AI Drafter 
TaxTMI 
TaxTMI 
2019 (11) TMI 1151
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....herefore assessed the interest income of Rs. 1,56,21,609/- derived from the loans& advances under the head 'Profits & Gains of Business' as against the head 'Other Sources' under which the assessee had declared such income. After re-classification of interest income under the head 'Profits & Gains of Business', the AO invoked the Explanation to Section 73, which reads 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 or the granting of loans and advances consists in the purchase and sale of shares of other companies, such company shall, for the purposes of this section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares' 3. The AO observed that the Explanation to Section 73 notably has two exceptions and it does not apply to companies viz. (a) whose gross to....
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....iscussed above. The decision of the ld. CIT (A) is accordingly reversed and the decision of the Assessing Officer on this issue is restored. 4. Being aggrieved by the order of the Tribunal, the assessee preferred an appeal u/s. 260A before the Hon'ble Calcutta High Court wherein the question raised was whether the principal business of the assessee was granting loans & advances and therefore the case of the assessee came within the exception set out in the Explanation to Section 73 and thereby whether the assessee was entitled to the benefit of set off of loss in share dealing by treating the same as business loss. After taking into consideration the contentions of both parties, their Lordships remitted the matter back to the Tribunal with the following findings &direction: "Justice Md. Nizamuddin Disputed issue sought for consideration by this Court in the present appeal is what is the principal business of the Assessee/Appellant? Whether it is granting of loans and advances or share dealing and whether case of the Assessee/Appellants falls within the exceptions to the Explanation under Section 73 of the Income Tax Act, 1961, which are mixed question of fa....
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....year is much less than the turnover from other business, could the assessee claim the former business to be its principal business? Suppose the assessee carries on more than one business and the turnover of one business is less than the others but the profit of that business is more because the expenses are less. Would that business become the principal business? In my opinion, all the above factors have to be judiciously analysed and assessed to determine the principal business of a Corporate assessee. There may be other factors also. Therefore, what is the principal business of the assessee is a very tricky question of fact which needs to be determined by the tribunal threadbare. With these observations, I entirely agree with the conclusions and the reasons by which those conclusions have been reached by my learned brother. I also agree with the final order that his lordship has passed." 5. Pursuant to the judgment of the Hon'ble Calcutta High Court, opportunity of hearing was granted to parties. At the time of hearing, the Ld. AR appearing on behalf of the assessee submitted that the assessee was a non-banking financial company registered with the Reserve Bank of India. A....
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....to the turnover achieved in the business of share trading &money lending to demonstrate that the total turnover of funds in money lending activity was far higher than the turnover in share dealings. He further submitted that even the income derived from the business of money lending was higher than the income (ignoring the negative sign) derived in business of share trading. He accordingly claimed that fund deployment criteria, turnover criteria as well as the income criteria when applied to the facts involved in the relevant year, it was the activity of money lending which was more significant than share dealing and therefore, the former constituted 'principal business' of the assessee company. The ld. AR also drew our attention to the comparative data for the immediately two preceding years as well the subsequent AY 2005-06, which was enclosed at Pages 5 & 6 of the paper book, to show that even in past years and succeeding year, the principal business of the assessee on fund deployment, gross turnover, and Income criteria was granting of loans & advances. It was accordingly claimed that assessee company fell within the exception carved out in the Explanation to Section 73....
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....in the purchase and sale of shares of other companies' and therefore only when the activity of granting loans & advances is inter-linked or inter-connected with business of purchase & sale of shares that the Explanation to Section 73 is not applicable, is wholly unsustainable. It is further observed that this contention of the ld. DR has also been specifically negated by the Special Bench of this Tribunal at Mumbai in the case of Asstt. CIT v. Concord Commercials (P.) Ltd. 95 ITD 117, wherein it was held as under: '18.The said Explanation reads as under :- 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 or the granting of (loans and advances) consists in the purchase and sale of shares of other companies, such company shall, for the purposes of this section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale o....
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.... of loans and advances, Explanation to section 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.' (Emphasis Supplied) 10. In view of the above therefore, the issue which now requires our consideration is whether the 'principal business' of the assessee company can be said to be granting of loans & advances. What constitutes the 'principal business' has not been defined anywhere in the Act. Accordingly what constitutes principal business will essentially depend on the facts and circumstances of each case. We however note that certain guiding principles and factors have been laid down by the Special Bench of this Tribunal at Kolkata in the case of Dy. CIT v. Venkateshwar Investment & Finance (P.) Ltd. 93 ITD 177, which are as follows: "10. We hold that to decide whether the case of an assessee falls in exceptions provided in Explanation to section 73 of the Act or not and to decide whether the principal business of the assessee is that of granting of loans and advances, the decisive factor is the nature of the activities of the assessee and not the actual inco....
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.... 73 are not applicable to the instant case. In this view of the matter, we hold that there is no mistake in the order of the CIT(Appeals) in holding that the case of the assessee-company is not hit by Explanation to section 73 and the loss so suffered shall be treated as business loss and not speculation loss and question referred to is answered in favour of the assessee and the grounds of appeal of the Revenue are dismissed." 11. The undisputed factual position in the present case is that the assessee company is a non-banking financial company so registered with the Reserve Bank of India. One of its main object is, granting of loans & advances. It can therefore be safely concluded that the assessee company is granting loans & advances as a part of his business activity and which is conducted in an organised manner regularly. From the financial statements, which are at Pages 7 to 18 of the paper-book, we note that the total funds available with the assessee company as at 31.03.2004 were Rs. 41.21 crores. The funds deployed inter-alia consisted of loan and advances of 13.03 crores, 2.33 crores in stock-in-trade of shares and 25.22 crores in Investment in shares. In our considered....