend
became incidental it and in such situation, in view of the decision of the High
Court in the case of CIT v. Emrald Co. Ltd. [2006] 284 ITR 586/150
Taxman 515 (Bom.) interest paid on borrowed capital would be allowable under
section 36(1)(iii) and not under section 57(iii) and further such interest
would not be attributed towards earning of dividend and, therefore, provisions
of section 14-A would not be applicable in such case.
CASE REVIEW
CIT v. Emrald Co. Ltd. [2006] 284 ITR 586/150 Taxman 515 (Bom.). [