HIGH COURT OF CALCUTTA
ALFA Tie-up (P.) Ltd.
Commissioner of Income-tax
IT Appeal No. 841 of 2004
OCTOBER 12, 2012
K.J. Sengupta, Actg. CJ.
This appeal has been directed against the judgment and order dated 11th August, 2004 passed by the Income Tax Appellate Tribunal, ‘E’ Bench, Kolkata in I.T.A. 2425/Kol/2003 for the assessment year 2000-01. The said appeal has been admitted by this Hon’ble Court by an order dated 23rd December, 2004 on the following substantial questions of law:-
“(i) Whether the Tribunal was justified in law in holding that Explanation to Section 73 was applicable in respect of the loss incurred by the appellant in the business of trading in shares and such loss was to be treated as speculation loss and its purported findings in that behalf are arbitrary, unreasonable and perverse?
(ii) Whether the Tribunal was justified in law in not considering and/or dealing with the appellant’s contention that the interest earned on loans was to be assessed under the head “income from other sources” and since the interest-income was higher, the losses in share-trading could not be treated as speculation loss?
(iii) Whether and in any event and even if the interest-income is held to be asses sable under the head “business”, such business was required to be treated as the appellant’s principal business ruling out the application of the Explanation to Section 73 and the purported findings of the Tribunal to the contrary are arbitrary, unreasonable and perverse?”
2. The short fact of this case leading to preferring the instant appeal is as follows:-
In the relevant assessment year the return of income the appellant has shown loss of Rs. 3,31,023/- in the business of purchase and sale of shares of other companies. The said loss has been set off against the interest income amounting to Rs. 5,48,716/-. The Assessing Officer has found that the total income of the appellant did not consist mainly of income from other sources, capital gains, interest on securities and income from house properties. It was noted by the A.O. on fact that the principal business of the appellant was not of banking or granting of loans and advances. In view of the above factual findings A.O. requested the assessee to explain why the share trading loss should not be deemed as speculation loss in view of provisions of Section 73 of the Income Tax Act, 1961. The appellant explained to the said quarries. It was stated in the explanation that it earned interest amounting to Rs. 5,48,716/- under the head ‘income from other sources’, which is more than the loss of Rs. 3,31,022/- suffered in the business of purchase and sale of shares. It was explained further that out of the total fund of Rs. 1,44,38,560/- more than 62% was invested in the business of finance. Thus it was the contention that the loss cannot be treated as speculation loss. However, A.O. did not accept the explanation offered by the appellant and the said income was assessed only under the head “business income” and not under the head “income from other sources”. It was also found by the Assessing Officer that for more than 10 months of the year, less than 50% of the fund available was utilized in its business of granting loans and advances. The Assessing Officer called upon the assessee to explain further in that regard in view of the above findings. The explanation offered was not accepted by the A.O. and treated the loss suffered by the appellant in the business of share trading as speculation loss applying Explanation of Section 73 of the Income Tax Act, 1961.
3. The above order was carried on to the Appellate Authority namely Commissioner of Income Tax (Appeals) unsuccessfully. It appears that the Commissioner of Income Tax also analyzed the fact and did not interfere with the decision of the A.O. in applying Explanation of Section 73 of the Income Tax Act, 1961. Thus assessee went up to the learned Tribunal in appeal from which the impugned judgment and order was passed as the learned Tribunal refused to interfere with the decision rendered by two authorities below.
4. Mr. Khaitan, learned Senior Advocate appearing for the appellant submits that on the facts and circumstances of this case Explanation to Section 73 will not apply as the income shown in the return should have been treated under head “other sources”, as the principal business of the assessee is granting of loans and advances. His grievance is that learned Tribunal did not consider nor decide the assessee’s contention that the interest income was asses sable under the head “other sources”. The criterion of turnover may be relevant when it is a case of comparing commodities. In order to elucidate this plea he contends that when share trading is compared with granting of loans turnover may be relevant. Turnover in respect of a commodity would depend upon how many times the same amount of money is rolled over in repeated activities of buying and selling the commodity. Money given by way loan is ordinarily not rolled over in the same manner. He submits on fact findings of all the parties that by the end of the year the assessee’s principal business was that of a granting loans and advances was not justified. He submits that once a particular business is found to be principal business as at the end of the year, such business alone can be regarded as assessee’s principal business. It would be illogical to suggest that the business of granting of loans and advances would be accepted as the principal business because it was carried on at the beginning and major part of the year though before the end of the year the assessee has substantially moved out of it, and went for some other business.
5. He submits referring to the decision of this Court in case of Peerless Financial Services Ltd. v. CIT  335 ITR 452 that the income generation test is also relevant for deciding the principal business. He further submits that on application of capital deployed test as also the income generation test, the principal business of the assessee should have been accepted as that of granting of loans and advances since the capital deployed in loans and interest income were higher as compared to the share trading business. In the alternative, he submits that if according to the Tribunal the interest income had become obscure, it should have held that such income was asses sable under the head “other sources” and had been higher the loss in share trading could not be treated as speculation loss.
6. Learned counsel for the respondent submits that Assessing Officer on fact after having examined accounts and accompanying documents found that total funds available with the assessee on 31st March, 1999 was Rs. 1,44,82,000/- out of which an amount of Rs. 22.75 lakhs was given as loans as on 31st March, 1999 representing 15.70% of the funds available with the assessee. As per loan confirmation accounts filed by the assessee along with the return of income it is seen that loans of Rs. 50.75 lakhs have been given only during the period from end of November, 1999 to end of March, 2000. Out of this loan Rs. 33.75 lakhs have been given only between mid February, 2000 to March, 2000. Hence, it is clear that for most part of the year and in fact almost 10 months of the assessee’s principal business was not that of granting of loans and advances. Consequently, the assessee is not covered by any of the exceptions provided under Explanation to Section 73 of the Income Tax Act, 1961. Its business in the purchase and sale of shares of other companies is therefore to be treated as speculation business and the loss incurred by the assessee in its business of purchases and sales of shares will, therefore, treated as speculation loss. Both CIT (Appeals) and the learned Tribunal on fact have accepted the aforesaid findings. In view of the aforesaid factual findings which has not been challenged on the ground of perversity the benefit of the Explanation to Section 73 of the Income Tax Act, 1961 as claimed the appellant has rightly been refused.
7. After hearing the learned counsel for the parties and after considering material we find in order to decide this appeal only question as mentioned below is required to be answered as follows:-
Whether Explanation to Section 73 of the Income Tax Act, 1961 in the facts and circumstances of this case has been applied properly by all the authorities below or not?
Before we proceed to dilate the matter we set out Section 73 with explanation here under:-
“Loss in speculation business.
73. (1) Any loss, computed in respect of a speculation business carried on by the assessee, shall not be set off except against profits and gains, if any, of another speculation business.
(2) Where for any assessment year any loss computed in respect of a speculation business has not been wholly set off under sub-section (1), so much of the loss as is not so set off or the whole loss where the assessee had no income from any other speculation business, subject to the other provisions of this Chapter, be carried forward to the following assessment year, and –
(i) it shall be set off against the profits and gains, if any, of any speculation business carried on by him asses sable for that assessment year; and
(ii) if the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on.
(3) In respect of allowance on account of depreciation or capital expenditure on scientific research, the provisions of sub-section (2) of section 72 shall apply in relation to speculation business as they apply in relation to any other business.
(4) No loss shall be carried forward under this section for more than [four] assessment years immediately succeeding the assessment year for which the loss was first computed.
[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.]
8. All the authorities below had concurrently found that major portion of the gross total income of the assessee consist mainly on income not in relation to the granting of loans and advances but consisting of the purchase and sales of shares of other companies. Even fund and income generation theories both have been considered by all authorities below. All the authorities below have held that it is not an income from any other source but from purchase and sale of shares consequently loss of same nature and as such Explanation has been applied rightly. When the fact is clear, law automatically follows. The task of this Court is to see that on given fact finding the law has been applied properly or not.
9. We are unable to accept the contention on this fact finding that the said Explanation has been misapplied. The decision cited by Mr. Khaitan, learned Senior Counsel is wholly distinguishable in the facts and circumstances of this case as on the fact it is found concurrently against which there has been no challenge, that the appellant company is not entitled to get the benefit of income from other sources as contemplated in explanation. Therefore, we do not find any reason to interfere with the judgment and order of the learned Tribunal. We uphold the same and dismiss the appeal.