2013 (3) TMI 217

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....e for the assessment year 2003-04 under the head "business income" is correct and (b)  whether the assessee was entitled to claim a deduction of interest paid by it on loans taken by it amounting to Rs. 3,65,14,210/- under Section 36(1)(iii) of the Act. 3. The assessee is M/s. Peninsular Investments Limited engaged in the business of investment in shares. It is a part of ITC group of Companies along with other companies such as M/s. Russel Credit Ltd and M/s. Russel Investments Ltd. In the financial year 2002-03 (relevant to the assessment year 2003-04), the assessee had taken a loan of Rs. 60.19 crores from M/s. Russel Credit Ltd and M/s. Russel Investments Ltd and utilized Rs. 23.78 crores from such loan for purchase 10,33,323 ....

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....em the requisite interest and at the same time taking the benefit of claiming such interest against the taxable receipts and thus reducing the taxable income. 7. The assessing officer by order dated 28-11-2005 agreed with the Revenue and disallowed the deduction under Section 36(1)(iii) of the Act of the amount of Rs. 3,65,14,210/- on the ground that the amount was not borrowed for the purpose of business, that the assessee had not utilized the borrowed funds for earning any income and claiming interest on the unutilized borrowed amount is merely an attempt to reduce the taxable income and that it was a colourable transaction. He held that parties who were involved in the transactions were related as seen from the shareholding pattern i.....

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....in any business of purchase and sale of shares during the previous year relevant to the assessment year 2003-04. He also held that the assessee had shown the shares and securities purchased by it as "investment" in the balance sheet and not as "stock-in-trade", and so the dividend income should be treated as "income from other sources" taxable u/s. 56 of the Act. So interest on funds borrowed for purchase of shares cannot be allowed as deduction under S.36(1)(iii) of the Act. He partly allowed the appeal of the assessee. 9. Aggrieved thereby the assessee filed I.T.A. No. 506/Hyd/2007 to the Income Tax Appellate Tribunal, Hyderabad Bench "A", Hyderabad. The said appeal was allowed by the said Tribunal by order dated 31-07-2008. 10. The....

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....ct. Consequently, it held that proceeds of sale of shares should also be treated as "business receipts/income" and not as per provisions of the Act pertaining to "capital gains". 11. Aggrieved thereby, the present appeal is filed by the Revenue. 12. Heard Sri J.V. Prasad, Senior Standing Counsel for the Revenue. 13. The Revenue contends that the Tribunal erred in directing the assessing officer to allow the above amount as a deduction under Section 36(1)(iii) of the Act, that the Tribunal's view that the assessee is engaged in the business of investment in shares is perverse, that the Tribunal should have seen that the shares were not held for the purpose of business, that the assessee had not declared any income from trading in sh....

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....nother group company). The assessee sold 8,70,000 shares of the said company during the financial year 2002-03. This shows that in order to acquire the shares, the assessee has been borrowing funds from its sister concerns and repaying the outstanding loan with interest at the end of each financial year and again taking a loan at the beginning of the following financial year. This policy was being followed without a break and the borrowing of funds by the assessee had assumed the characteristic of a continuing loan. Thus, in our opinion, the Tribunal had rightly held that the assessee is in the business of investment in shares and the loans borrowed by the assessee were utilized for the purpose of acquiring shares. 17. The material on re....