TaxTMI 
TaxTMI 
2008 (1) TMI 516
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....income and the nature of principal business of the assessee company did not take it outside the ambit of Explanation to s. 73 of the Act. Therefore, he was of the view that the assessment order passed by the AO was erroneous and prejudicial to the interest of Revenue as the amount of Rs. 41,91,333 was in the nature of speculation loss and the assessee was not entitled to set off the same against any other income except speculation gain. Accordingly, show-cause notice was issued to the assessee. In reply thereto, the assessee contended as under: (1) The principal business of the company is of granting of loans and advances and therefore, the Explanation to s. 73 did not apply in the case of the assessee. (2) The assessment order was passed with the approval of the Jt. CIT Thus two officers examined the share dealings and were of the view that assessee's principal business was of granting of loans and advances and Explanation to s. 73 did not apply. (3) Reserve Bank of India had granted registration certificate to the company to carry on the business of non-banking finance institution. (4) As per the memorandum of association, the main object of the company is "to carry on the bu....
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....p; 41,91,333 The CIT took the view that the income of the assessee company is not mainly from the interest on securities, income from house property, capital gains and income from other sources and, therefore, the assessee company cannot be excluded from the application of Explanation to s. 73 of the Act. For determining whether the principal business of the assessee is granting of loans and advances, the CIT referred to the utilization of the funds disclosed by the assessee in the balance sheet as on 31st March, 2001. Under paras 6 and 7 he noted that the assessee is not a banking company as admittedly the RoC had granted registration to the assessee company as non-banking financial company. The CIT thus took the view that the assessee company is not exempt from the application of Explanation to s. 73 of the Act and, therefore, he set aside the assessment order made on 27th Nov., 2003 and directed the AO to recompute the income of the assessee considering the loss in share trading amounting to Rs. 41,91,333 as speculation loss in terms of provisions of Explanation to s. 73 of the Act. 3. The learned Authorised Representative before us contended that there was n....
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..... CIT vs. Venkateswar Investment & Finance (P) Ltd. (2005) 92 TTJ (Kol)(SB) 1129 : (2005) 93 ITD 177 (Kol)(SB). In this case also it was held that the Explanation to s. 73 will not apply in the case of a company where the principal business is of granting of loans and advances. Referring to this case it was pointed out that in this case the AO had determined the principal business on the basis that the loss in shares was more than the interest income. The Hon'ble Special Bench has held that what constitutes principal business will depend on the facts and circumstances of each case. The main criteria in this case was held to be the deployment of the capital, not the actual income from such activities. Our attention was invited towards p. 1 of the paper book and it was pointed out that out of the share capital of Rs. 4,88,03,500, a sum of Rs. 2,29,49,578 was invested in loans and advances and the sum of Rs. 1,67,44,796 was applied to the current assets. It is only a sum of Rs. 1,83,90,000 which was invested in the shares The assessee is a non-banking financial company as per the certificate of registration granted by the RBI, the copy of which is available at p. 12 of the paper book.....
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....ssed under s. 263 and accordingly he set aside the order passed by the AO and directed the AO to recompute the income of the assessee considering the loss from the share trading business. The learned Departmental Representative relied on the following decisions: (i) Thalibai F. Jain & Ors. vs. ITO 1975 CTR (Kar) 66 : (1975) 101 ITR 1 (Kar); (ii) Addl. CIT vs. Mukur Corporation (1978) 111 ITR 312 (Guj); (iii) CIT vs. Seshasayee Paper & Boards Ltd. (2000) 242 ITR 490 (Mad); (iv) CIT vs. M.M. Khambhatwala (1992) 198 ITR 144 (Guj); (v) Malabar Industrial Co. Ltd. vs. CIT (2000) 159 CTR (SC) 1 : (2000) 243 ITR 83 (SC). 7. We have carefully considered the rival submissions, perused the materials placed before us along with the case law relied on before us along with the order of the CIT passed under s. 263. Sec. 263 lays down as under: "263. (1) The CIT may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the AO is erroneous insofar as it is prejudicial to the interests of the Revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems ....
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....rpose he need not to show any reason or record any reason to believe. It is a part of his administrative power to call for the records and examine them relating to any assessee. Secondly, he may consider any order passed by the AO as erroneous as well as prejudicial to the interest of the Revenue. This consideration having regard to the language of s. 263 apparently is a consideration which he exercises by calling for and examining the record available at this stage. There is no question of the assessee to appear and make submission. Thirdly, if after calling for and examining the records the CIT considers that the order of the AO is erroneous insofar it is prejudicial to the interest of the Revenue, he is bound to give an opportunity to the assessee of being heard and after making or causing to be made such enquiry as he may deem fit, pass such order thereon as the circumstances of the case may justify including an order enhancing or modifying the assessment or cancelling assessment and directing a fresh assessment. This empowers the CIT to cause or make such enquiries as he deems necessary. Fourthly, the CIT under s. 263 can enhance or modify the assessment. Thus, in order to in....
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.... noted that under para 2 of the assessment order the AO has noted that the assessee carried on the business of leasing, financing, hire-purchase, trading in shares and also act as a broker for sale and purchase of vehicles. The CIT by invoking the provisions of s. 263 set aside the order of the AO as in his view the Explanation to s. 73 is applicable in the case of the assessee and the assessee was not entitled to set off the loss of Rs. 41,91,333 from the business income. 10. Now, the question before us is whether there was an error in the order of the AO so that CIT could have invoked the provisions of s. 263 provided that the order is also prejudicial to the interest of the Revenue. Even otherwise also on merit, whether the assessee can set off the loss against the business income. The Explanation to s. 73 of the Act stipulates 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 ....
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.... principal business of the assessee is not granting of loans and advances. Under para 8 of his order under s. 263 the CIT held that the assessee is not a banking company and under para 9 of the order the CIT held that the assessee is not an investment company. But nowhere the CIT has held that the assessee company is not the one which is not (sic) engaged in the business of granting of loans and advances. This clearly shows that the CIT agreed with the contentions of the assessee that the assessee is engaged in the business of granting of loans and advances. Even no such error was pointed out by the CIT in his order passed under s. 263 that the assessee is not the company which is engaged in the business of granting loans and advances. We noted that the CIT made a reference to the judgment of the Hyderabad Bench in the case of Melville Finvest Ltd. vs. Jt. CIT for the applicability of the Explanation. 11. We have gone through that decision of the Hyderabad Bench of Tribunal in the aforesaid case of Melville Finvest Ltd. The facts of this case are that the main object of the assessee company was to carry on and undertake a business of hire-purchase, financing. investment in shares.....
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....were attracted and the loss from share transactions had to be held as speculation loss." This decision, in our opinion, will not assist the Revenue. In this decision the Tribunal has discussed only the first exception provided under-the Explanation to, s. 73 which relates to the gross total income which consists mainly of the income chargeable under the heads "Interest on securities". "Income from house property", "Capital gains" and "Income from other sources". The second exception whether the assessee company was engaged in the business of granting of loans and advances was not the issue before the Tribunal and, therefore, no finding has been given in that case by the Tribunal whether the assessee is engaged in the business of providing the loans and advances. In the case before us the claim of the assessee relates to the fact that the principal business of the assessee is of granting of loans and advances and this plea of the assessee has not been rejected by the CIT while passing the order under s. 263. 12. In the case of Dy. CIT vs. Venkateswar Investment & Finance (P) Ltd., we find that the Special Bench has considered the criteria of the principal business of granting of l....
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....um of association clearly mentioned the business of granting and advancing money as one of its main objects. The Explanation to s. 73 is in the nature of deeming provisions and as such has to be strictly construed and the onus was on the Revenue to show that the case of the assessee fell within the four comers of the deeming provisions of law. Merely because the loss in dealing in shares in one particular year was more than the income from the principal business of the assessee of granting loans and advances, it could not be said that the principal business of the assessee was not that of granting loans and advances. Considering the totality of facts and circumstances of the case, the principal business of the assessee was that of granting of loans and advances and the provisions of Explanation to s. 73 were not attracted to the case and, accordingly, the loss incurred in the business of purchase and sale of shares was not to be treated as speculative loss within the meaning of Explanation to s. 73. To decide as to whether the case of an assessee falls in exceptions provided in Explanation to s. 73 of the Act or not and to decide as to whether the principal business of the assess....
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....al business, the business of banking or the granting of loans and, advances, Explanation to s. 73 does not apply. The company is excluded from the ambit of Explanation on the basis of the nature of the principal business carried on by it. The two kinds of exceptions provided in Explanation to s. 73 are based on two independent tests laid down in the Explanation itself. The test to be applied on the first category of company is the character of its gross total income. The test laid down in the case of the second category of company is the nature of the principal business carried on by it. In the first category, where the test is that of the character of loss total income, the other test relating to the nature of principal business carried on by it does not apply. Likewise in the second category of company where the test is the nature of the principal business carried on by it, the test of the gross total income does not apply. The two exceptions provided in Explanation to s. 73 are governed by two different tests laid down in the said Explanation itself. Therefore, the examination of the exceptions provided in Explanation to s. 73 is to be done strictly in accordance with the tests....
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....e the Hon'ble High Court was that the CIT before passing the final order under s. 263 must necessarily and in all cases record final conclusion about the points in controversy before him. On this plea, the High Court held that the CIT can set aside the assessment and direct the AO to make a fresh assessment. Thus, this case will also not assist the Revenue. 18. In the case of CIT vs. Seshasayee Paper & Boards Ltd., the issue was whether the CIT has to record final conclusion on the points of controversy in an order passed under s. 263. The Hon'ble High Court has held that the power of the CIT are very wide in exercising the powers of revision and the CIT can direct the AO to make a fresh assessment. Thus, this case will also not assist the Revenue. 19. In the case of CIT vs. M.M. Khambhatwala, the issue before the Hon'ble High Court was whether the CIT can exercise powers under s. 263 where the issue was debatable. The High Court has held that the CIT can exercise powers under s. 263 where the issue is debatable. This decision has been overruled by the Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. vs. CIT. Thus, this decision in our opinion will not assist the ....