2010 (11) TMI 450 - AT - Income Tax

Loan Business Loss Deemed Normal, Not Speculative: Tribunal Decision Upheld

The Tribunal held that the assessee, engaged in granting loans and advances, falls under the exempted category in Explanation to Section 73(1) of the ... Applicability of Explanation to Section 73(1) - Determination of speculation loss - it is clear that if in case of a company part of the business consists of dealing in shares the same may be treated as losses in speculation business except for certain companies falling under exceptions - appellant has utilized their funds mainly for the purpose of investment in shares and more than that for the purpose of making loans and advances - Held that: assessee's main source of income and source of application of fund is in loans and advances - It is clear that the loans and advances given by the assessee in its regular business are to the tune of Rs.7.3 crores as against the investment in shares at Rs.5.38 crores - Held that: Assessing Officer has not disputed the fact that the interest income earned from granting of loans and advances is not the business income, rather he has assessed the same as business income - It has to be considered as normal business loss and deducted in the computation of the 'profits and gains of business - Appeal is dismissed Issues Involved:Applicability of Explanation to Section 73(1) of the Income Tax Act regarding the determination of speculation loss.Detailed Analysis:1. Applicability of Explanation to Section 73(1):The primary issue in this appeal is the applicability of Explanation to Section 73(1) of the Income Tax Act concerning the determination of speculation loss. The Revenue contended that the assessee's principal business is dealing in shares and not banking or granting loans and advances. Therefore, the loss from share trading should be treated as speculation loss.2. Facts and Findings:The assessee is a private limited company engaged in dealing in shares, earning interest from the advancement of borrowed funds, consultancy income, and income from the sale of debentures. The Assessing Officer (AO) concluded that the assessee is not an investment company as per Explanation 1 to Section 73 of the Act. Consequently, the AO treated the loss from share trading (Rs. 54,65,063) as speculation loss, which cannot be set off against other income except for speculation profit.3. CIT(A) Decision:The CIT(A) allowed the assessee's claim, holding that the assessee is a finance company whose principal business is making loans and advances. The CIT(A) noted that the assessee had been assessed under the Interest Tax Act, which applies to banks and credit institutions. The AO had accepted the assessee's status as a financial company under the Interest Tax Act, thus the same status should be recognized under the Income Tax Act. The CIT(A) concluded that the deeming provisions of Explanation to Section 73(1) do not apply to the assessee.4. Tribunal's Analysis:The Tribunal examined the financial profile of the assessee, noting that a significant portion of funds was used for loans and advances, and the interest income constituted 64.23% of the total income. The balance sheet showed loans and advances at Rs. 7.31 crores, investments in shares at Rs. 5.38 crores, and stock of shares at Rs. 1.44 crores. The Tribunal emphasized that the principal business of the assessee was granting loans and advances, not trading in shares.5. Legal Interpretation:The Tribunal referred to the provisions of Explanation to Section 73(1), which exempts companies whose principal business is banking or granting loans and advances from being deemed as carrying on speculation business. The Tribunal found that the assessee's principal business activity was granting loans and advances, supported by the financial data and the AO's treatment of interest income as business income.6. Conclusion:The Tribunal concluded that the assessee falls under the exempted category of companies mentioned in the explanation below Section 73. Therefore, the loss from share trading activity should be considered as normal business loss and not speculation loss. The Tribunal confirmed the CIT(A)'s decision and dismissed the Revenue's appeal.7. Final Order:The appeal by the Revenue was dismissed, and the order pronounced on 19.11.2010 confirmed the CIT(A)'s decision in favor of the assessee.