CIT vs. Niraj Amidhar Surti (Gujarat High Court)

Merely because shares are purchased by taking loan at high interest does not mean gains are taxable as business profits

The assessee, a CA, offered income from profession, LTCG, STCG & speculation profits. He borrowed funds @ 30% p.a. and bought a large number of shares of Home Trade Ltd at Rs. 50. The shares were pledged as security for the loan. After 14 months, the assessee repaid the loan, obtained the shares & sold them at Rs. 750 each for a profit of Rs. 1.73 crores which was offered as LTCG. The assessee invested in s. 54 EC bonds & claimed exemption. The AO held that as the assessee had borrowed at an “exorbitant” rate of interest & taken risk, the transaction was an “adventure in the nature of trade” and the profits assessable as business profits. This was reversed by the CIT (A) & Tribunal. On appeal by the department, HELD dismissing the appeal:

(i) The AO held the transaction to be an “adventure in the nature of trade” and not normal investment on the basis that (a) assessee had borrowed funds at an exorbitant rate of 30% and (b) the shares were held by the lender till the entire loan was paid. However, this reasoning loses sight of the fact that merely because the shares had been purchased from borrowed funds obtained on high rate of interest would not change the nature of the transaction from investment to one in the nature of an “adventure in the nature of trade”. Moreover, as the shares were held for a long-period of 14 months, the intention of the assessee had always been that of making investment in shares and not dealing in shares. This is also apparent from the fact that the shares had not been treated as stock in trade by the assessee. The fact that the shares were in the physical possession of the lender was not relevant because the assessee was the owner thereof;

(ii) A capital investment and resale does not lose its capital nature merely because the resale was foreseen and contemplated when the investment was made and the possibility of enhanced values motivated the investment {Sutlej Cotton Mills Supply Agency Ltd 100 ITR 706 (SC)} followed.