TMI Blog2004 (12) TMI 310X X X X Extracts X X X X X X X X Extracts X X X X ..... raised the following grounds of appeal: "(1) That the Ld. CIT(A) has erred in law as well as on facts in treating the speculation loss to be as business loss, without appreciating that the Explanation to section 73 of the Act is clearly applicable in the instant case. (2) That the Ld. CIT(A) has erred in law and on the facts of the case in holding that loss of Rs. 51,28,005 is a business loss, ignoring the judgment of jurisdictional High Court in the case of Eastern Aviation Industries Ltd. v. CIT reported in 208 ITR 1023 and that of Arvind Investment Ltd reported in 192 ITR 365. (3) That the order of the Ld. CIT(A) deserves to be vacated and that the order of the Assessing Officer deserves to be restored." 3. The Ld. CIT D.R. submitted that the loss on purchase and sale of shares during the relevant year has been claimed by the assessee at Rs. 51,28,005, which is more than the lease rental and interest income shown by the assessee and the assessee has filed a loss return at Rs. 34,03,960. He argued that the Explanation to section 73 of the Act is clearly applicable in the present case and the Assessing Officer has rightly held the loss of Rs. 51,28,005 as speculation lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the fund employed in the business of granting loans and advances for the last 3 years and also of the year under assessment which shows that loans and advances were Rs. 1.58 crores as on 31-3-1995, Rs. 1.57 crores as on 31-3-1996 and Rs. 31.15 lakhs as on 31-3-1997. The Ld. Counsel submitted that the business of the share dealing was started for the first time during the relevant period and no share business was carried out in any of the earlier 3 preceding financial years prior to the financial year relevant to the assessment year 1997-98. He argued that the case relied upon by the learned CIT D.R. are distinguishable since in those cases the principal business of the assessee was not that of granting of loans and advances. He argued that merely because numerical value of the loss in purchase and sale of shares is more than the income of the assessee under the head "Income from other sources" during the relevant period, does not mean that the principal business of the assessee ceased to be that of granting of loans and advances. He argued that the granting of loans and advances is, in fact, the Core business of the assessee which is carried on year after year. He relied on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business income. Section 73(1) provides that any loss in respect of a speculation business carried on by the assessee shall be set off only against the profits and gains of another speculation business, if any. Thus, loss from speculation business cannot be set off from profits and gains of other business which is not speculation business. Explanation to section 73 provides as under: "Explanation.- Where any part of the business of a company (other than a company whose gross total income consists mainly of income which is chargeable under the heads "Interest on securities", "Income from house property", "Capital gains" and "Income from other sources", or a company the principal business of which is the business of banking or the granting 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." As per the above Explanation, in the case of a company, business of purchase and sale of shares shall be deemed to be speculation business. However, certain companies a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Business Y.E. 31-3-1994 Y.E. 31-3-1995 Y.E. 31-3-1996 Y.E. 31-3-1997 Interest income 7,520 11,88,440 19,70,558 14,35,520 Lease Rentals Nil Nil 4,23,488 8,06,256 6. We find that the loss resulting on account of share transaction effected by the assessee during the year under consideration has been treated as deemed speculation within the meaning of Explanation to section 73 of the Act. A plain reading of the provision of Explanation to section 73 of the Act 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 section 73 of the Act. Accordingly, the controversy in the present case revolves around the question as to whether the principal business of the assessee-company during the relevant period is that of granting of loans and advances. 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. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... main objects. The Assessing Officer has treated the share loss from share dealings as speculative loss within the meaning of Explanation to section 73 mainly for the reason that the interest income during the relevant period was lower than the loss suffered from share dealings in the year under consideration. The other important aspects of the case, namely, the past history of the case, the object clause of the Memorandum and Articles of Association, the current deployment of the capital of the company were not properly appreciated by him. The Explanation to section 73 is in the nature of deeming provision and as such has to be strictly construed and the onus is on the revenue to show that the case of the assessee falls within the four corners of the deeming provision of law. This view is fortified by the decisions of the Hon'ble Supreme Court in Vegetable Products Ltd.'s case, Laxmi Industries Ltd. Co.'s case, Mayank Poddar (HUF)'s case and R.J. Trivedi Sons' case. Merely because the loss in dealing in shares in one particular year is more than the income from the principal business of the assessee of granting loans and advances, it cannot be said that the principal business of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o conclude that the principal business of the company of granting loans and advances or acquisition of shares, stocks, bonds etc. As stated above, it is to be decided after considering all the surrounding circumstances of the case. In the case on hand we find that in the assessment years 1985-86 to 1990-91 the turnover of the assessee is much higher than the interest income earned by it. We then find that only in the assessment years 1991-92, 1992-93 and 1994-95 there was nil turnover of the assessee. We find force in the argument of the learned A.R. of the assessee that if there is temporary suspension of the business it cannot be considered to have been closed or discontinued." 7. The provision of Explanation to section 73 is clearly a deeming provision of law and has to be strictly construed. In the case of Mayank Poddar v. WTO [2003] 262 ITR 633 (Cal.), the Hon'ble jurisdictional High Court held "The subject is not to be taxed unless the charging provision clearly imposes the obligation. Equally important is the rule of construction that if the words of a statute are precise and unambiguous, they must be accepted as declaring the express intentions of the Legislature. A prope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... saction amounting to Rs. 7,95,447, loss in regular share dealing business amounting to Rs. 12,90,145 and loss of interest attributable to the share dealing business amounting to Rs. 8,21,400. As against the above, the only income of the assessee-company for the relevant year by way of dividend amounted to Rs. 3,87,603 only. In these facts, the Hon'ble High Court held that the Explanation to section 73 was clearly applicable and the loss suffered by the assessee-company in the share trading transactions inclusive of interest paid on borrowed money attributable to that business was rightly treated by the Tribunal as a loss in speculative business. The facts of this case before the Hon'ble High Court are distinguishable from the facts in the present case before us. In the case before the Hon'ble High Court the whole business of the assessee was that of dealing in shares and some dividend income was also earned and declared by the assessee. In the case of the assessee before us, the whole business of the assessee is not that of dealings in shares and the assessee has been doing the business of advancement of loans and advances in the relevant year as well as in the past years. In the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t company. In the said case, the dispute before the Hon'ble High Court was whether the assessee was an investment company within the meaning of section 109. Section 109(ii) defines "investment company" as under: (ii) 'investment company' means a company whose gross total income consists mainly of income which is chargeable under the heads 'Interest on securities', 'Income from house property', 'Capital gains' and 'Income from other sources'. Thus, the definition of 'investment company' was identical to companies which are excluded from the applicability of Explanation to section 73. In the said case before the Hon'ble High Court, the business income of the assessee during the year under consideration was less than the income from house property, other sources and capital gains. Therefore, the Assessing Officer held the assessee-company to be investment company undersection 109(ii) on the ground that more than 51 per cent of the gross total income was income from house property. On appeal, the CIT(Appeals) and the Tribunal did not agree with the finding of the Assessing Officer. The Revenue was in reference before the Hon'ble High Court. Their Lordships of the Hon'ble High Court, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ered within the Explanation to section 73 or is a company which is outside such Explanation because of the exception provided to certain types of companies under the Explanation because the definition of "investment company" and companies which are to be excluded from the applicability of Explanation to section 73 are identical. This decision of the Hon'ble High Court although relates to the provision of section 104 read with section 109 of the Income-tax Act, but being in pari materia with the issue before us, is applicable and overall view of the function of the assessee-company of the relevant period as well as of the past years has to be taken into account in order to find out the principal business of the assessee. Merely because the loss in share dealings is more than the profit earned in the Core business of the assessee of advancement of loans and advances, does not mean that the business of advancement of loans and advances is not the principal business of the assessee. In the past years the assessee has no share dealings whatsoever and clearly the principal business of the assessee in the preceding years was that of advancement of loans and advances. 10. We hold that to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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