Share-investment business allows interest deduction and share-sale profits are taxed as business income, not capital gains.

Borrowings used for acquiring shares in the course of a share-investment business were held to qualify for interest deduction under section 36(1)(iii), because the assessee's business objects, NBFC status and consistent borrowing pattern showed a business purpose. The share acquisitions were part of the assessee's business activity, so the interest expenditure was allowable. On the same factual setting, profits from sale of shares were required to be assessed as business income and not as capital gains, since the transactions formed part of the business deployment of funds rather than a separate capital asset realisation.

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Issues: (i) Whether the assessee was carrying on the business of investment in shares so that interest on borrowings used for acquiring shares was deductible as business expenditure under section 36(1)(iii). (ii) Whether the profits from sale of shares were to be assessed as business income rather than capital gains.

Issue (i): Whether the assessee was carrying on the business of investment in shares so that interest on borrowings used for acquiring shares was deductible as business expenditure under section 36(1)(iii).

Analysis: The assessee's memorandum of association permitted investment in, holding, buying, selling and otherwise dealing in shares, and its registration as a non-banking financial company supported the character of share acquisition as part of its business. The borrowing pattern showed a continuing business arrangement, since loans were repaid and reborrowed as a matter of consistent policy, and the funds were used for acquisition of shares in furtherance of the assessee's business objects. Once the borrowings were for the purpose of business, the manner of deployment of the funds did not control deductibility of interest.

Conclusion: The interest on the borrowings was allowable as business expenditure under section 36(1)(iii), in favour of the assessee.

Issue (ii): Whether the profits from sale of shares were to be assessed as business income rather than capital gains.

Analysis: Since the assessee's real activity was investment in shares as part of its business and the shares were acquired and dealt with in that business setting, the income arising from their sale could not be split off and taxed as capital gains while simultaneously allowing business interest deduction. The correct approach was to compute the receipts from the share transactions under the normal business provisions, and not under the capital gains provisions.

Conclusion: The profits from sale of shares were to be assessed as business income, in favour of the Revenue on this limited aspect and against the assessee's capital gains claim.

Final Conclusion: The assessee succeeded on the allowability of interest as business expenditure, but the share-sale receipts were directed to be assessed under the business head, resulting in a partly favourable outcome for the assessee overall.

Ratio Decidendi: Where borrowings are made for a share-investment business carried on within the assessee's business objects, interest is deductible under section 36(1)(iii), and the resulting share-trading or investment receipts must be computed under the business head rather than as capital gains.

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