TMI Blog2019 (11) TMI 1151X X X X Extracts X X X X X X X X Extracts X X X X ..... applicable, is wholly unsustainable. What constitutes the 'principal business' has not been defined anywhere in the Act. Accordingly what constitutes principal business will essentially depend on the facts and circumstances of each case. We however note that certain guiding principles and factors have been laid down by the Special Bench of this Tribunal at Kolkata in the case of Dy. CIT v. Venkateshwar Investment Finance [ 2004 (12) TMI 310 - ITAT CALCUTTA-E] Amongst the two, the principal or dominant business of the assessee was granting loans advances and thereby the assessee falls outside the ambit of the Explanation to Sec. 73 of the Act. Consequent thereto, the loss incurred by the assessee in the business of share dealing cannot be construed as speculation loss. We therefore have no hesitation in holding that the loss incurred by the appellant during the relevant year was assessable as business loss and which the appellant could set-off against its business income inter alia including interest income derived from the business of granting loans. Appeal of the assessee is allowed. - I.T.A. No. 2283/Kol/2007 - - - Dated:- 6-9-2019 - A. T. VARKEY, JUDIC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness of which is the business of banking or the granting of loans and advances. According to AO, the assessee did not fall within the first limb of exception in as much as the aggregate of the sum assessable under the head 'Business Income' exceeded the aggregate of the sum assessable under the head 'Other Sources', 'Capital Gains' and 'House Property'. The AO further held that even the second limb of exception was not applicable in the assessee's case because in his view its activity of money lending could not be said to be company's principal business activity because the majority of funds were deployed in Investment in shares rather than loans advances. The AO therefore concluded that the Explanation to Section 73 was applicable in the given facts of the present case.Accordingly the AO disallowed the set off of share trading loss of ₹ 1,48,61,635/- against normal business income treating it to be in the nature of deemed speculation loss. On appeal, the ld. CIT (A) deleted the impugned disallowance by observing that the case of the assessee fell within the first limb of the exception provided in Explanation to Section 73. Aggrieved ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ussed and considered by the Tribunal which is apparent on perusal of the impugned order of the Tribunal. According to us this allegation cannot be brushed aside in the present appeal simply on the ground of matter of facts and evidence because it is directly related to application of the provisions of law i.e. Section 73 of the Income Tax Act, 1961 and Explanation under it. We think Tribunal would be the appropriate forum to scrutinize the said relevant facts and evidence to come to a definite conclusion as to whether principle business of the assessee is of granting of loans and advances or dealing in shares and whether case of the assessee falls within the exception under Section 73 of the Income Tax Act, 1961 and whether loss from shares dealing was speculation loss or not in the facts and circumstances of this case. Accordingly we set aside the impugned order of the Tribunal and remand to it on the aforesaid issues with direction to decide the aforesaid issue afresh after hearing the parties and examining the relevant records including the records of the assessment proceeding but it would not allow the assessee to file any fresh or new document and on consideration of the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... recorded by the AO that the main object of the assessee company as set out in the Memorandum of Association was granting of loans advances. He also referred to Para 4 of the assessment order wherein while concluding that the assessee company was engaged in the business of granting loans advances, the AO recorded a finding of fact that the funds deployed in share trading was only ₹ 2.33 crores whereas the funds deployed in money lending was ₹ 13.03 crores. The Ld. AR thereafter took us through the financial statements of the assessee company for the year ended 31.03.2004 and furnished the following summary statement of the fund deployment of the assessee for the year ended 31.03.2004: Investible Funds Deployed in Amount Percentage Stock-in-Trade of share dealing 2.33 crores 5.65% Loans Advances 13.03 crores 31.62% Investment 25.22 crores 61.21% Other A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and Income criteria was granting of loans advances. It was accordingly claimed that assessee company fell within the exception carved out in the Explanation to Section 73 of the Act and the AO be therefore directed to allow the set off of loss from share dealing against income derived from other business income inter alia including interest income. 8. Per contra, the ld. DR supported the order of the AO. He submitted that the Explanation to Section 73 has to be read and understood as a whole. According to him the second limb of exception in the said Explanation which excludes company whose principle business is of granting of loans advances is required to be read with the phrase to the extent to which the business consists of purchase and sale of shares . He therefore argued that in the given facts of the case, the assessee company was unable to demonstrate that the activity of granting loans advances was inter-connected with its business of share dealing and in that view of the matter the provisions of Explanation to Section 73 had been rightly invoked by the AO. 9. We have given our thoughtful consideration to the rival submissions and the facts involved ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 19. The law stated in the Explanation may be edited for our purpose in the following lines : Where any part of the business of a company consists in the purchase and sale of shares of other company 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 . 20. The transactions of purchase and sale of shares would be held as speculation business only if the company was hit by the Explanation to section 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 against profits and gains, if any, of another speculation business. 21. But the explanation has provided two exceptions. The first exception is available in the case of a company whose gross total income consists mainly of income which is chargeable un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 and sale of shares is more than the interest income during the relevant period, does not mean that the principal business of the assessee ceases to be that of granting of loans and advances. What constitutes the principal business has not been defined anywhere in the Act. What constitutes the principal business will depend on the facts and circumstances of each case. The Memorandum and the Articles of Association of the company, past history of the assessee, current and past year's deployment of the capital of the assessee, break-up of the income earned during the relevant and past years and the nature of 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 income and has substantial interest income, it does not imply that the assessee's principal business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1.03.2004 were ₹ 41.21 crores. The funds deployed inter-alia consisted of loan and advances of 13.03 crores, 2.33 crores in stock-in-trade of shares and 25.22 crores in Investment in shares. In our considered view the AO erred in comparing the funds deployed in shares held by Investment which aggregated to ₹ 25.22 crores as against loan advance of ₹ 13.03 crores and therefore he wrongly concluded that the activity of granting loans advances was not the principal business of the assessee. On the other hand, we find merit in the ld. AR's contention that the correct comparison parameter was the funds deployed in the business of share dealing i.e. ₹ 2.33 crores with the funds deployed in the business of loan and advance of ₹ 13.03 crores. For better understanding, the details of the funds deployed by the assessee in earlier years as well as preceding years are given below: Asst Year Loans Advances Share Dealings 2002-03 1080.13 lacs 825.97 lacs 2003-04 139 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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