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TMI Blog2017 (4) TMI 447X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Assessee that it's principal business is granting of loans and advances. The assessee is also engaged in the business of trading in shares, commodities and other securities. For A.Y.2008-09 the assessee filed return of income declaring loss of Rs. 4,48,14,300/-. This loss was arrived at by the assessee after considering a loss of Rs. 6,47,25,338/- from share trading. According to the AO the assessee was a company and in view of the provision of Explanation to section 73 of the Income Tax Act, 1961 (act) which provides that where any part of the business of any company consists in the purchase and sale of shares of other companies such company shall for the purpose of section 73 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, the loss from share trading i.e., purchase and sale of shares ought to be considered as "Speculation loss" and the same ought not to be set off against other income of the Assessee as provided u/s.73(1) of the Act. Sec.73(1) of the Act provides that any loss, computed in respect of a speculation business carried on by the Assessee, shall not be set off ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Balance Sheet i.e. Rs. 188,86,24,138/-. On the other hand, inventories are Rs. 55,56,52,816/- and investments are Rs. 97,82,183/- as on 31.03.2008. The volume of transactions in share trading i.e. sales is also very high i.e. Rs. 179,59,32,368/-. In view of the above findings, the assessee's claim that second exception is applicable in its case, is not accepted. In view of the above, a sum of Rs. 6,47,25,338/- is treated as speculation Loss and is not allowed to set off with business profit. However, the assessee is allowed to carry forward the Speculation Loss of Rs. 6,47,25,338/- to set off with Speculation profit in subsequent years." 6. Before CIT(A) the assessee submitted that it was a company whose principal business was granting loans and advances and therefore outside the purview of Explanation to Section 73 of the Act. The assessee gave the details of deployment of funds as on 31.3.2008 Balance Sheet, which were as follows:- Amount in Rs.crores (i) Inventories (shares) 55.57 (ii) Sundry Debtors .05 (iii) Cash in Hand and at Bank 8.79 (iv) Loans & Advances 124.46 (v) Investments 0.98 It was submitted that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to section 73 and, therefore the revenue authorities were quite justified in treating the loss from the share dealing business as speculation loss and in refusing to set off the same against the income earned from Money lending business." 7. Attention of the CIT(A) was drawn to the Memorandum of Association of the Assessee and it was pointed out that the Assessee was authorised by the main objects clause, (clause-2) to carry on the business of money lending. It was pointed out that the Assessee has been granted NBFC Certificate on 26.07.2001 the RBI to carry on the business of -banking finance company. Attention was drawn to the decision in the case of ITO vs. M/s Vaishno Tradelink (P) Ltd., ITA No. 1666 (Kol) 2005, order dated 14.07.2006 wherein the Hon 'ble Kolkata Bench of ITAT held that where more funds were deployed in granting loans and advances than in shares and the said business is authorised by the Memorandum of Association of the company, the principal business of the company is granting of loans and advances and the provisions of explanation to section 73 will not apply in such cases. Reliance was also placed on the decision of the Special ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unting to Rs. 3,04,18,813/- was wrong and against the provisions of law. 9. The CIT(A) after considering all the above submissions upheld the plea of the assessee and he held as follows :- "5.1.5. Decision : I have used the assessment order, written submissions of the appellant as well as the remand report. I find that in the instant case, the principal business of the appellant is granting of loans and advances since the fund deployed in loans and advances is more than the stock of shares. Further, it is observed that in the relevant year, the appellant earned interest income of Rs. 7,45,43.913/- and incurred a loss of Rs. 6,31.80.918/- in share trading business. The case of Eastern Aviation & Industries (supra) relied upon by the A.O in the assessment order is not applicable to the instant case as the second exception to Explanation to sec.73 relating to principal business criterion was not an issue before the Hon'ble High Court. I am of the view that the appellant's case is fully covered by the decision of the Hon' ble IT AT, Kolkata Bench in the case of M/s Vaishno Tradelink (supra) and the special bench judgement in the case Venkateshwar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 373 ITR 243 (cal) wherein the Hon'ble Calcutta High Court on identical facts came to the conclusion that if granting of loans and advances was on a larger scale than the business of buying and selling shares then that would be a criteria to decide the principal business of the company as being one of granting loans and advances. The Hon'ble Court held that income alone cannot be taken into consideration for the purpose of deciding the principal business of a company. Our attention was drawn to the facts of the aforesaid case which are narrated in para - 3 of the aforesaid judgment and it was submitted that the facts of the assessee's case are identical to the case decided by the Hon'ble Calcutta High Court. Our attention was drawn to para-8 of the aforesaid decision which reads as follows :- "8. Mr. Nizamuddin was unable to make any suitable reply to the aforesaid submission of Mr. Poddar. Speaking for ourselves we are inclined to accept the submission advanced by Mr. Poddar. Because both income and business activity, according to the legislative mandate, are distinguishing factors. Therefore, income alone cannot be taken into account in deciding whether the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is just and proper and calls for no interference. The reliance placed by the AO on the decision of the Hon'ble Calcutta High Court in the case of Eastern Aviation (supra) was rightly held to be not applicable to the facts of the present case by the CIT(A). As we have already seen there are two exceptions to applicability of Explanation to Sec.73 viz., (i) companies whose gross total income consists mainly of income which is chargeable under the head "Interest on securities" "Income from house property", "capital gains", "income from other sources"; (ii) a company the principal business of which is the business of banking or granting loans and advances. The first exception is based on "Income criterion" and the second exception is based on "principal business" criterion. The second exception to Explanation to sec.73 relating to principal business criterion was not an issue before the Hon'ble High Court and it was only the income criterion that was in dispute before the Hon'ble High Court. We are of the view that there is no merit in the submission of the learned DR that the case should be re examined by the AO in the light of the RBI guidelines with regard to NBFC. We do n ..... X X X X Extracts X X X X X X X X Extracts X X X X
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