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2016 (4) TMI 820 - ITAT KOLKATA

2016 (4) TMI 820 - ITAT KOLKATA - TMI - Speculation loss by virtue of Explanation to Sec. 73 of the Act as “business loss” on account of holding principal business of assessee as granting loan and advance - Held that:- The provisions of Explanation to Sec. 73 of the Act will not be applied where the principal business of the assessee is that of granting loans and advances and such company is also in the business of purchase and sale of shares, then the activity of purchase and sale of shares wou .....

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hesitation in upholding the order of the Learned CIT(A) - Decided in favour of assessee.

Addition on account of interest income - Held that:- As per the guidelines of RBI if assessee does not pay interest for a period of exceeding six months then interest income should not be recognized in its books of account. The guideline of RBI is very much applicable to assessee as it is NBFC and governed by regulations of RBI. We also find that various courts has decided that real income should .....

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has booked the income in that year. However, AO disagreed the view of assessee on the ground that the income was accrued in the AY 2001- 02 so it was to be offered for tax in that year. Before us Ld. AR submitted that this issue is already covered in favour of assessee by this Tribunal in assessee’s own case - Decided in favour of assessee. - ITA No.1796 & 285/Kol /2008 - Dated:- 18-3-2016 - Shri N.V.Vasusdevan, Judicial Member and Shri Waseem Ahmed, Accountant Member For The Assessee Shri S.D. .....

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espectively. Shri D.S. Damle, Ld. Authorized Representative appearing on behalf of assessee and Shri Tanuj Neogi, Ld. Departmental Representative appearing on behalf of Department. 2. At the time of hearing Ld. DR stated that both appeals can be heard for the sake of convenience. Hence, we heard them together and deem it appropriate to dispose of by this common order. First we take up ITA No.1796/Kol/08 A.Y. 01-02. 3. First of all, it is observed that there is a delay of 191 days on the part of .....

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Mst. Katiji & Ors (1987 AIR 1353, 1987 SCR (2) 387) analyzed the situation while dealing with the delay on behalf of the Government and observed as enumerated below: "When substantial justice and technical considerations are pitted against each other, cause of substantial justice deserves to be preferred for the other side cannot claim to have vested right in injustice being done because of a non deliberate delay." "It must be grasped that judiciary is respected not on accoun .....

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institutional decisions and do not share the characteristics of decisions of private individuals. 5. In the instant case as the Government is Appellant as submitted that before finalization of appeal, the case has to cross many channel and we feel that there is sufficient cause for condoning the delay in the institution of the appeal hence we are inclined to condone the delay of 191 days in preferring the instant Appeal. Now let us proceed with the case on merits. 6. Grounds raised by Revenue ar .....

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s by directing the AO to delete the interest of ₹ 3,04,18,767/- receivable from M/s Bolten Properties Ltd and M/s APR Properties Ltd. during the previous year 200-01 from the total income of the assessee when the assessee itself had shown the said sum of interest as its income in its Return and it follows the mercantile system of accounting. 5) That ld. CIT(A) had erred in law and as well on facts in not appreciating the facts that the assessee is not entitled to maintain mercantile system .....

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) as Non-Banking Finance Corporation (NBFC for short) engaged in the business of money lending, investment in share and dealing in share. During the year assessee has shown following income:- a) Share trading (-) Rs.7,30,88,822/- b) Interest (net) (+) Rs.6,68,25,887/- c) Dividend (+) ₹ 31,63,652/- d) Other income (+) ₹ 2,41,210/- e) Capital gains (-) ₹ 41,14,395/- f) Share dealing (speculation) (-) Rs.3,27,55,782/- g) Administrative expenses (-) ₹ 14,25,064/- h) Depreciat .....

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as made a reference before Ld. ACIT, Range-4 Kolkata dated 18.12.2003 for the intervention in respect of pending assessment proceeding on the request of assessee u/s 144A of the Act and accordingly the Ld. CIT(A) directed the AO to treat the loss of ₹7,30,88,822/- as speculation loss by virtue of provision of Explanation to Sec. 73 of the Act. As per the said Explanation the loss from share dealing business shall be treated as speculation if the income under head from share dealing busines .....

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case of CIT v. Park View Properties Pvt. Ltd.261 ITR 473 (Cal). Accordingly, AO treated the loss from share dealing business of assessee as speculation loss by virtue of the provision of Explanation to Sec. 73 of the Act. 8. Aggrieved, assessee preferred appeal before Ld. CIT(A) and submitted that there are two exceptions provided in the Explanation to Sec. 73 of the Act that the provisions of Explanation to Sec. 73 of the Act will not be applicable. Firstly in terms of gross total income and se .....

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2000-01 3369.96 8239.19 200-01 2001-02 1854.44 3358.27 2001-02 2002-03 838.04 2817.49 2002-03 2003-24 304.03 3225.21 Accordingly, Ld. CIT(A) deleted the addition made by AO by observing as under:- 9. In the impugned order the AO and the Addl. Commissioner considered the applicability of Explanation to Sec. 73 only in the context of test laid down relating to composition of gross total income. The ratio laid down by the Calcutta high Court in the case of CIT Vs. park View Properties Pvt Ltd. (su .....

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s of non-banking financial company and was registered with RBI as NBFC. As an NBFC the assessee arrived on business of financing and derived substantial interest. It also carried on share trading business. However, when the assessee carried on more than one business; it was necessary to ascertain the principal business with reference to regularity of the activities and predominant deployment of funds in different business segments. From the comparative chart of deployment of funds during the rel .....

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nds deployed in granting of loans were substantially more than in stock-in-trade of shares. I further note that there had been consistent and substantial decrease in deployment of funds in share trading business over the 4 years. The funds invested in stock-in-trade of shares as on 31st March 2000 were ₹ 3369.96 Lacs which came down substantially to ₹ 304.03 Lacs by 31st March 2003. Deployment of business funds in share trading business got progressively reduced between F.Y 1999-00 t .....

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7) wherein the Tribunal made the following observations: We hold that to decide whether the case of an assessee falls in exceptions provided in Explanation to section 73 of the Act or not and to decide whether the principal business of the assessee is that of granting of 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. Merely because the numerical value of the profit/loss in purchase a .....

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apital of the assessee, breakup of the income earned during the relevant and past years and the nature of the activities of the assessee will all help in determining the principal business of the assessee. If in any particular year, the assessee has nominal business since and has substantial interest income, it does not imply that the assessee s principal business is of fiancé or granting of loans and advances. Similarly the assessee, the principal business of which is the granting of loa .....

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larly carried on business of granting of loans & earned substantial interest. Deployment of funds in the business of granting of loans was predominantly more than share trading business and therefore applying fund deployment criteria assessee s principal business could be said to be granting of loans and therefore the Explanation to Sec. 73 was not applicable. The AO is accordingly directed to assess loans in business of purchase & sale of shares as business loss and allow it s set off a .....

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so relied upon jurisdictional High Court s decision in the case of CIT vs. Park View Properties. However, before Ld. CIT(A) assessee argued that Explanation to Sec. 73 provides exceptions clauses. The AO has relied upon the one exception only which says if the company gross total income consists mainly of income for house property, Capital gain and other sources then the explanation to Sec. 73 of Act does not apply, but AO has not considered the other condition which says if Company principal bu .....

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sheet as on 31.03.2001 the assessee has 4.37 crores of share capital and 7.15 crores reserves and 100.68 crores of unsecured loans (credit) i.e. Total ₹112.20 crores. This fund is applied towards loan and advances of 3.73 crores, 18.5 crores in stock-in-trade of shares and 38.37 crores in investment. In the given chart produced before the Ld. CIT(A) the assessee very conveniently forgot to show the funds applied towards investment which is at ₹38.37 crores. Investment has been made u .....

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e trading. Thus, assessee s main engagement was trading in shares and investment in shares and assessee is no more an NBFC company as RBI has cancelled its certificate. Therefore, exceptions to explanation to Sec. 73 of the Act do not apply and requested to treat the loss in share trading as speculative and relied on the order of AO. From the aforesaid discussion, we understand that the AO has invoked the provisions of explanation to Sec. 73 of the Act for treating the loss from shares trading b .....

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e relief to the assessee from the provisions of explanation to Sec. 73 of the Act. The ld. AR has filed a paper book which is running in pages from 1 to 52. We find from the paper book filed by the assessee that the company is a NBFC registered with RBI vide registration no. 05.01076 on dated 20.3.1998. The copy of certificate from RBI is placed on page 29 of the paper book. We find that this certificate would be issued by RBI only when the assessee is engaged in the lending activities. We furth .....

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advances (Rs. in lacs) 1999-00 2000-01 3369.96 8239.19 200-01 2001-02 1854.44 3358.27 2001-02 2002-03 838.04 2817.49 2002-03 2003-24 304.03 3225.21 We observe that the Learned AO has decided the impugned issue on the basis of income composition of the assessee. Accordingly the AO held that the income from share trading is more than the income from capital gain and other sources. So the AO applied the provisions of Explanation to Section 73 of the Act. Now let us understand the Explanation to sec .....

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f 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 above, it is very clear that the provisions of Explanation to Sec. 73 of the Act will not be applied where the principal business of the assessee is that of granting loans and advances and such company is also in the business of purchase and sale of shares, then the acti .....

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ulation loss and accordingly we have no hesitation in upholding the order of the Learned CIT(A). Accordingly, the ground raised by the Revenue is dismissed. 10. Coming to next ground of Revenue s appeal is that Ld. CIT(A) erred in deleting the addition made by Assessing Officer on account of interest income of ₹3,04,18,767/-. During the year, assessee has created its profit and loss account by interest income from the following parties:- a) M/s Boltono Properties Ltd. ₹2,49,63,287/- .....

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der consideration, loans were provided to the above parties without any agreement between the company and the debtor. There was no mentioned for charging of any interest at a specific rate for any specific period in the agreement. The loan debtor neither acknowledged its liability to pay interest nor provided any confirmation for the payment of interest. The assessee has recognized interest income unilaterally without any confirmation from the party concerned. Besides the loan debtor never deduc .....

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ng to note that assessee has advanced money to the above parties without any writing agreement for charging interest. Besides the loan debtor has repaid the principal amount of loan. The assessee has not shown any efforts for recovery of interest amount from the parties. Finally, AO disregarded the plea of the assessee by confirming the addition of ₹3,04,18,767/- towards the interest on the above loan in the total income of assessee. 11. Aggrieved, assessee preferred appeal before Ld. CIT( .....

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on is laid down by the Supreme Court in CIT Vs. Shiv Prakash Janak Raj & Co Pvt. Ltd. (222 ITR 583). In that case assessee followed mercantile system of accounting. It had advanced loans to a firm whose partners were shareholders/directors. After the expiry of the relevant year interest on loan was given up. The Tribunal found that such waiver was not based on commercial consideration & therefore the Supreme Court upheld the assessment of accrued interest rejecting assessee s plea that o .....

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an entry is made about a hypothetical income, which does not materialize. In the decided case the assessee company had accounted for revised electricity tariff after the revision was upheld by the Supreme Court. Neither the consumers nor the State Government however accepted revision in Power Tariff and the Electricity Undertaking was taken over by the government and the revised tariffs were never realized. The AO assessed revised power tariff as assessee s income because the assessee had accou .....

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In this case, assessee accounted for interest on the amounts advanced to Bolten Properties Ltd. & APR Properties Ltd but such interest was never actually received & as ultimately written off. As per Sec. 194A the payer of interest was liable to deduct tax; from such interest. If the debtors had acknowledged their liability to pay interest then there would have been tax deduction u/s. 194A. It does not appear that the revenue took any steps against the debtors for the default committed in .....

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to accept submissions of the A/R that ₹ 3,04,18,767/- did not represent assessee s real income and therefore not chargeable to tax in AY 2001-02. The AO is accordingly directed to exclude interest of ₹ 3,04,18,767/- from assessee s total income. Ground Nos. 3 to 6 are allowed. Being aggrieved by this order of Ld. CIT(A) Revenue is in appeal before us. 12. We have heard rival contentions and perused the materials available on record. Before us Ld. DR submitted that assessee is not a .....

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hought that interest was unrecoverable then it should write it off in the books of account. If the theory of real income is applied so liberally then assessee would claim for every unrealized income in the first instance that it is not a real income. Ld. DR relied on the order of AO. 13. On the other hand Ld AR relied on the order of Ld. CIT(A) and submitted that the assessee has recognized interest income in its books of accounts. According to Ld. DR, assessee is a money lender and loans were g .....

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. The assessee was an NBFC and as such it was bound to follow income recognition norms contained in Prudential Account Guidelines issued by the RBI. As per the said Prudential Guidelines where the interest remained in arrears for consecutive period of six months then the assessee was not permitted to recognize any income. Ld. AR relied the case law of Hon'ble Delhi High Court in the case of CIT v. Vashist Chai Vayapar Ltd and Others 330 ITR 440 (Del) has held that where an NBFC does not real .....

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accounts for the year ended 31.03.2007, assessee actually written off the interest earlier accounted. However, in the AY for 2007-08 no deduction was allowed for the bad debts written off even though in AY 2001-02 the income was assessed by the AO. It will thus be appreciated that the year in which the interest was written off as bad debt deduction has not been allowed by the Revenue. In the circumstances, assessee submitted that the relief allowed by Ld. CIT(A) following the judgment of Hon' .....

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O did not agree with the plea taken by assessee and AO added it to the total income of assessee. In our considered view there has to be real income before charging the tax. In the present case the ld. DR has not brought anything on record to controvert the findings of the ld. CIT(A). The AO has not taken the confirmation by exercising his power under section 133(6) of the Act from the loan parties. We are also putting our reliance in the similar case where the Hon ble Supreme Court has held in t .....

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t, been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account. 14. We find that as per the guidelines of RBI if assessee does not pay interest for a period of exceeding .....

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. This ground of Revenue s appeal is dismissed. 15. In the result, Revenue s appeal is dismissed. Coming to the ITA 285/Kol/2008 A.Y 02-03. 16. Revenue has raised following grounds:- 1. That the Ld. CIT(A) has erred in law as well as on facts by directing the assessing office to assess loss in business of purchases & sale of shares as business loss. 2. That the Ld. CIT(A) has erred on facts by observing that the principal business of the assessee was granting of loans and advances and the sa .....

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are inter-connected and same facts we have already discussed in ITA No. 1796/Kol/2008 for AY 2001-02 in para-7 to 14 of this order and taking a consistent view in this matter, hence, we dismiss issue No 1 and 2 of this appeal of Revenue accordingly. 18. Next issues raised in ground No. 3 and 4 in this appeal by Revenue is that Ld. CIT(A) erred in deleting the addition made by AO for ₹ 8.40 lacs on account of interest receivable from Shaw Wallace & Co. Ltd. 18.1 The assessee has claime .....

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147 of the Act. 19. Aggrieved assessee preferred an appeal before Ld. CIT(A) who deleted the addition by observing as under:- 5. In Ground No.s 4 to 10 the assessee has objected to the assessment of ₹ 8,40,000 being accrued interest on ICDs granted to Shaw Wallace & co. Ltd. the reasons given by the AO for the said addition are same as discussed in the assessment for A.Y 1999-2000. In my appellate order of the even date in appeal No. 144/CIT(A)-IV/05- 06 for the AY 1999-2000 I have del .....

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said discussion we understand that assessee has given loan to M/s Shaw Wallace & Co. on interest but assessee did not account for the interest income due to the dispute which then was pending in the court of law. M/s Shaw Wallace & Co. paid the interest amount after deducting TDS in AY 2003-04 and accordingly assessee has booked the income in that year. However, AO disagreed the view of assessee on the ground that the income was accrued in the AY 2001- 02 so it was to be offered for tax .....

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