COMMISSIONER OF INCOME TAX vs. NAVDEEP INVESTMENT PVT.LTD.

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ITR/36/1990HC GujaratGJHC24013223199029 March 2003Author: HONOURABLE MR. JUSTICE R.K.ABICHANDANI,HONOURABLE MR. JUSTICE A.L.DAVE3 pages
AI SummaryAllowed

What did the High Court hold?

The High Court held that the Appellate Tribunal was correct in law in upholding the assessee's claim that investment in shares is business income and that interest on that investment should also be treated as business income. The Tribunal's reasoning was that the assessee was an investment company and there was a direct relationship between its borrowings and its investments in shares. This nexus meant that the interest on borrowings for the purpose of acquiring shares could be regarded as an expenditure incurred for the purpose of business, falling under the purview of Section 36(1) of the Income Tax Act, 1961, rather than being treated as income from other sources under Section 56. The question referred to the High Court was answered in the affirmative, in favour of the assessee and against the revenue. The reference was disposed of accordingly.

What were the facts?

The assessee, Navdeep Investment Pvt. Ltd., is an investment company. For assessment year 1981-82, it declared a total income of Rs. 3362/-, showing dividend and interest income as part of its business income. The Income Tax Officer (ITO) disallowed deduction under Section 80-M, observing that interest payable on investments in shares (calculated at Rs. 94,766/- at 13.5% interest) exceeded dividend income (Rs. 60,000/-). The Commissioner of Income Tax (Appeals) also denied the deduction. The Income Tax Appellate Tribunal (ITAT) accepted the assessee's claim that there was a direct relationship between its borrowings and investments in shares, considering the assessee's status as an investment company. The ITAT held that interest on borrowings for shares should be regarded as expenditure for business purposes, falling under Section 36(1) rather than Section 56.

What were the issues?

1. Whether, as a matter of law, the Appellate Tribunal was correct in upholding the assessee's claim that investment in shares constitutes business income, and consequently, interest on such investment should also be treated as business income? (Section 36(1) and Section 56 of the Income Tax Act, 1961). Assessee's Contention: The assessee argued that as an investment company, its investments in shares are part of its business. Therefore, interest on borrowings made for these investments should be treated as business expenditure. The Tribunal upheld the finding that there was a direct nexus between borrowings and investments in shares, supporting this claim. Revenue's Contention: The revenue, through the ITO and CIT(Appeals), disallowed the deduction under Section 80-M, based on the calculation that interest on investments in shares exceeded dividend income. The revenue's implicit contention was that such interest should not be treated as business income or that the conditions for deduction under Section 80-M were not met.

Which sections of the Income-tax Act were involved?

Section 256,Section 80-M,Section 56,Section 36(1)

AI-generated summary — verify with the full judgment below

IN THE HIGH COURT OF GUJARAT AT AHMEDABAD

INCOME TAX REFERENCE No 36 of 1990

For Approval and Signature:

Hon'ble MR.JUSTICE R.K.ABICHANDANI and Hon'ble MR.JUSTICE A.L.DAVE

============================================================ 1. Whether Reporters of Local Papers may be allowed : NO to see the judgements?

2.

To be referred to the Reporter or not? : NO 3. Whether Their Lordships wish to see the fair copy : NO of the judgement?

4.

Whether this case involves a substantial question : NO of law as to the interpretation of the Constitution of India, 1950 of any Order made thereunder?

5.

Whether it is to be circulated to the concerned : NO Magistrate/Magistrates,Judge/Judges,Tribunal/Tribunals?

-------------------------------------------------------------- COMMISSIONER OF INCOME TAX Versus NAVDEEP INVESTMENT PVT.LTD. -------------------------------------------------------------- Appearance: 1. INCOME TAX REFERENCE No. 36 of 1990 MR MANISH R BHATT for Petitioner No. 1 SERVED BY RPAD - (N) for Respondent No. 1

--------------------------------------------------------------

CORAM : MR.JUSTICE R.K.ABICHANDANI and MR.JUSTICE A.L.DAVE

Date of decision: 29/03/2003

ORAL JUDGEMENT (Per : MR.JUSTICE R.K.ABICHANDANI)

The Income Tax Appellate Tribunal, Ahmedabad Bench `A', has referred the following question of law under Section 256 (1) of the Income Tax Act, 1961:-

1.

"Whether, the Appellate Tribunal is right in law in upholding the claim of the assessee that the investment in shares is business income and therefore interest on that investment would go under business income.?"

The relevant assessment year was 1981-82. The assessee filed return of income on 25-8-1981 declaring total income of Rs.3362/-. The assessee Company is an investment Company, and it declared dividend income and interest income at Ahmedabad, but the same was shown as part of the business income. As regards the question which has been referred, the Income Tax Officer has observed that the interest referable to investment in shares exceeded the dividend income when normal rate of interest of 13.5% was applied to the investment. He worked out interest payable at Rs.94,766/- while the dividend income at Rs.60,000/-. As there was deficit, no deduction was admissible under Section 80-M as held by the I.T.O. In appeal, it was pleaded by the assessee that deduction should be granted under Section 80-M since the assessee was an investment Company. The C.I.T. (Appeals), held that deduction was not allowable. The Tribunal accepted the assessee's case that there was direct relationship between borrowal and investment in shares. In the present case, the assessee was claiming status of an investment Company and since there was nexus between borrowal and investment in shares, the interest on the borrowal for the purpose of shares could be regarded as expenditure for the purpose of business since the Tribunal upheld the finding that the assessee was an investment Company. The Tribunal was right in accepting the assessee's contention that the interest on the borrowals for the purpose of shares must be regarded as an expenditure for the purpose of business not covered by Section 56 but by Section 36(1). The Tribunal was, therefore, right in upholding the claim of the assessee that the investment in shares was business income, and therefore, interest on that investment would go under business income. The question referred to us is, therefore, answered in the affirmative, in favour of the assessee and against the revenue. The Reference stands disposed of accordingly, with no orders as to costs.

(R.K.Abichandani,J.)

(A.L.Dave,J.)

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