JUDGMENT 1. Appeal under Section 260A of the Income Tax Act, 1961 [for short, the Act] by the revenue against the order of the income tax appellate tribunal, Bangalore bench, posing for answer the following substantial questions of law: a) Whether, the tribunal was correct in holding that the loss incurred by the assessee in the sale of shares held by its of M/s ICDS Limited is an allowable deduction despite the same having been incurred due to a personal settlement entered into by some of the directors of the assessee company with that of other members of the Manipal Group of companies and there being no business interest of the assessee involved in such sale? b) Whether, the tribunal was correct in holding that interest payments made towards acquisition of shares of M/s ICDS Ltd. pursuant to the awards entered into by the directors of the company with other rival factions of Manipal Pax group would amount to an expenditure incurred during the course of business and was an allowable deduction? c) Whether the tribunal failed to take into consideration that the shares were purchased by the assessee company of M/s ICDS Ltd. at the instance of the directors in order to take hold of M/s ICDS Ltd. by defeating the Ambani award which had conferred control of this company in favour of its rival faction which did not amount to any business benefit for the assessee company and consequently recorded a perverse finding? 2. Under the impugned order, the tribunal while allowing the appeal filed by the assessee, reversed the finding of the assessing officer and the first appellate authority, which had taken the view that certain amounts claimed as business loss of the assessee-company relevant for the assessment year 1996-97, though computed as short term capital loss, but nevertheless claimed as loss under the head profits and gains of the business, cannot be so allowed and further finding that the claim of the assessee for reduction of a sum of Rs. 63,85,464/- as business expenditure being interest paid to its directors and others in respect of the borrowings of the company for carrying on its business, is also to be allowed. 3. The tribunal, in allowing the appeal, has held that a sum of Rs. 63,85,464/- as business expenditure being interest paid to its directors and others in respect of the borrowings of the company for carrying on its business, is also to be allowed. 3. The tribunal, in allowing the appeal, has held that a sum of Rs. 90,92,800/-, which in fact had been returned by the assessee in his return as short term capital loss and claimed by the assessee as business loss during the course of the business and not accepted by the assessing officer and the appellate authority, is nevertheless to be allowed as business loss, for the reason that the assessee itself was carrying on the business of investment and trade in shares and stocks and therefore the loss which was attributable to the purchase of 1,00,000 number of shares of M/s ICDS Ltd., at a face value of Rs. 220/- per share as against the market value of Rs. 70/- at the relevant time i.e. as on 4-4-1995 and sold on 24-8-1995 for a price of Rs. 129/- per share and the entire holding of the assessee-company in M/s ICDS Ltd., the company being sold by way of this transaction and the result being a loss of Rs. 90,92,800/- attributable to the sale of very 1,00,000 number of shares at Rs. 129/- per share on 24-8-1995 and the assessee company having claimed this amount as loss in business, being a company dealing in stock and shares and therefore should have been treated as loss under the head business. 4. Consequently, the tribunal also opined that the amount of Rs. 63,85,464/- paid by the assessee as interest paid on the borrowings for the purpose of investment in the assessee's business and which had been disallowed by the assessing officer for the reason that the transaction being not in the normal course of business cannot be allowed as deductible expenditure incurred by the assessee for the purpose of its business should also be allowed and is required to be reversed and as such allowed the claim towards payment of interest in the computation of the overall tax liability of the assessee. It is against this order of the tribunal recording such a finding, this appeal by the revenue raising the substantial questions of law as referred to above. 5. We have heard Sri K.V. Aravind, learned Counsel for the appellant-revenue and Sri S Parthasarathi, learned standing counsel for the respondent-assessee. 6. It is against this order of the tribunal recording such a finding, this appeal by the revenue raising the substantial questions of law as referred to above. 5. We have heard Sri K.V. Aravind, learned Counsel for the appellant-revenue and Sri S Parthasarathi, learned standing counsel for the respondent-assessee. 6. Submission of Sri Aravind, learned Counsel for the appellant, is that the tribunal has committed a grave error in concluding that the transaction of purchase and sale of 1,00,000 number of shares of M/s ICDS Ltd. should have been treated as part of business transaction of the assessee, notwithstanding the fact that the purchase of 1,00,000 number of shares was not as a part of investment and trading activity of the company in the normal carrying on of the business; that the transaction was not as a part of the assessee's trading transactions, but was only as a result of a private settlement entered into by the directors of the company, with the directors of a sister group of companies, who all happened to be members of one family, and such being the nature of the transaction, being not motivated or necessitated by any business exigency or even any business prospects, but to fulfil the obligations of the individual directors vis-a-vis similar directors in a sister group of companies under an arbitration proceeding that had been conducted by Mr. Ambani of the Ambani Group, which resulted in an award known as 'Ambani Award' and therefore could never be treated as part of the business activity of the assessee-company, but the director acting in the name of the company for their own need and benefit. 7. Submission is that the needs and exigencies of individual directors do not automatically become the needs and exigencies of the company in which they are directors and the compulsion of the directors cannot be translated as a business transaction in the hands of the company. 7. Submission is that the needs and exigencies of individual directors do not automatically become the needs and exigencies of the company in which they are directors and the compulsion of the directors cannot be translated as a business transaction in the hands of the company. Learned Counsel for the appellant would point out the distinction between the members and the company which is always to be maintained, even under the Companies Act and in support of such submission would place reliance on the decision of the Supreme Court in the case of Calcutta Tramways Company Ltd. v. Commissioner of Wealth Tax 85 ITR 133 , wherein it has been held that certain shares held by the assessee company was not held to be assets of the shareholders and the present is a converse case, where shares held by the company cannot be treated as shares of the individual directors, in the sense, the obligation to purchase ICDS shares at an inflated price, over and above the market price, i.e. for Rs. 220/- as against the market price of Rs. 79/-, was not an obligation of the assessee-company but the obligation of the directors and that cannot be translated into the obligations of the company and in this regard would further place reliance on the decision of this Court rendered on 26-10-2007 in ITA No. 89 of 2002 [The Commissioner of Income Tax, Mysore v. Sea Rock Investment Ltd. ITA No. 89 of 2002], wherein it has been held a settlement entered into amongst the individual directors of a company cannot be held to be a settlement binding on the company and it has been further held that the company cannot be a party to a family settlement assuming that such members of the family or other shareholders or directors of the company, and on such premise would submit that the transaction in question could have never been characterized as a transaction in the course of the business of the assessee-company or for the business requirement of the company, and if so, the tribunal could not have concluded that it should be treated as part of the business activity of the company, just because the assessee was also in the business of trading in shares and stocks. 8. 8. It is also submitted that when once the finding that the loss claimed by the assessee is a loss in the course of the business becomes unsustainable, then the other consequences as noticed and as found by the tribunal particularly in the matter of allowing the interest paid on the amount said to have been borrowed for the purchase of shares as a part of the business expenditure also, automatically falls to ground and therefore all the three questions posed for our answer should be answered in the negative in favour of the revenue and against the assessee. 9. On the other hand, Sri S Parthasarathi, learned Counsel for the respondent-assessee. submits that notwithstanding the fact that the motivation or reason for acquiring 1,00,000 number of shares of M/s ICDS Ltd. by the assessee-company was as per the award and notwithstanding the award being in respect of a dispute that had arisen amongst the members of the family of Pai group; that the company itself was being run as a family concern and not much distinction was maintained between the company and the directors of the company, as the very members of the same family were also the directors in the sister group of companies and therefore the award cannot be read in isolation, in the sense, de bars the family, the company in which all the members of the family were either shareholders or directors and as such the tribunal was very correct in treating the obligations of the directors in terms of the Ambani Award as virtually the obligations on the part of the company and therefore the tribunal was justified in reversing the finding in this regard. 10. Sri Parthasarathy would also submit that irrespective of the exigency and other things, the assessee-company itself being involved in the activity of buying and selling of shares and stocks, mere motivation for investment in a particular share cannot be the criterion when in fact the company has so invested and on the sale of the shares the company had incurred a loss; that even otherwise, it would be part of the business transactions of the company and in that view of the matter also, the tribunal is justified in reversing the finding recorded by the lower authorities. 11. 11. Further submission of learned Counsel for the respondent-assessee is that even assuming for argument's sake but not conceding, the question as to the acquisition of 1,00,000 number of shares by the company is to be held as not part of the business transactions of the company, then also, the allowing of interest payment on the borrowings cannot follow the consequence, for the reason that there was in fact borrowal by the assessee-company; that interest paid on such borrowing which was otherwise being utilized for its business activities, was being allowed in the earlier years and just because in the instant case of transaction is to be held as not a business transaction, there is no justification for disallowing the interest payment totally and at any rate such part of the borrowal attributable to the investment made for acquiring 1,00,000 number of shares in M/s ICDS Ltd., and which even the assessing officer has allowed as short term capital loss in the computation of taxable income of the assessee, and if it is to be treated as borrowal for such investment in the capital asset, the interest attributable to such borrowal should necessarily be allowed even in the computation of the capital loss of the assessee under the head 'capital gain' and in fact when the assessee intended to carry forward it as unabsorbed capital loss, whether short term or otherwise, in terms of Section 74 of the Act, and this aspect of the matter having not been examined by the tribunal independently, the question relating to payment of interest cannot be automatically answered against the assessee as a sequel to the answer to the first question in favour of the revenue and therefore would urge that to the extent answer to the second question does not become automatic, but depends on the examination of the fact situation and on ascertainment of the extent of borrowal made by the assessee company for the purpose of investment in the capital asset i.e. for the investment of acquisition of 1,00,000 number of shares in M/s I CDS Ltd., and interest, if any, paid on such borrowal till the disposal of the shares, should necessarily be added to the cost of acquisition of shares by the assessee and on such premise, the loss under the head of short term capital can be computed. 12. 12. We have bestowed our attention to the submissions made at the Bar, perused the record in the context of the questions posed for our answer in this appeal. 13. We notice that while the first and the second questions do arise for our examination, the third question is only a question which is in the context of the logic employed by the tribunal for arriving at the findings giving rise to first and the second questions and therefore the third question is virtually part of first and the second questions and need not be answered independently. 14. In so far as the first question is concerned, we find that the purchase of shares by the assessee-company on 4-4-1995 at a price of Rs. 220/- per share against the market price of Rs. 70/- per share, was definitely not either as a normal business transaction of the assessee nor for any exigency of the business requirement of the assessee-company. Though Sri Parthasarathy would urge prudence cannot be a yardstick for measuring the profits and loss of the assessee or the company, the question here is one of claiming loss and not for making profits, but the question assumes significance as the assessee is more keen on carrying forward the loss to the subsequent years and in which case it should be a loss necessarily incurred and incident to the business transaction and which was necessary in the course of the business. 15. There cannot be any two opinions that the need of the individual directors cannot be elevated to the status of the need of the company, however binding the Ambani award may be on the directors and the directors being obliged to purchase the shares of M/s ICDS Ltd., at a value of Rs. 220/- per share and transfer it later to a sister company or others at a price of Rs. 129/- per share. Payment made by the assessee-company at Rs. 220/- per share in favour of a sister concern, may be a company of which the shareholders were members of the same family, is nevertheless a payment which is only relatable to the award which binds the directors and not the company. It is obvious that the directors are using their position in the company to further their own needs and requirements. 16. It is obvious that the directors are using their position in the company to further their own needs and requirements. 16. Be that as it may, if the company is claiming to be a company carrying on business in trading shares and stocks, while any purchase in the normal course and from the market, whether the company acquires at. a price, high or low, nevertheless, if constituted part of the business of the company and business transactions of the company, but an acquisition of share, at a value far higher than the market value when the shares otherwise were available at Rs. 70/- per share, but paying Rs. 220/- per share to purchase them only from a particular seller cannot be construed as any part of the business transaction of the assessee-company. This argument does get support from the decision referred to above and relied on by learned Counsel for the appellant-revenue. In this view of the matter, we have to necessarily answer the first question in favour of the revenue and against the assessee and in the negative. The tribunal was in error in holding that the loss incurred by the assessee in the sale of shares held by it should be allowed as a business loss. In fact, the assessee itself having returned this as a loss which is claimed as short term capital loss, and having computed under the head 'capital gain', that also goes against the claim of the assessee and the tribunal overlooked this aspect also. 17. In so far as the second question is concerned, it has to necessarily follow the first question, being consequential to the answer given to the first question. However, Sri Parthasarathy, learned Counsel for the respondent-assessee has vehemently urged that the assessee should not be deprived of the claim for payment of interest, which could be even otherwise eligible in law and just because the tribunal committed an error in holding that the loss should have been computed under the head profits and gain of business and profession. 18. To this extent, there appears to be some justification for the submissions made by Sri Parthasarathi, but the answer necessarily goes against the assessee. 18. To this extent, there appears to be some justification for the submissions made by Sri Parthasarathi, but the answer necessarily goes against the assessee. For the purpose answering the second question, further direction is issued in the context of the assessing officer having determined the loss as a short term capital loss and in the computation of such short term capital loss, to examine as to the scope for claiming any interest paid by the assessee on its borrowing as an interest payment attributable to the borrowing for the purpose of investment in the purchase of 1,00,000 number of shares in M/s ICDS Ltd. Only to this extent, the matter is sent back to the assessing officer to re-examine this question and on such finding, to issue fresh demand notice computing the actual liability of the assessee as against the demand for a sum of Rs. 6,86,360/- as had been determined in terms of the order dated 23-10-2000 passed by the assessing officer while rectifying the earlier assessment order dated 26-2-1999. 19. In the result, the questions raised in this appeal are answered in favour of the revenue and against the assessee and the appeal is allowed. To the extent indicated above, the matter goes back to the assessing officer to issue fresh demand depending upon the extent of interest payment, which, if can be allowed under the provisions of law on the investment made by the assessee for purchase of 1,00,000 number of shares in M/s ICDS Ltd.