TMI Blog2005 (5) TMI 254X X X X Extracts X X X X X X X X Extracts X X X X ..... as is apparent from para 7 of the assessment order pertaining to the asst. yr. 1997-98. It was noticed by the AO that purchase of shares had been shown by the assessee in the balance sheet under the head "Investments". Considering this fact, the AO was of the view that loss arising on the sale of such shares was capital loss assessable as short-term or long-term capital losses. As a result thereof, such loss could be set off only against the capital gains in view of s. 74 of the Act and against no other income. Alternatively, he was of the view that even presuming the loss to be business loss, such loss has to be considered as deemed speculative loss in view of the provision of Explanation to s. 73 of the Act and, therefore, could not be set off against the other income of the assessee. Thus, on both the grounds, the assessee's claim to set off such losses against other income was disallowed by the AO for all the three years. 4. At this stage, it may also be mentioned that in asst. yr. 1998-99, the assessee had raised a plea that the assessee-company was a finance company as per the guidelines of RBI and, therefore, the exception provided by the legislature in the Explanation to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ject of the assessee-company as per the memorandum of association and articles of association clearly states that the assessee is a finance company, (iii) the assessee had not received any secured loans but had unsecured loans of Rs. 17,01,414 against which the loans granted were to the tune of Rs. 1,13,49,046 (figures relating to the asst. yr. 1997-98) and (iv) that the capital employed in the finance activities was Rs. 2,62,37,690 whereas in other business, it was only Rs. 89,28,541 (figures relating to asst. yr. 1997-98). Reliance was also placed on the CBDT Circular No. 204 dt. 24th July, 1976 and certain decisions namely, Offshore India Ltd. vs. ITO (1986) 24 TTJ (Cal) 86 : (1986) 15 ITD 549 (Cal) and Hon'ble Supreme Court judgment in the case of Investment Ltd. vs. CIT (1970) 77 ITR 533 (SC). 6. The learned CIT(A), after considering the judgment of the Hon'ble Supreme Court in the case of Investment Ltd., held that the assessee was engaged in the business of purchase and sale of shares and accordingly the provisions of s. 74 of the Act, were not applicable. Besides this, he was also of the view that the assessee-company fell within the exception provided in the Explanation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h shares would be capital gain or loss as the case may be and consequently, the provisions of s. 74 of the Act, would be applicable. Secondly, it was contended that even assuming that the assessee was dealing in shares, it cannot be said on facts that the principal business of the assessee was either banking or granting of loans and advances. According to him, the object in the memorandum of association only suggested that the assessee is entitled to carry on the business with reference to such objects but whether the principal business of the assessee was that of banking or granting of loans and advances would depend on the facts of each case. It was also submitted that registration by RBI as NBFC does not mean that the assessee was engaged principally in the business of banking or granting of loans and advances. He drew our attention to para 4 of the orders of the learned CIT(A) wherein the provisions of s. 45 of the RBI Act have been quoted. He also drew our attention to the definition of "financial institution" given in s. 45(1)(c) of the RBI Act, which includes various activities including acquisition of shares, stock, bonds, debentures, securities, etc., letting or delivery o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. Considering the voluminous purchases and sales, it was pleaded by him that the assessee was carrying on the business of purchase and sale of shares and no adverse inference can be drawn merely because the shares were shown under the head "Investment". Hence, the provision of s. 74 of the Act could not be applied. Finally, it was concluded by him that the assessee's case fell within the exception provided in the Explanation to s. 73 of the Act. 9. At the end of hearing, we directed the learned counsel for the assessee to furnish the copies of balance sheets for all the years along with complete details of schedules and audited report as well as the complete details of purchase and sale of shares for all the years. In response to the said direction, the learned counsel for the assessee has filed the details in the additional paper book numbering pp. 53 to 184. 10. Rival submissions of both the parties have been considered carefully in the light of the material placed before us. The first question to be considered is, whether purchase of shares by the assessee was by way of "investments" or by way of "stock-in-trade". It is the settled legal position that the entries in the boo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the objects stated in the memorandum of association; (ii) registration of NBFC by RBI; (iii) the capital employed by the assessee in the finance activities; and (iv) income earned from the financing business. As far as the first two factors are concerned, they merely suggest or indicate that the assessee is entitled to carry on the business of financing including granting of loans and advances. But these two factors by itself cannot lead to conclusion that the principal business of the assessee is that of granting loans and advances so as to fan within the ambit of exception provided in the Explanation to s. 73 of the Act. 13. Coming to the other two factors, we find that the income of the assessee from the activity of granting loans and advances is very low as compared to the total business income of the assessee. The learned CIT(A) has mentioned in his order pertaining to asst. yr. 1997-98 that the total income of the assessee-company of Rs. 82,03,887 which included the amount of Rs. 50,47,554 from the finance activity after set off of loss on sale of shares amounting to Rs. 22,54,544. We have gone through the financial statement given by the assessee in the paper book. The per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was 32.5 per cent approximately of the total. Thus, it is seen that the income from granting of loans and advances in all the three years was less than 35 per cent. 14. Coming to the aspect of employment of capital, we find that in the asst. yr. 1997-98, the loans and advances as per Sch. VI amounted to Rs. 1.14 crores approximately while the total capital including borrowed funds and reserved amounted to Rs. 3.44 crores approximately. This also shows that employment of capital in the activity of granting loans and advances was much less than the capital employed in other fields. The learned counsel for the assessee in his written submissions has taken the figure of Rs. 2.62 crores approximately as net capital employed in the finance division, which in our opinion, is not attributed towards loans and advances only schedule shows that Rs. 1.47 crores approximately was employed in various other current assets and the same cannot be considered as part of the capital employed towards loans and advances. Similarly, the capital employed in the activity of granting of loans in asst. yr. 1998-99 was Rs. 1.76 crores approximately as per Sch. VI of the balance sheet as against the total fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erence may also be made to another Special Bench decision in the case of Dy. CIT vs. Venkateswar Investment Finance (P) Ltd. (2005) 92 TTJ (Cal)(SB) 1129 : (2005) 93 ITD 177 (Cal)(SB), wherein it was held that overall situation should be taken into consideration including objects mentioned in the memorandum of association, the capital employed and the income derived from the activity of granting loans and advances. In that case, it was found on facts that entire funds available with the assessee were employed in the business of granting loans and advances and the major income related to such business. But in the present case, the capital employed as well as the income derived from the business of granting loans and advances was much less than the capital employed and income derived from other business activities and, therefore, the provision of Explanation to s. 73 of the Act squarely applies to the case of the assessee. 17. In view of the above discussions, we hold that the learned CIT(A) was not justified in holding that the provisions of Explanation to s. 73 were not applicable to the assessee's case. Consequently, the orders of the learned CIT(A) are reversed on this issue ..... X X X X Extracts X X X X X X X X Extracts X X X X
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