TaxTMI 
TaxTMI 
2019 (5) TMI 1603
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..... CIT (A) failed to appreciate the fact that the Appellant Company satisfies both the conditions given in Explanation to section 73 to exclude the Company from the deeming fiction of section 73 of the Act. 3. For that the Commissioner of Income Tax (Appeals) erred on facts and in law in concluding that the Appellant has suffered losses on trading of shares and hence Appellant major component of income is from business only. The Ld. CIT (A) failed to appreciate the facts that the losses suffered by Appellant were on sale of Investment only and Appellant major component of income is not form business and hence Appellant is duly covered by the exceptions provided in explanation to section 73 of the Act. 4. For that the Commissioner of Income Tax (Appeals) erred on facts and in law in confirming the action of Assessing Officer of treating short term capital loss of Rs. 63,27,007/- (STT Paid) and long term capital loss of Rs. 1,14,46,874/- (STT Paid) as Speculative Business loss in terms of Explanation to section 73 of the Act. The Ld. CIT (A) failed to appreciate the fact that the Appellant Company had always the intention to invest in shares, Bonds, Mutual Funds etc. and accounted....
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.... laid down and the provisions under Explanation to section 73 were met. According to the A/R the appellant is covered by the two exceptions provided in the said Explanation, namely, that its income consists mainly of other interest income or dividend income and it is also principally in the business of banking. The submissions read as under: "During the assessment year 2012-13, your appellant Company has earned the following Taxable Income: Under the head of Amount (Rs.) Loss from business 2,445/- Short Term Capital Loss (STT Paid) 63,27,004/- Long Term Capital Loss (STT Paid) 1,14,46,874/- Dividend Income (Exempted) 12,52,106/- Your appellant Company has consistently, year after year, shown the transactions relating to purchase/sale of shares, Mutual Funds etc as investment in its books of accounts. During the year, your Appellant has entered in to a very few delivery based transactions of purchase & sale of few shares. It will kindly be appreciated that all the transactions were delivery based only and there was no intraday, future & options transaction made by your appellant. During the year, your appellant has suffered long term capital loss of 114,46,874/-....
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....act that the Appellant Company had always the intention to invest in shares, Bonds, Mutual Funds etc and accounted the transactions as investment year after year in books of account and hence correctly categorized the income from sales of those securities under the head 'Income from Gain'. It is reiterated that the appellant's intention was always to invest and not to trade in these investments with a view of capital appreciation and accordingly appellant has accounted accounted for and valued the same as investments in its books of account. It is further submitted that the transaction of purchase and sale of shares would be held as speculative business only if the company was hit by the provisions of Explanation to section 73. The implication of the Explanation is that if a company incurs a speculation loss in a manner deemed in the explanation such loss shall not be set off except against profit and gains, if any, of another speculation business. The explanation provides for two exceptions. The first exception is available in the case of a company whose gross total income consists mainly of income which is chargeable under head "interest on securities', 'inc....
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....tion to section 73. If any one of the above two conditions is satisfied, the Company will not be hit by the deeming provisions of section 73. In order to determine whether the exception that is carved out by the explanation applies, the legislature has first mandated a computation of the gross total income of the Company. The words "consists mainly" are indicative of the fact that the legislature had in its contemplation that the gross total income consists predominantly of income from the four heads that are referred to therein. Obviously, in computing the gross total income the normal provisions of the Act must be applied and it is only thereafter, that it has to be determined as to whether the gross total income so computed consists mainly of income which is chargeable under the heads referred to in the explanation. The two exceptions provided in Explanation to Section 73 are governed by two different tests laid down in the said explanation itself. Therefore, the examination of the exceptions provided in Explanation to section 73 is to be done strictly in accordance with the tests laid down In the Explanation." Your good-self will-kindly appreciate that in the present case....
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....ve that NBFC Company is a company which provides the banking services without holding the banking license. Now, we analyze the second exception provides in Explanation to section 73, which read out as under: OR (ii) The principal business of the company is the business of banking or the granting of loans and advances. From a plain reading of aforesaid second exception provided in explanation to section 73, your good-self will kindly observe that second exception provides that if a Company is engaged in the business of banking or the granting of loan and advances then said Company is out of purview of Explanation to section 73 of the Act. It is an undisputed fact that your Appellant Company is an approved NBFC meaning thereby that Company is engaged in the business of banking services without holding the banking license. Furthermore the appellant Company is also engaged in the business of granting of loans and advances and therefore, clearly also falls in the second exempted category of the companies which are not hit by provisions of Explanation to section 73, i.e., the companies' engaged in the business of banking services OR in granting of loans and advances. The appe....
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.... company should be banking OR granting of loans and advances. Your appellant Company has main income under the head Capital Gain/Income from Other Sources i.e. other than Business Income OR being a NBFC Company, its principal business is banking or granting of loans and advances and, therefore, it is not covered by the Explanation to section 73 of the Act and therefore, Explanation to section 73 is not applicable. In view of our aforesaid submissions, your good-self is requested to kindly give direction to Assessing Officer to accept the gain / loss arising from the transactions of sale/purchase of shares under the head Income/Loss from Capital Gain. Without prejudice to our aforesaid contention that losses suffered from transactions of sale / purchase of Shares, Mutual Funds, etc. are loss under the head 'Income from Capital Gain' and not speculative activity, we wish to submit that in case your good-self is of the view that the aforesaid loss is from speculative activity than it is requested to please allow Long Term Capital Loss of Rs. 114,46,874/- to be carried forward to subsequent years (as speculative business loss) against set off of income from speculative busi....
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....higher than the income from dividend and there is no income reflected in the profit and loss account on account of loans and, advances. Therefore, it is not possible to appreciate the A/Rs contention that the assessee's main income was derived from granting of loans and advances. 5.2. In so far as the contention of the A/R is concerned that the appellant is engaged in the business of banking as it is an approved NBFC and hence provides banking services without holding the banking license, the perusal of the financial statements do not show that any sort of banking services are provided. There is no loan or credit facility provided, no long term or short term financing, no under writing of stocks and shares or trading in money markets. Moreover, NBFCs are typically not allowed to take deposits from the general public. Hence the appellant is not covered by either of the exclusionary clauses provided by the Explanation to Section 73 as it is neither in the business of banking nor in the business of granting loans and advances. 5.3. Thus as discussed above, since the gross total income of the appellant does not mainly consist of business income nor it is engaged in the business....
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....clusion that since the appellant had traded the shares through delivery based share transactions in the demat account, the same cannot be held as speculative business. The overwhelming judicial opinion, however, is that section 73 would apply even in a case where there is physical delivery of shares. These decisions, in addition to the ones cited above, are as under: (i) Rohini Capital Services Ltd. vs. DCIT (ITAT, Del) 92 ITD 317 (ii) AMP Spinning & Weaving Mills (P) Ltd. vs. ITO (ITAT, SB-Ahd.) 100 ITD 142 (iii) RPG Industries Ltd. vs. CIT (Cal) 338 ITR 313 5.3.1. Therefore, it is held that delivery based share transactions are not specifically excluded from the deeming provisions of section 73. There is a fundamental difference between a speculative transaction provided u/s 43(5) and a speculative business is deemed as such u/s 73. Undoubtedly there are certain decisions which have held that the transactions in derivatives and futures and options which are done through recognized stock exchange are not speculative transactions within the meaning of section 43(5)(d) and hence these losses cannot be treated as speculative losses. Assuming but not admitting that the appella....
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.... the assessee. The above order was challenged by the AO has also been dismissed by the ITAT. It was further stated that the provision of section 73 of the Act dos not apply as assessee has accounted for these transactions as investment in books of account. It was further stated that the provision of section 73 of the Act will not be hit if the gross total income of the company includes income mainly; income from other heads or the principle of the company is the business of banking or loans and advances. He submitted that during the year the assessee has suffered losses mainly under the head loss from capital gains and further appellant has earned exempt dividend income and therefore, the company clearly falls in the category of the company whose main income is house property, capital gain and interest income and therefore, provision of section 73 does not apply to the company. Further he stated that the company is a non banking financial company registered with the Reserve Bank of India and is mainly engaged in the activity of financing 6. the learned departmental representative vehemently supported the order of the learned AO and the learned CIT - A. He further submitted that th....