2017 (4) TMI 447 - AT - Income Tax

Share trading loss reclassified as normal business loss by Tribunal, bogus sundry creditors addition deleted

I.T.O., Ward-12 (3), Kolkata Versus Amrabathi Investra Pvt. Ltd.

The Tribunal upheld the CIT(A)'s decisions, determining the Assessee's principal business as granting loans and advances. Consequently, the share trading ... Share trading loss - business loss OR speculation loss - whether for coming to a conclusion that the principal business of an Assessee is giving of loans and advances, whether the funds deployed would be the relevant criteria? - Held that:- The decision in the case of Savi Commercial (2015 (4) TMI 554 - CALCUTTA HIGH COURT) clearly lays down the proposition that volume of loans and advances would be decisive to come to a conclusion that the principal business of a company was granting loans and advances. It is undisputed that the funds deployed in the business of granting loans and advances by the Assessee was more over a number of AYs. Thus the conclusion of the CIT(A) that the principal business of the Assessee was giving of loans and advances and therefore the Assessee was outside the mischief of Explanation to Sec.73 of the Act, is just and proper and calls for no interference. - Decided against revenue Addition on bogus sundry creditors - Held that:- In the light of the findings of CIT(A) that the income in question has been written back in A.Y.2013-14 and offered to tax, the action of AO in bringing the said amount to tax in A.Y.2008-09 cannot be sustained. Moreover, there was no material on record to show that the assessee’s liability to re-pay M/s. Swagatam Lefin Pvt. Ltd was remitted by the other party or the liability ceased to exist. Therefore the condition for invoking the provision of Section 41(1) of the Act was not satisfied. The CIT(A) was therefore fully justified in deleting the addition made by AO. Consequently ground raised by the revenue is dismissed. Issues Involved:1. Classification of share trading loss as business loss or speculation loss.2. Application of Explanation to Section 73 of the Income Tax Act.3. Determination of principal business of the assessee.4. Treatment of interest income.5. Deletion of addition regarding bogus sundry creditors.Issue-wise Detailed Analysis:1. Classification of Share Trading Loss:The Revenue contended that the loss from share trading amounting to Rs. 6,47,25,338 should be considered as 'speculation loss' under Explanation to Section 73 of the Income Tax Act, 1961, and not be set off against other income. The Assessee, a Non-Banking Financial Company (NBFC), argued that its principal business was granting loans and advances, thus the loss should be treated as a normal business loss. The CIT(A) upheld the Assessee's plea, agreeing that the principal business was indeed granting loans and advances, making the loss a normal business loss.2. Application of Explanation to Section 73:The Assessee claimed exemption from Explanation to Section 73, which deems certain companies' share trading losses as speculation losses. The Assessee argued that it fell under the exceptions specified in the Explanation, particularly as a company whose principal business was banking or granting loans and advances. The CIT(A) agreed, noting that the Assessee's deployment of funds in loans and advances was significantly higher than in share trading, thus qualifying for the exception.3. Determination of Principal Business:The CIT(A) and Tribunal found that the Assessee's principal business was indeed granting loans and advances, based on the deployment of funds. The Tribunal referenced the decision in CIT vs. Kanoria Investment (P) Ltd. and other relevant cases, concluding that the principal business is determined by fund deployment rather than income earned. The Tribunal upheld the CIT(A)'s finding that the Assessee's principal business was granting loans and advances, thereby excluding it from the purview of Explanation to Section 73.4. Treatment of Interest Income:The AO had treated the interest income as the main income of the Assessee, despite it being negative. The CIT(A) and Tribunal did not explicitly address this issue separately, but the overall conclusion that the principal business was granting loans and advances implicitly resolved this matter in favor of the Assessee.5. Deletion of Addition Regarding Bogus Sundry Creditors:The AO added Rs. 25,00,000 to the Assessee's income under Section 41(1) of the Act, considering it a benefit derived from a liability that ceased to exist. The Assessee argued that this amount was written back and offered to tax in A.Y. 2013-14. The CIT(A) accepted this argument, noting that the same income cannot be taxed twice and that there was no evidence of remission or cessation of liability. The Tribunal upheld the CIT(A)'s decision, dismissing the Revenue's ground on this issue.Conclusion:The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decisions on all grounds. The principal business of the Assessee was determined to be granting loans and advances, thus the share trading loss was treated as a normal business loss and not a speculation loss. The addition regarding bogus sundry creditors was also deleted, as the income had already been taxed in a subsequent year.