P.P.S Janarthana Raja, J.:— This appeal is filed under section 260A of the Income-tax Act, 1961, by the Revenue, against the order of the Income-tax Appellate Tribunal, Chennai Bench “C”, Chennai, in I.T.A No. 437.Mds/2004, dated January 25, 2007, raising the following substantial questions of law:
“1. Whether, on the facts and circumstances of the case, the Tribunal was right in holding that the profit/loss on purchase and sale of shares of Raasi Cements Ltd. should be treated as capital gain/loss and also allowing indexation benefit?
2. Whether, on the facts and circumstances of the case, the Tribunal was right in allowing the interest liability incurred on borrowings to acquire the shares ?”
2. The facts leading to the above substantial questions of law are as under:
3. The assessee is a public limited company and is carrying on the business of investment in shares and securities. The relevant assessment year is 2000-01 and the corresponding accounting year ended on March 31, 2000. The assessee filed its return of income on November 30, 2000, declaring loss of Rs. 15,62,90,890. The return was processed under section 143(1) of the Income-tax Act (“the Act” in short) on January 18, 2002. Subsequently the case was reopened under section 147 of the Act after issuing notice under section 148 of the Act. One M/s. India Cements Ltd. (“the ICL” in short) is a leading manufacturer of cement in South India. M/s. Raasi Cements Ltd. (“the RCL” in short) was also a cement manufacturer. RCL is having two other divisions of paper and ceramic. ICL wanted to take over the cement division of RCL and for this purpose, the ICL, in concert with two of its subsidiaries and also with one of its associate concerns, M/s. Trishul Investments Pvt. Ltd., decided to come out with an open offer to the shareholders of RCL for purchase of its shares at a price of Rs. 300 per share. The open offer was opened on May 4, 1998, and closed on June 2, 1998. As the assessee-company did not have sufficient funds to purchase the shares of RCL, funds were provided by ICL either directly or by arranging bridge loans from ICICI Bank. The interest liability on these borrowed funds was debited in the books of the assessee-company only.
4. Under this scheme, for every share held in RCL, the shareholders were paid a sum of Rs. 300 per share by ICL and the paid up value of the shares of RCL was reduced to Re. 0.05 per share. The assessee worked out capital gains which arose from the restructuring by taking total amount received as consideration and reducing therefrom the cost of acquisition of the shares. While doing so, it excluded the face value of the residuary amount of shares. This resulted in long-term capital loss as well as short-term capital loss. The Assessing Officer did not accept the same under the head “Capital gain” and held that the entire shareholding would constitute business assets of the assessee-company and hence indexation of cost of acquisition benefit could not be extended to the assessee. On the issue of interest liability, the Assessing Officer disallowed the same on the ground that the entire transaction was carried out on behalf of the ICL. Aggrieved by the order, the assessee filed an appeal to the Commissioner of Income-tax (Appeals) (“the CIT(A)” in short). The Commissioner of Income-tax (Appeals) dismissed the appeal and confirmed the order of the Assessing Officer. Aggrieved, the assessee filed an appeal to the Income-tax Appellate Tribunal (“the Tribunal” in short). The Tribunal allowed the appeal. Hence the present tax case by the Revenue.
5. Learned standing counsel appearing for the Revenue submitted that the Assessing Officer is right in holding that the assessee had engaged in an adventure in the nature of trade at the behest of the holding company, i.e, M/s. India Cements Ltd. It is also submitted that, as the intention of the assessee is to do business, the Assessing Officer had correctly assessed under the head “Income from business”. It is also further submitted that the question of allowing interest liability will not arise as there is no specific provision under the scheme of computation of capital gains under the Income-tax Act to allow any interest liability.
6. Heard the counsel. The assessee is in the business of investments in shares and securities and it was never in the business of trading in shares. The term “business” is defined in section 2(13) of the Act. The “capital asset” is defined in section 2(14) of the Act. The test to decide whether it was an investment or an adventure in the nature of trade, has a very thin line of demarcation. Even a single instance of transaction can be regarded as business and even multiple transaction sometimes are deemed as investments. So, the criteria for deciding whether it is investment or business is that of the intention of the assessee, viz., whether the assessee's real intention is to invest or the intention was in the nature of trade. As per the memorandum of association of the assessee-company, it could be seen that the assessee-company was incorporated on January 24, 1995, under the Companies Act, 1956, to engage in the business of investment. The Tribunal considered the relevant materials and evidences and held in paragraph 8 of its order, as follows:
“On a consideration of rival submission, we are of the view that the assessee's contention is justified in law. It is also a point for consideration that the Department never attempted to lift the corporate veil to see the real nature of the transaction. Right from the memorandum of association, the object of the assessee-company is only to an investment company. Particularly for the period ending March 31, 1996, and March 31, 1997, the company did not carry on any operations. The purchase of shares of RCL by the assessee-company was only with the intention of making investment. The assessee had no intention to trade in shares. Hence, it cannot be a business asset in the hands of the assessee-company. The assessee-company offered the same under the capital gain. Hence, by respectfully following the decisions of the hon'ble Supreme Court and the Calcutta High Court cited supra, we set aside the orders of the authorities below by holding that it is only an investment activity and it cannot be termed as a business activity. We, therefore, decide the first issue in favour of the assessee and against the Revenue.”
7. The finding given by the Tribunal is that the assessee had no intention to trade in shares. Hence, the purchase of shares could not be business asset in the hands of the assessee. The assessee has rightly offered the same under the head “Capital gain”. The Tribunal also correctly arrived at a conclusion that it is only an investment activity and held that the profits derived from the sale of shares is subject to capital gain. The reasons given by the Tribunal are based on valid materials and evidence and we do not find any error or legal infirmity in the order of the Tribunal so as to warrant interference. Under the circumstances, no substantial question of law arises for consideration of this court in respect of question No. 1.
8. In respect of question No. 2, the interest liability on the borrowed funds was debited in the books of the assessee-company. The Tribunal correctly held that the interest paid for acquisition of shares would partake of the character of cost of share and, therefore, the same was rightly capitalised along with the cost of acquisition of shares. There is no denial regarding the money borrowed for the acquisition of shares by the assessee. The Tribunal correctly held that the interest payable thereon should be added to the cost of acquisition of shares. The reasons given by the Tribunal are based on valid materials and evidence. Under these circumstances, we do not find any error or legal infirmity in the order of the Tribunal so as to warrant interference. Hence no substantial question of law arises for consideration of this court, in respect of question No. 2.
9. In the result, no substantial questions of law arise for consideration of this court and accordingly, the tax case is dismissed. No costs.