Case Law Details
RELEVANT PARAGRAPH
4. From the record, we found that during the relevant year under consideration, the assessee was continuously engaged in the activity of financing, trading and real estate and had also undertaken transaction of purchase and sale of shares. It had earned income from paper trading including commission and service charges amounting to Rs. 4.78 lakhs, interest income of Rs. 42.56 lakhs, dividend income of Rs. 0.26 lakhs, profit on sale of mutual funds Rs. 44.90 lakhs and suffered loss in purchase and sale of shares, delivery whereof were taken amounting to Rs. 94.21 lakhs. The AO proceeded to apply Explanation to Section 73 by observing that net result of the assessee company was loss of Rs. 2.61 lakhs. As per AO, loss on account of share transaction was more than its income from other sources, therefore exception applicable for taking out assessee’s case from the clutches of Explanation to Section 73 is not applicable. With regard to assessee’s plea that it was mainly engaged in the business of granting of loans and advances, the AO observed that major part of the assessee’s turnover was from sale of paper. In respect of assessee’s contention regarding amount of loan of Rs. 3.76 crores advanced by the assessee, the AO observed that assessee has taken a whopping sum of Rs. 12.74 crores as a loan. Accordingly, he held that assessee cannot be said to be a company, the principal business of which is banking and granting of loans and advances. Thus, the assessee’s case was held to be not covered by any of the exceptions to Explanation to Section 73 of the Act.
5. Provisions of Section 73 of the Act deal with carry forward and set off of loss from the business of speculation. Explanation to Section 73 is a deeming provision wherein on fulfilment of specified conditions, purchase and sale of shares are deemed to be speculative activities. As per Explanation to Section 73 where any part of a business of a company (other than company whose gross total income consists mainly of income which is chargeable under the head 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 purpose of this section, deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares.
6. It is crystal clear from the plain reading of Explanation to Section 73 that if any of the following conditions are satisfied the provisions of Explanation to Section 73 will not be attracted:-
(i) If the gross total income of the company includes income mainly from the heads i.e. interest on securities, income from house property, capital gains and income from other sources.
OR
(ii) The principal business of the company is the business of banking or the granting of loans and advances.
7. If any one of the aforesaid two conditions is satisfied, the company will be exempted from the clutches of the provisions of Explanation to Section 73. The word “OR” written in between the two conditions suggests that either first or second condition needs to be satisfied for excluding a company from the purview of Explanation to Section 73. In the case of first condition, the head of income is to be verified and if it is found that loss from transaction of purchase and sale of share is more than the other income specified therein, the assessee will be deemed to be covered by the Explanation to Section 73.
8. The second condition used the word “principal” relevant to the business of the company. This condition specifies that the principal business of the company should be banking or granting of loans and advances. It means that any company whose principal business is banking or granting of loans and advances will not be attracted by the Explanation to Section 73.
9. If any one of the above two conditions are being satisfied, the assessee company will not be hit by the deeming provisions of Section 73.
10. In the instant case before us, undisputedly the loss arising out of the transaction of purchase and sale of shares is more than income from other sources, therefore on the plea of quantum of income the assessee is not being taken out of the ambit of Explanation to Section 73. With regard to its principal business which is granting of loans and advances, the assessee company clearly falls outside the ambit of Explanation to Section 73. For determining the principal business of the assessee company, one has to find out the money invested in granting of loans and advances vis-a-vis money invested in business of share transaction. For determining the principal business of the assessee, the memorandum of association of the company, its past history, current deployment of its capital, break up of income earned during the year would all help in determining the principal business of the company. Merely because income/ loss in dealing in shares in one particular year is more than income/ loss from principal business of the assessee of granting loans and advances, it cannot be said that principal business of assessee is not that of granting loans and advances^ This issue has been considered in great detail by the ITAT Special Bench in the case of Venkateshwar Investment and Finance (supra) wherein it was held that in view of the provisions of Explanation to Section 73, loss in purchase and sale of shares shall not be treated as speculation loss in case of a company principal business of which is granting of loans and advances. Following was the observation of the Special Bench :-
“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 Honourable 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 dealings is more than the profit earned in the Core business of the assessee of advancement of loans and advances, does not mean that the business of advancement of loans and advances is not the principal business of the assessee. In the past years the assessee has no share dealings whatsoever and clearly the principal business of the assessee in the preceding years was that of advancement of loans and advances.
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 income from such activities during a particular year. Merely because the numerical value of the profit/ loss in purchase and sale of shares is more than the interest income during the relevant period, does not mean that the principal business of the assessee ceases to be that of granting of loans and advances. What constitutes the “principal business” has not been defined anywhere in the Act. What constitutes the principal business will depend on the facts and circumstances of each case. The Memorandum and the Articles of Association of the company, past history of the assessee, current and past year’s deployment of the capital of the assessee, break-up of the income earned during the relevant and past years and the nature of activities of the assessee will all help in determining the principal business of the assessee. If in any particular year, the assessee has nominal business income and has substantial interest income, it does not imply that the assessee’s principal business is of finance or granting of loans and advances. Similarly the assessee, the principal business of which is the granting of loans and advances, may earn a comparatively high income from other activities in any particular year and still the principal business of the assessee may remain granting of loans and advances. The Explanation to section 73 is in the nature of a deeming provision and as such has to be strictly construed. The decisive factor is the true nature of activities of the company during the relevant period as well as in the past or succeeding periods. Considering the objects of the assessee-company as stated in the Memorandum of Association and the fact that the income from interest and lease rentals were the only income in the past years and the loss from share dealings was incurred only during the year under consideration and considering the position of deployment of funds in loans and advances and leasing business which is more than 3 times of the fund deployed in share business as on 31-3-1997 and taking into consideration the various decisions of the Honourable Courts (supra) and the totality of the facts and circumstances of the case, we hold that the principal business of the assessee is that of granting loans and advances and as such the case of the assessee fails in exception to Explanation to section 73 of the Act and the provision of Explanation to section 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. In the result, the appeal of the Revenue is dismissed.”
11. In view of the above decision, the company whose principal business is that of granting of loans and advances, may earn a comparatively high income from some other activity in a particular year, merely because the income/loss from share trading in the year under consideration is higher than the interest income, that itself would not be sufficient to conclude that the principal business of the company is not that of granting of loans and advances. Even then, the principal business of the company can remain granting of loans and advances. There may be a case where in any particular assessment year the income from interest is lower than income/ loss from share trading or there may be temporary lull of the trading activity of a company in a particular year. While applying this proposition to the facts of instant case, we have verified the chart of deployment of funds in the assessee’s activity of granting loans and advances vis-a-vis dealing in shares and found that net working capital employed by the assessee in the business of granting loans and advances was Rs. 6.85 crores, as against net working capital blocked in business of dealing in shares which amounted to Rs. 62.38 lakhs only. The net working capital of the assessee in its activity of paper trading and real estate was Rs. 6.04 crores. Even if we club the net capital employed in the business of share, paper trading and real state which works out to be Rs. 6.66 crores as against net capital employed in the activity of loans and advances which is Rs. 6.85 crores, we found that highest deployment of capital was in the activity of loans and advances. Thus, we found that highest capital employment was in the business of loans and financing which was Rs.6.85 crores as compared to all the other business activity of the assessee which clearly demonstrate that the main activity of assessee was giving loans and advances. As per the audited balance sheet placed on record, the assessee had given loans and advances of Rs. 5.53 crores whereas stock of shares was just Rs. 62.28 lakhs.
