Share investment business test: borrowed-fund interest deductible where share dealings are part of a continuing business arrangement.

Where a company's memorandum, financing pattern and share-holding activity show a continuing business of investing in, buying, selling and dealing in shares, borrowings used to acquire those shares are treated as for business purposes and the related interest is deductible. The classification of share-sale proceeds in the accounts does not control their true character; substance prevails over accounting nomenclature. On that basis, interest on borrowed funds was allowable as a business deduction and the share transaction receipts were assessed as business income, with no interference warranted where the Tribunal's view was not shown to be perverse.

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Issues: (i) Whether the assessee was engaged in the business of investment in shares so that interest on borrowings used for acquiring shares was allowable as deduction. (ii) Whether the interest paid on borrowed funds and the income from sale of shares were to be treated as business-related receipts and deductions.

Issue (i): Whether the assessee was engaged in the business of investment in shares so that interest on borrowings used for acquiring shares was allowable as deduction.

Analysis: The assessee's memorandum permitted it to carry on the business of investment, buying, selling and dealing in shares, and it was registered as a non-banking financial company. The borrowing pattern showed that funds were raised from sister concerns, repaid at year-end and borrowed again in the next year, indicating a continuing financing arrangement for acquiring shares. The holding of shares, including group-company shares for maintaining control, was treated as part of the business of investment in shares. The manner in which the accounts described the activity did not displace the substance of the business.

Conclusion: The assessee was engaged in the business of investment in shares, and the borrowed funds were used for business purposes.

Issue (ii): Whether the interest paid on borrowed funds and the income from sale of shares were to be treated as business-related receipts and deductions.

Analysis: Once the borrowing was found to be for business, the interest on such borrowings fell within the allowance under the provision governing interest on capital borrowed for business. The classification of sale proceeds as capital gains in the accounts was held not to be ative of the true character of the receipts, and the Tribunal's view that the share transactions formed part of the business activity was not shown to be perverse. As no substantial question of law arose, interference was unwarranted.

Conclusion: The interest was allowable as a business deduction, and the sale proceeds were to be assessed as business income.

Final Conclusion: The appeal failed because the findings that the assessee carried on the business of investment in shares and that the borrowings were for that business were upheld, leaving no substantial question of law for interference.

Ratio Decidendi: Where the evidence shows that borrowings are part of a continuing business arrangement for acquiring and holding shares in the course of an investment business, interest on such borrowings is deductible as business expenditure and the character of the income is determined by substance, not by accounting nomenclature.

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