2011 (6) TMI 401 - AT - Income Tax

Tribunal rules loan business not share trading, overturning speculation loss addition.

The Tribunal determined that the appellant company's principal business was granting loans and advances, including bill rediscounting, not trading in ... Speculation loss - application of Explanation to Section 73 - Revenue contended appellant Company as Investment company and not a company engaged in the business of granting of loans and advances and considered the loss incurred in trading of shares as speculation loss - Held that:- Rediscounting charges received by the assessee as well as the amounts collected for delayed payments were held to be in the nature of interest under the Interest Tax Act. Discounting would amount to interest for the time the bill is to run which would in turn mean that rediscounting charges have to be construed as interest only. Therefore, activity of bills rediscounting would amount to granting of loans and advances and, accordingly, Explanation to sec.73 would not be applicable. We set aside the order of the CIT(A) and delete the addition made on account of speculation loss by invoking Explanation to sec.73 - Decided in favor of assessee. Issues Involved:1. Treatment of the Appellant Company as an Investment Company under Explanation to Section 73.2. Determination of the principal business of the assessee company.3. Applicability of Explanation to Section 73 to the assessee's business activities.4. Interpretation of bill rediscounting as a form of granting loans and advances.Issue-wise Detailed Analysis:1. Treatment of the Appellant Company as an Investment Company under Explanation to Section 73:The primary contention was whether the appellant company should be treated as an investment company under the provisions of Explanation to Section 73. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] treated the company as such, leading to the classification of the loss incurred in trading of shares as speculation loss. The appellant argued against this classification, asserting that their principal business was granting loans and advances, which should exempt them from the provisions of Explanation to Section 73.2. Determination of the Principal Business of the Assessee Company:The AO noted that the original assessment described the business of the assessee as primarily trading in shares and investments, with additional income from interest on loans and bill discounting. The AO observed a shift in the assessee's stance, now claiming their principal business was granting loans and advances. The AO and CIT(A) both concluded that the primary business, as per the Memorandum of Association, was dealing in shares, and the lending of money was ancillary.3. Applicability of Explanation to Section 73 to the Assessee's Business Activities:The Tribunal considered whether the Explanation to Section 73 applied to the assessee's business activities. The Explanation exempts companies whose principal business is banking or granting loans and advances. The Tribunal found that the AO and CIT(A) erred in focusing solely on the Memorandum of Association and not the actual business activities. The Tribunal emphasized that the real nature of the business should be determined by actual activities rather than the objects stated in the Memorandum of Association.4. Interpretation of Bill Rediscounting as a Form of Granting Loans and Advances:The Tribunal examined whether bill rediscounting constituted granting loans and advances. The assessee argued that bill rediscounting charges should be treated as interest, thus classifying it as a loan activity. The Tribunal referred to the Karnataka High Court's decision in the case of State Bank of Mysore v. CIT, which held that rediscounting charges constitute interest. The Tribunal also cited the definition of 'discount' from Black's Law Dictionary, which supports the interpretation of rediscounting as a form of interest.Conclusion:The Tribunal concluded that the principal business of the assessee was indeed granting loans and advances, including bill rediscounting. Consequently, the provisions of Explanation to Section 73 were not applicable. The Tribunal set aside the order of the CIT(A) and deleted the addition made on account of speculation loss by invoking Explanation to Section 73, thereby allowing the assessee's appeal.