COMMISSIONER OF INCOME TAX Vs. RAJEEVA LOCHAN KANORIA

JUDGEMENT

(1.) The Tribunal has referred the following two questions of law under Section 256(1) of the Income-tax Act, 1961, to this court :

(2.) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that investment in shares was the admitted business for the assessee when the activity in such investment was only to purchase shares for acquisition of controlling interest of companies and had not earned any income (except director's fees) by such vocation ?" 2. The assessee is an individual. This reference relates to the income-tax assessment of the assessee for the two previous years relevant to the assessment years 1982-83 and 1983-84. In respect of these two years, the assessee filed his income-tax returns showing losses of Rs. 3,74,570 and Rs. 1,40,940, respectively. In his returns of total income, the assessee declared income assessable under the head "Profits and gains of business or profession", "Capital gains" as well as under the head "Income from other sources". In the previous year relevant to the assessment year 1982-83, the Assessing Officer in the course of the assessment proceedings found that the assessee had shown payment of interest of Rs. 4,70,457 on the moneys borrowed by him and had also received interest of Rs. 1,55,459 on advances made by him, thus claiming a business expenditure of Rs. 3,14,998 on account of interest payments. Similarly, in the previous year relevant to the assessment year 1983-84, the assessee received interest of Rs. 1,77,787 as against interest payments of Rs. 5,86,493. Thus the assessee claimed a business expenditure of Rs. 4,08,706 on account of interest payment made on moneys borrowed by the assessee.

(3.) In the course of the assessment proceedings, it was submitted on behalf of the assessee before the Assessing Officer that the assessee had borrowed funds for business purposes like acquisition of shares for acquiring controlling interest in various companies, making loans and advances in the course of financing business as well as for dealing in shares, etc. The Assessing Officer found that the assessee was interested in about nine companies which were controlled by him and in some of these companies, he was also one of the directors. The Assessing Officer also found that the assessee had invested Rs. 10,79,228 in purchase of shares of different companies for acquiring controlling interest and another sum of Rs. 18,96,226 in the financing business. The Assessing Officer observed that the assessee made investment on capital account and as such the interest, if any, paid on borrowed moneys could not be treated, as relating to his business activities and, therefore, the net interest paid on borrowed moneys was not deductible in computing the business income under Section 28 of the said Act. The Income-tax Officer calculated interest at the rate of 18 per cent. on Rs. 10,79,228 being the amount invested in purchase of shares of different companies in which the assessee acquired and held controlling interest and disallowed Rs. 1,94,261 (forming part of Rs. 3,25,646 at page 25 of the paper book) in computing his business income. Similarly, for the assessment year 1983-84, the Assessing Officer disallowed a sum of Rs. 1,94,246 out of interest paid on borrowed moneys.