By TIOL News Service

CHANDIGARH, OCT 10, 2016: THE issue raised in this case is Whether mere 28% share holding of a company do establish the fact that the shares were acquired wholly and exclusively for the purpose of control, they were not acquired wholly and exclusively for the purpose of earning income. NO is the answer.

Facts of the case

Mr. Ashok Kumar Malhotra HUF, Ashok Kumar Malhotra as an individual, M/s M.B.D. Enterprises Pvt. Ltd. and the assessee purchased 2459, 1495, 945 and 1933 equity shares in the company, respectively, aggregating to 6832 shares. The entire share capital of the company is held by them. The assessee, thus, purchased 28.29 per cent of the equity shares of the company. She is the wife of Ashok Kumar Malhotra and a member of his HUF as also a share-holder and a Director in M/s M.B.D. Enterprises Pvt. Ltd. She borrowed money from the Ashok Kumar Malhotra HUF for the purchase of these shares on interest. For the assessment year in question, she paid interest of Rs.18,91,355/- in respect of which she claimed a deduction under Section 57 (iii).

The assessee, an individual, had claimed a deduction of Rs 18,91,335/- on account of interest paid to the Ashok Kumar Malhotra HUF. Ashok Kumar Malhotra was the assessee's husband and the assessee was a member of the said HUF. The assessee claimed that she had borrowed funds from the HUF during the AY 1987-88 to purchase shares of M/s M. Gulab Singh & Sons Pvt. Ltd. and M/s M.B.D. Enterprises Pvt. Ltd. AO asked the assessee to furnish details of the investment out of the borrowed funds. As the assessee did not furnish the details, AO assumed that out of the borrowed funds investment to the extent of 50 per cent had been made for the purchase of the shares in these companies. AO accordingly disallowed 50 per cent of the interest out of the total interest claimed. On appeal, CIT(A) observed that the entire borrowed funds of Rs.18,91,355/- had been used by the assessee for acquiring shares of the company M/s M. Gulab Singh & Sons Pvt. Ltd. and no part thereof was utilised for purchasing shares of M/s M.B.D. Enterprises Pvt. Ltd. Having held that the shares were purchased to acquire control of the company and not as an investment, the CIT (A) disallowed the entire amount of Rs.18,91,355/-. The CIT(A) accordingly enhanced the assessee's income by Rs.9,45,660/- and ordered initiation of penalty proceedings u/s 271 (1)(C) for furnishing inaccurate particulars of income. On further appeal, Tribunal agreed with CIT (A) that the entire funds were utilized for the purpose of purchasing the shares of the company and confirmed the order of the CIT (A) enhancing the income. The assessment order and the order of CIT (A) did not furnish the details of the assessee's holding. The Tribunal's order, however, furnishes the details of the assessee's holdings. Tribunal firstly held that the assessee had not clarified that she had been in the business of dealing in shares and that unless the assessee proved that she had been dealing in shares as a business it was difficult to accept the contention that she purchased the shares for the purpose of making or earning income.

Held that,

++ as per section 57(iii), the words "such income" refer to income from other sources. The deduction under Section 57 (iii) is not available only to persons who deal in shares as a business. Even other investors are entitled to the benefit of Section 57. The observation, that unless and until the assessee proves that she has been dealing in shares as a business it is difficult to accept the contention that the shares purchased by her are for the purpose of making and earning such income, is not wellfounded. There is no presumption that a person not involved in the business of dealing in shares purchases them for a purpose other than making or earning income from such shares. There is certainly no presumption that such persons purchase shares for the purpose of gaining control of the company. In fact, a large number of persons purchase shares in various companies for the purpose of making or earning income therefrom than for purpose of gaining control of companies. That a company in which the shares are purchased does not declare dividend even for a few years is not determinative of the purpose for which the shares are purchased. The receipt of dividend is not the only criteria. What is entitled to be deducted is the expenditure exclusively for the purpose of making or earning such income. If an assessee establishes that he has incurred expenditure for the purpose of making or earning such income, he is entitled to the deduction under Section 57(iii). It is not necessary that the expenditure laid out or expended actually results in making or earning such income. There are several companies which do not declare dividend in certain years. There are companies which do not declare income for several years and are ultimately wound up. That does not mean that the expenditure laid out or expended for the purpose of purchase of its shares was not wholly or exclusively for the purpose of making or earning income therefrom. Thus, the fact that no dividend is declared does not by itself indicate that the expenditure was not laid out or expended for the purpose of making or earning income. The first question of law is, therefore, answered in favour of assessee;

Treatment of investment made by assessee

++ the assessee had acquired about 28 per cent of the shares in the company M/s M. Gulab Singh & Sons Pvt. Ltd. That by itself would not establish that the shares were purchased for the purpose of acquiring control over the company. However, as we have also held, it is not an acquisition of over 50 per cent of the equity share capital alone that would allow gaining control over a company. The purpose of acquisition of shares must be ascertained after considering all the facts and circumstances of the case. In the present case, the assessee acquired about 28 per cent of the shares in the company. It is true that the Malhotra group owns the entire shareholding in the company. When a party buys shares in a company, it is reasonable to presume that it does so wholly and exclusively for the purpose of making or earning dividend income. If a party expects the company to do well presently or in future, it is but natural that it would seek to acquire as many shares as it can. This too would be wholly and exclusively for the purpose of making or earning income therefrom. Parties do not acquire control for control's sake. In the present case, the other members of the group held 72% of the equity shares. There is nothing to indicate that the assessee herself or in concert with others intended acquiring control for any reason. Our attention was not invited to anything that indicates any reason for the assessee acquiring the shares for the purpose of acquiring or even maintaining control. It is reasonable then to presume that the assessee acquired the shares wholly and exclusively for the purpose of making or earning income. The Tribunal appears to have proceeded only on the basis that the entire shareholding of the company is held by the appellant along with other members of the group including her husband and her husband's HUF and the fact that the dividend had not been declared. There could always be prospects of the company doing well in future. Indeed, if that was not the expectation, the appellant would not have invested in the company at all. There is merely a finding that the real intention appears to be to hold and acquire the control of the company, as otherwise the assessee and the other family concerns, in which she is also interested, would not have invested large amount by way of investment particularly when the company had not declared any dividend. We observed earlier, neither of these reasons by itself warrants the conclusion that the shares were acquired wholly and exclusively for the purpose of control and that they were not acquired wholly and exclusively for the purpose of making or earning income. In the facts and circumstances of this case, these two factors even taken together do not warrant the conclusion arrived at by the Tribunal;

++ it is important to note that the decision turned on an appreciation of the nature of the transaction. The Division Bench found, as a matter of fact, that the investment had been made not for the purpose of earning income but for the purpose of taking full control over SOML. It was also found, as a question of fact, that the shares were not purchased for the purpose of earning income, though that could be regarded as the ultimate motive. In other words, earning income, by acquiring the shares, was not the purpose but the motive. It was further found that the dominant purpose was not to earn income but to gain control and, at the highest, it was a mixed purpose. The judgment, therefore, does not carry the matter further as far as this appeal is concerned. Mr. Sethi then relied upon a judgment of a Division Bench of the Bombay HC in CIT vs. Amritaben R. Shah, [1999] 238 ITR 777. It was a reference on the question whether the assessee was entitled to a deduction u/s 57(iii) of the interest on the loans raised for acquiring shares in Raval Tiles and Marbles Pvt. Ltd. with an intention to acquire control over the company. The assessee, her husband and her father-in-law purchased the entire share capital of the company. AO and the CIT(A) held that the shares were purchased with a view to acquiring controlling interest in the company and that the assessees were, therefore, not entitled to deduction under Section 57(iii). The Tribunal, however, allowed the deduction. The assessee did not appear at the hearing of the reference before HC. It is important to note that the Court proceeded on the basis that there was no dispute that the shares in question were purchased by the assessee for the purpose of acquiring controlling interest in the company and not for earning dividends. The judgment was based on this fact. As we mentioned earlier, we have proceeded on the basis of the concession that if shares are purchased with a view to acquiring controlling interest in the company, the assessee is not entitled to a deduction u/s 57(iii). In CIT vs. Amritaben R. Shah there was a positive finding that the shares were not purchased wholly and exclusively for the purpose of earning income by way of dividends but for acquiring the controlling interest. In the facts and circumstances of this case, it was held that the assessee was not entitled to a deduction u/s 57(iii). Even the judgments referred to in that case proceeded on the basis that the shares were purchased with a view to acquiring a controlling interest in the company and in prosecuting a share-holders' litigation. The judgment does not militate against our view. The questions of law are, therefore, answered in favour of the assessee. The appeal is accordingly allowed and the impugned order of the Tribunal is set aside.

(See 2016-TIOL-2421-HC-P&H-IT)