TMI Blog2008 (1) TMI 516X X X X Extracts X X X X X X X X Extracts X X X X ..... ature of principal business of the assessee company did not take it outside the ambit of Explanation to s. 73 of the Act. Therefore, he was of the view that the assessment order passed by the AO was erroneous and prejudicial to the interest of Revenue as the amount of Rs. 41,91,333 was in the nature of speculation loss and the assessee was not entitled to set off the same against any other income except speculation gain. Accordingly, show-cause notice was issued to the assessee. In reply thereto, the assessee contended as under: (1) The principal business of the company is of granting of loans and advances and therefore, the Explanation to s. 73 did not apply in the case of the assessee. (2) The assessment order was passed with the approval of the Jt. CIT Thus two officers examined the share dealings and were of the view that assessee's principal business was of granting of loans and advances and Explanation to s. 73 did not apply. (3) Reserve Bank of India had granted registration certificate to the company to carry on the business of non-banking finance institution. (4) As per the memorandum of association, the main object of the company is "to carry on the business of le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s engaged in the business of leasing finance, hire-purchase, trading in shares and also acting as a broker for sale and purchase of vehicles. Thus, the principal business of the assessee was that of financing. The AO has duly noted this fact. No such action has been taken by the CIT in the previous year or in the subsequent assessment year. The assessment for asst. yr. 2005-06 has been completed under s. 143(3). The CIT relied on the decision of the Tribunal Hyderabad Bench 'A' in the case of Melville Finvest Ltd. vs. Jt. CIT (2004) 91 TTJ (Hyd) 488 : (2004) 89 ITD 528 (Hyd). The facts of that case were entirely different. 4. Referring to the decision of the Special Bench of Tribunal in the case of Asstt. CIT vs. Concord Commercials (P) Ltd. (2005) 94 TTJ (Mumbai}(SB) 913 : (2005) 95 ITD 117 (Mumbai)(SB) it was pointed out that the deeming provisions relating to Explanation to s. 73 cannot be applied where the principal business of the assessee is a business of banking or granting of loans and advances. It was pointed out that the transaction of purchase and sale of shares would be held as speculation business only if the company was hit by the Explanation to s. 73. The implicati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... kept in the bank, etc. as per norms prescribed by the RBI for non-banking financial company. Thus, it was contended that the principal business of the assessee was that of granting of loans and advances and for this attention was drawn to cl. 16 and cl. 1 of the objects clause of the memorandum of association of the company. Our attention was also, drawn towards the decision of the Hon'ble Gujarat High Court in the case of Barkha Investment Trading Co. vs. CIT (2006) 200 CTR (Guj) 342 : (2006) 281 ITR 316 (Guj) for the proposition that once the assessee company is registered with the RBI and kept the registration alive as non-banking financial company, the company is to be considered as a company, the principal business of which is granting of loans and advances and Chapter III-B of RBI Act will have an overriding effect. Reliance was also placed on the following decisions for the proposition of law that the Explanation to s. 73 is not applicable to a company which is doing the business of granting of loans and advances: (a) Narain Properties Ltd. vs. Asstt. CIT (2007) 11 SOT 1 (Lucknow); (b) ITO vs. Raghav Commercial Ltd. (1983) 16 TTJ (Cal) 335 [referring CIT vs. Distributo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment. Explanation-For the removal of doubts, it is hereby declared that, for the purposes of this sub-section,- (a) an order passed on or before or after the 1st day of June, 1988 by the AO shall include- (i) an order of assessment made by the Asstt. CIT or Dy. Director or the ITO on the basis of the directions issued by the Jt. CIT under s. 144A; (ii) an order made by the Jt. CIT in exercise of the power or in the performance of the functions of an AO conferred on, or assigned to, him under the orders or directions issued by the Board or by the Chief CIT or Director General or CIT authorised by the Board in this behalf under s. 120; (b) 'record' shall include and shall be deemed always to have included all records relating to any proceeding under this Act available at the time of examination by the CIT; (c) where any order referred to in this sub-section and passed by the AO had been the subject-matter of any appeal filed on or before or after the 1st day of June, 1988, the powers of the CIT under this sub-section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 263, both the conditions that the order passed by the AO is erroneous and also that it is prejudicial to the interest of Revenue must be satisfied. If one of them is absent, it will be held that the provisions of s. 263 were not lawfully invoked. The term 'erroneous' has not been defined under the IT Act but it is well-settled that each and every type of mistake or error committed by the AO cannot be said to be an error. An order can be said to be erroneous if there is incorrect assumption of facts or incorrect application of law in the order by the AO. If the AO after making the enquiries and examining the records has taken one of the possible views, it cannot be said that the order passed by the AO was erroneous. 8. The assessee is a non-banking financial company registered with the RBI under s. 45-1A of the RBI Act. The main business of the assessee company as per the copy of the memorandum of association submitted to us is: "To carry on the business of leasing and hire-purchase finance and to provide on lease or hire-purchase all types of industrial and office plants, equipments, machineries, vehicles, land and buildings, real estates, movable and immovable properties an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of loans and advances consists in the purchase and sale of shares of other companies, such company shall, for the purposes of this section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares" From the plain reading of this Explanation to s. 73 it is apparently clear that this Explanation is applicable. Where any part of the business of a company consists of the purchase and sale of shares of other companies, such company shall, for the purposes of s. 73, be deemed to be carrying on the speculation business to the extent to which the business consists of purchase and sale of shares. Two exceptions are provided under this Explanation and wherever these exceptions are applicable, purchase and sale of shares business will not be regarded to be the speculation loss. The first exception is applicable to the company whose gross total income consists mainly of income chargeable under the heads "Interest on securities", "Income from house property", "Capital gains" and "Income from other sources". The second exception is applicable to a company where the principal business of the company is the business o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tures, bonds. securities. etc. The assessee filed the revised return declaring the loss. The sales figures in the P L a/c consist of sale of waste yam and sale of shares. The AO noticed that the decrease in the stock included on the expenditure side of the P L a/c related to the decrease excluded in the value of the shares held by the assessee as stock-in-trade. The AO invoked the Explanation to s. 73 and held that the loss incurred by the assessee in the purchase and sale of shares must be regarded as loss in speculation business to be set off only against the speculation income. The CIT(A) upheld the order of the AO. When the matter came before the Tribunal, the Tribunal held as under: "The Explanation to s. 73 is attracted to the gross total income of the company which does not consist mainly of (i) interest on securities, (ii) income from house property, (iii) capital gains, and (iv) income from other sources. The income assessable under the head 'Income from other sources' in the instant case was a marginal figure of Rs. 21.90 lakhs as mentioned in the show cause notice issued by the CIT(A), the income from purchase and sale of yarn waste before deduction of expenditure was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... advances with reference to the Explanation to s. 73. In this case the Special Bench of the Tribunal has held as under: "A plain reading of the provisions of Explanation to s. 73 makes it clear that the loss in purchase and sale of shares shall not be treated as speculation loss in the case of a company. the principal business of which is the business of granting of loans and advances as provided in the Explanation to s. 73. What constitutes the 'principal business' has not been defined anywhere in the Act. Therefore, what constitutes principal business will depend on the facts and circumstances of each case. The memorandum of articles of association of the company, past history of the company, current deployment of the capital of the company, break-up of the income earned during the relevant year would all help in determining the principal business of the company. The company, whose principal business is that of granting loans and advances, may earn a comparatively high income from some other activity in any particular year. Merely because the income/loss from share trading in the year under consideration is higher than the interest income, that itself would not be sufficient t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s that of granting loans and advances, the decisive factor is the nature of the activities of the assessee and not the actual income from such activities during a particular year. In that view of the matter, there was no mistake in the order of the CIT(A) in holding that the case of the assessee company was not hit by Explanation to s. 73 and the loss so suffered should be treated as business and not speculation loss." If the facts of this case are applied to the facts of the case of the assessee, we find that in the case of the assessee the main business of the assessee is that of granting of loans and advances. The assessee has mainly deployed the funds for loans and advances and the funds deployed in that business were more than the investment in the shares. 13. In the case of Asstt. CIT vs. Concord Commercials (P) Ltd., the Special Bench of Tribunal has held as under: "The transactions of purchase and sale of shares would be held as speculation business only if the company was hit by the Explanation to s. 73. The implication of the Explanation is that if a company incurs a speculation loss in a manner deemed in the Explanation, such loss shall not be set off except agains ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sts laid down in the Explanation." From this decision of the Special Bench which is binding on us, we find that the income criteria will not apply for determining whether the assessee's principal business is granting of loans and advances. 14. We have also gone through the decision of the Hon'ble Gujarat High Court in the case of Barkha Investment Trading Co. vs. CIT. We find that in this case the Hon'ble High Court has observed that when the assessee company is treated and registered as an "investment company" by RBI under the provisions of Non-Banking Financial Companies (Reserve Bank) Directions, 1977, which are issued under the provisions of RBI Act, which has been arrived at after consultation with the Central Government as to the status of a company, namely, whether a company which is a financial institution is an investment company or not, would be final insofar as the financial system is concerned. It was also observed in this case that Chapter III-B of the RBI Act has an overriding effect. 15. We have also gone through the other cases relied on by the learned Authorised Representative. In those cases also similar view has been taken that when the principal business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssist the Revenue. 20. We have also gone through the aforesaid decision of the Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. vs. CIT, wherein their Lordships have held as under: "The pre-requisite to the exercise of jurisdiction by the CIT under s. 263 is that the order of the AO is erroneous insofar as it is prejudicial to the interests of the Revenue. The CIT has to be satisfied of twin conditions, namely, (i) the order of the AO sought to be revised is erroneous; and (ii) is prejudicial to the interests of the Revenue. If one of them is absent-if the order of the AO is erroneous but is not prejudicial to the Revenue-recourse cannot be had to s. 263(1). There can be no doubt that the provision cannot be invoked to correct each and every type of mistake or error committed by the AO, it is only when an order is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind. The phrase 'prejudicial to the interest of the Revenue' ha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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