TaxTMI 
TaxTMI 
2004 (12) TMI 310
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....ssment years the assessee was not dealing in shares but was having interest income from loans and advances and rental income from leasing." 2. In this appeal the Revenue has raised the following grounds of appeal: "(1) That the Ld. CIT(A) has erred in law as well as on facts in treating the speculation loss to be as business loss, without appreciating that the Explanation to section 73 of the Act is clearly applicable in the instant case. (2) That the Ld. CIT(A) has erred in law and on the facts of the case in holding that loss of Rs. 51,28,005 is a business loss, ignoring the judgment of jurisdictional High Court in the case of Eastern Aviation & Industries Ltd. v. CIT reported in 208 ITR 1023 and that of Arvind Investment Ltd reported in 192 ITR 365. (3) That the order of the Ld. CIT(A) deserves to be vacated and that the order of the Assessing Officer deserves to be restored." 3. The Ld. CIT D.R. submitted that the loss on purchase and sale of shares during the relevant year has been claimed by the assessee at Rs. 51,28,005, which is more than the lease rental and interest income shown by the assessee and the assessee has filed a loss return at R....
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....icer wherein the assessee submitted that the principal business of the assessee all along had been the business of granting of loans and loans as is clear from the object clause of the company in the Memorandum of Association. In its reply dated 13-12-1999 the assessee filed the figures of the fund employed in the business of granting loans and advances for the last 3 years and also of the year under assessment which shows that loans and advances were Rs. 1.58 crores as on 31-3-1995, Rs. 1.57 crores as on 31-3-1996 and Rs. 31.15 lakhs as on 31-3-1997. The Ld. Counsel submitted that the business of the share dealing was started for the first time during the relevant period and no share business was carried out in any of the earlier 3 preceding financial years prior to the financial year relevant to the assessment year 1997-98. He argued that the case relied upon by the learned CIT D.R. are distinguishable since in those cases the principal business of the assessee was not that of granting of loans and advances. He argued that merely because numerical value of the loss in purchase and sale of shares is more than the income of the assessee under the head "Income from other sources" du....
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....s argument that the deeming provision of law has to be strictly construed. 5. We have considered the rival submissions. The only dispute in the present appeal is whether the loss suffered by the assessee in purchase and sale of shares amounting to Rs. 51,28,005 can be set off against the business income. Section 73(1) provides that any loss in respect of a speculation business carried on by the assessee shall be set off only against the profits and gains of another speculation business, if any. Thus, loss from speculation business cannot be set off from profits and gains of other business which is not speculation business. Explanation to section 73 provides 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 ....
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....-3-1994 Y.E. 31-3-1995 Y.E. 31-3-1996 Y.E. 31-3-1997 Loans & Advances 6,350 1,58,94,503 1,57,37,361 31,15,711 Leasing Nil Nil 20,36,000 9,56,809 Shares Nil Nil Nil 12,32,947 Income (in Rupees) Business Y.E. 31-3-1994 Y.E. 31-3-1995 Y.E. 31-3-1996 Y.E. 31-3-1997 Interest income 7,520 11,88,440 19,70,558 14,35,520 Lease Rentals Nil Nil 4,23,488 8,06,256 6. We find that the loss resulting on account of share transaction effected by the assessee during the year under consideration has been treated as deemed speculation within the meaning of Explanation to section 73 of the Act. A plain reading of the provision of Explanation to section 73 of the Act makes it clear that the loss in purchase and sale of shares shall not be treated as speculation loss in the case of a company, the principal business of which is the business of granting of loans and advances as provided in the Explanation to section 73 of the Act. Accordingly, the controversy in the present case revolves around the question as to whether the principal business of the assessee-company during the relevant period is that o....
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.... much more than the funds deployed in the business of shares. The main object No. 3 of the assessee-company as stated in the Memorandum of Association clearly mentions the business of granting and advancing money as one of its main objects. The Assessing Officer has treated the share loss from share dealings as speculative loss within the meaning of Explanation to section 73 mainly for the reason that the interest income during the relevant period was lower than the loss suffered from share dealings in the year under consideration. The other important aspects of the case, namely, the past history of the case, the object clause of the Memorandum and Articles of Association, the current deployment of the capital of the company were not properly appreciated by him. The Explanation to section 73 is in the nature of deeming provision and as such has to be strictly construed and the onus is on the revenue to show that the case of the assessee falls within the four corners of the deeming provision of law. This view is fortified by the decisions of the Hon'ble Supreme Court in Vegetable Products Ltd.'s case, Laxmi Industries Ltd. Co.'s case, Mayank Poddar (HUF)'s case and R....
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....ncipal business is of granting of loans and advances or the acquisition of shares, stocks, bonds, etc. Thus merely because the income from interest and dividend in the year under consideration is higher than from trading in fabric, that itself would not be sufficient to conclude that the principal business of the company of granting loans and advances or acquisition of shares, stocks, bonds etc. As stated above, it is to be decided after considering all the surrounding circumstances of the case. In the case on hand we find that in the assessment years 1985-86 to 1990-91 the turnover of the assessee is much higher than the interest income earned by it. We then find that only in the assessment years 1991-92, 1992-93 and 1994-95 there was nil turnover of the assessee. We find force in the argument of the learned A.R. of the assessee that if there is temporary suspension of the business it cannot be considered to have been closed or discontinued." 7. The provision of Explanation to section 73 is clearly a deeming provision of law and has to be strictly construed. In the case of Mayank Poddar v. WTO [2003] 262 ITR 633 (Cal.), the Hon'ble jurisdictional High Court held "The subjec....
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....e is an investment company, losses must be taken into account. The profits and gains represent "positive income" whereas losses represent "negative income". In this case the assessee had shown a net loss of Rs. 28,50,358 in its Profit & Loss Account which included speculative loss in share transaction amounting to Rs. 7,95,447, loss in regular share dealing business amounting to Rs. 12,90,145 and loss of interest attributable to the share dealing business amounting to Rs. 8,21,400. As against the above, the only income of the assessee-company for the relevant year by way of dividend amounted to Rs. 3,87,603 only. In these facts, the Hon'ble High Court held that the Explanation to section 73 was clearly applicable and the loss suffered by the assessee-company in the share trading transactions inclusive of interest paid on borrowed money attributable to that business was rightly treated by the Tribunal as a loss in speculative business. The facts of this case before the Hon'ble High Court are distinguishable from the facts in the present case before us. In the case before the Hon'ble High Court the whole business of the assessee was that of dealing in shares and some divi....
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....l view of the functioning of the company instead of confining its attention to the income of the year under consideration for the purpose of determining whether the assessee-company was an "investment company" within the meaning of clause (ii) of section 109 of the Act and on a consideration of the same in holding that it was not an investment company. In the said case, the dispute before the Hon'ble High Court was whether the assessee was an investment company within the meaning of section 109. Section 109(ii) defines "investment company" as under: (ii) 'investment company' means 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'. Thus, the definition of 'investment company' was identical to companies which are excluded from the applicability of Explanation to section 73. In the said case before the Hon'ble High Court, the business income of the assessee during the year under consideration was less than the income from house property, other sources and capital gains.....
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.... other company is, therefore, the true nature of the primary activities of the company". Thus, to arrive at the conclusion whether a company is an investment company or not, the decisive factor is the nature of the activities of the company which gives rise to the income and not the actual income from such activities during a particular year. The above test would be equally applicable while determining whether a company is covered within the Explanation to section 73 or is a company which is outside such Explanation because of the exception provided to certain types of companies under the Explanation because the definition of "investment company" and companies which are to be excluded from the applicability of Explanation to section 73 are identical. This decision of the Hon'ble High Court although relates to the provision of section 104 read with section 109 of the Income-tax Act, but being in pari materia with the issue before us, is applicable and overall view of the function of the assessee-company of the relevant period as well as of the past years has to be taken into account in order to find out the principal business of the assessee. Merely because the loss in share ....