Commissioner of Income Tax vs Aravind Prakash Malpanino

The revenue has preferred this appeal challenging the order passed by the Tribunal which has held that the Assessee was engaged in the business of shares and, therefore, he is entitled to claim deduction by way of business expenditure and thus setting aside the orders passed by the assessing authority as well as the first Appellant authority.

The Assessee claimed transactions of shares as business and also claimed deduction of interest paid by him. Consequently, he claimed deduction towards business expenditure. However, the assessing officer held that it is an investment in shares and that the shares were not treated as stock-in-trade and, therefore, it is a capital asset and the Assessee is not entitled to deductions towards business expenditure and also towards payment of interest. Aggrieved by the said order, the Assessee preferred an appeal to the Commissioner of Income Tax who upheld the order of the assessing officer and dismissed the appeal. Against the said order the Assessee preferred an appeal to the Tribunal. The Tribunal on re-appreciation of the material on record held that the Assessee has been claiming from the year 1997-98 the transactions in shares as a business and claimed deductions which were allowed by the department for three consecutive years. It is only for the assessment year 2000-01 the said deductions were not allowed on the ground that in the balance sheet, shares were treated as an investment coupled with the fact that a part of the shares held by the Assessee are of family concerns. On a careful examination of the material on record it held that, looking into the volume, frequency and regularity of transactions, it is clear that the transactions were made with a profit motive and not for investment. The principles of accountancy do not override the provisions of the Income Tax Laws and, therefore, merely on the basis of an entry in the balance sheet for the year 2000-2001. where the shares are shown as an investment, the assessing officer was not justified in holding that the Assessee was not in the business of shares and the shares held by him were only as an investment and, therefore, it set aside the order and allowed the deductions towards business expenditure. Aggrieved by the said order, the revenue is before this Court.

This Court on 9-8-2007 admitted the appeal to consider the following substantial questions of law:

Whether the Tribunal committed an error in holding that the Assessee is carrying on the business has declared the shares as investment and not as stock in trade and consequently the Assessee is not entitled for allowance of interest paid on the amounts borrowed for investment in shares as business expenditure?

Whether the Tribunal was correct in holding that the Assessee is entitled for deduction of interest payment, insurance premium paid on car and depreciation on car as an allowable business expenditure when the Assessee was not carrying on the business in trading shares?

The learned Counsel for the revenue assailing the impugned order contended that, when the Assessee has shown in the balance sheet for the assessment year 2000-01 the shares held by him as an investment and not as stock-in-trade, it constitutes a capital asset and, therefore, the Assessee is not entitled to deduction under the heading of business expenditure. Therefore, the Tribunal was in total error in interfering with the well considered order passed by the assessing officer as well as the first appellate authority.

Per contra, the learned Counsel appearing for the Assessee submits that, in the balance sheet of the three years prior to 2000-01 also, the Assessee has shown the shares as investment, claimed business expenditure and the department has allowed the same. Before the assessing officer he has produced records to show that he is in the business of purchase and sale of shares every month which fact is not in dispute and. therefore, as held by the Supreme Court the principles of accountancy do not over-ride the provisions of the Income Tax Laws and the question whether the Assessee is carrying on a business or not is purely a question of fact which is to be determined from the material on record and as rightly held by the Tribunal, the material on record clearly establishes the fact that the Assessee was carrying on the business of shares and the shares held by him was not an investment and, therefore, he submits that no case for interference is made out.

From the material on record, it is clear that the Assessee is dealing in shares. He has filed returns for the years 1997-98, 1998-99 and 1999-2000 furnishing the particulars of these transactions as well as the income derived therefrom and the profit. He has claimed business expenditure and also deductions on account of interest paid on the loans borrowed. The department has accepted the said transactions as a business transaction and allowed business expenditure as well as deduction for payment of interest. It is only in the year 2000-01, for the first time, they declined to allow the business expenditure and interest on the ground that the Assessee has shown in the balance sheet the shares as an investment and not as stock-in-trade. The Assessee has produced the ledgers, bills, receipts to show that he is carrying on the business in shares which clearly shows what is the opening stock, what is the quantum of shares purchased, what is the closing stock, the bills of purchase and sale of shares, etc. It also discloses that in each month there were purchases of shares of at least 3 to 4 days and in some months for 5 days. Therefore, it cannot be said that it is an isolated transaction of a purchase and sale of shares. On the contrary looking into the volume, frequency and regularity of the transactions, it is clear that the Assessee was in the business of sale and purchase of shares in each month apart from the family shares held by the Assessee. As stated earlier, the department has accepted the said case of the Assessee for the assessment years 1997-98 to 1999-2000. In para IV of the returns of the income, the Assessee has clearly mentioned that the business income was being earned from the share transactions. The Honble Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd., Madras Vs. Commissioner of Income Tax, Madras, has held that the principles of accountancy do not over-ride the provisions of the Income Tax Laws. The question whether the Assessee is carrying on a business or not is to be ascertained from the material placed before the assessing officer and not by a mere entry in the balance sheet. It is in this background, the Tribunal on a proper appreciation of the material placed by the Assessee, has come to conclusion that the Assessee was in the business of sale of shares with a profit motive and not for investment and, therefore, entitled to business expenditure as well as deduction of interest towards loan borrowed. The said finding of the Tribunal is based on legal evidence and does not suffer from any legal infirmity which calls for interference.

In this view of the matter, we answer the substantial questions of law raised in this appeal in favour of the Assessee and against the revenue. Therefore, we do not see any merit in this appeal. Accordingly, the appeal is dismissed.