I-T - : THE issue before the Bench is - Whether when the main business of the assessee is to earn interest income from loans and advances, loss arising from sale and purchase of shares is covered under exclusionary clause of Explanation to Sec 73. And the answer goes in favour of the assessee.
Facts of the case
In assessment proceedings, AO issued notice to explain as to why the business of sale and purchase of shares may not be treated as speculation business as per Explanation to Section 73. Assessee submitted that it was also doing business of sale and purchase of shares and earning mainly interest by granting loans and advances and income from interest. As per memorandum of association its principal business was to deal and develop real estate. AO considered the loss on sales and purchase of shares as speculation loss which was not set off against the net profit observing that it would be set off against the speculation profit in subsequent years. CIT (A) confirmed the order of the AO. ITAT allowed the appeal of the assessee observing that principal business of the company being granting of loans and advances, and its activities were covered under the exclusionary clause of Explanation to Section 73, hence deeming provision for carrying of speculation business in respect of purchase and sale of shares was not applicable. The company was liable to set off losses against its other income by way of interest.
Revenue contended that the principal business of the company was not granting loans and advances and the principal business of the company was to be looked into from the memorandum of association. Exclusionary clause of the Explanation being not applicable, the purchase and sale of shares was a speculation business, losses of which could not be set off against other income of the assessee and speculation losses could be set off only against the profits of the speculation business. For determining the principal business of a company, the profit and loss account of one year is not relevant and the said issue can be determined while taking into consideration the trend of business activities of last several years.
Assessee contended that the only income, which was received in the assessment year in question, was income from loans and advances which thus had to be treated as the principal business of the company. Thus, the loss suffered from purchase and sale of shares had been rightly set off against the income received from loans and advances. Reliance was placed on the judgment of Bombay High Court in the case of Commissioner of Income Tax vs. Darshan Securities P. Ltd. and PCBL Industrial Ltd. vs. Commissioner of Income Tax and another.
After hearing both the parties, the High Court held that,
++ section 73 provides that any loss computed in respect of speculation business carried on by the assessee, shall not be set off except against profits and gains, if any, of another speculation business. Section 73(1) of the Act uses the words “business carried on”. The Explanation also uses the phrase “where any part of the business of the company..... consists in the purchase and sale of shares of other companies”. Section 28(1) provides for charging of income tax on profits and gains of any business or profession which was carried on by the assessee at any time during the previous year. Section 28(1) read with Section 73(1) which also uses the words “business carried on” clearly indicate that what is chargeable to the income tax is the business actually carried on and profits and gains of the said business. Explanation to Section 73 of the Act mentions “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 granting of loan and advances....”. The Explanation to Section 73 of the Act contains a deeming clause which is to the effect that where any part of the business of a company consists in the purchase and sale of the other companies, such company shall, for the purpose of this section, be deemed to be carrying on a speculation business. The Explanation to Section 73 of the Act contains an exclusionary clause, according to which following companies are excluded from the operation of the deeming clause – (i) 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”, (ii) or a company the principal business of which is the business of banking or granting of loans and advances”. In first category of exclusionary clause the phrase used is “whose gross total income consists mainly of income”. In second exclusionary category, the phrase used is “a company the principal business of which is the business of banking or granting of loans and advances”. The question to be considered is as to whether a company, which fulfils the conditions as mentioned in the exclusionary categories, can be denied the benefit, if the income consists mainly of income as used in first category and the principal business of which as used in the second category from the activities and business which are not the part of the memorandum of association of the company;
++ Section 28(1), Section 73(1) and the Explanation to Section 73 of the Act indicate that the income which is chargeable is the income in the relevant year arising from business or profession carried on by the company. The words “carried on” mean actual carrying of the activity. The words “carried on” has to be read in context of what actually was done by the company in the relevant year, rather than what was main object in the memorandum of association of the company. Thus the submission of counsel for the revenue that since in the memorandum of association the activity or business, which is shown to have been carried on by the assessee, is not included, it is not entitled to be considered in exclusionary clause, has to be rejected;
++ for qualifying the exclusionary category, the condition to be fulfilled is that gross total income consists mainly of income which is chargeable under the heads – (a) “Interest on securities”, (b) “Income from house property”, (c) “Capital gains” and (d) “Income from other sources”. The said provision uses the words “mainly of income”. The words “mainly of income” and similarly in the second category the words “principal business of which” mean substantially or primarily. The total gross income of the assessee, which has been shown in the assessment order is interest income of Rs.9,59,252/-. The assessment order does not refer to any other income, hence the condition that income consists “mainly of income” is completely fulfilled. One of the heads of the income for exclusionary category is income from other sources. The second category consists of the phrase “a company the principal business of which is granting of loans and advances”. The income, which has been treated to be gross income, is income from interest of the assessee from granting loans and advances. Thus the assessee was covered by exclusionary clause of Explanation to Section 73 of the Act and the Tribunal has rightly set off the losses from sale and purchase from the income of the assessee from loans and advances.
In assessment proceedings, AO issued notice to explain as to why the business of sale and purchase of shares may not be treated as speculation business as per Explanation to Section 73. Assessee submitted that it was also doing business of sale and purchase of shares and earning mainly interest by granting loans and advances and income from interest. As per memorandum of association its principal business was to deal and develop real estate. AO considered the loss on sales and purchase of shares as speculation loss which was not set off against the net profit observing that it would be set off against the speculation profit in subsequent years. CIT (A) confirmed the order of the AO. ITAT allowed the appeal of the assessee observing that principal business of the company being granting of loans and advances, and its activities were covered under the exclusionary clause of Explanation to Section 73, hence deeming provision for carrying of speculation business in respect of purchase and sale of shares was not applicable. The company was liable to set off losses against its other income by way of interest.
Revenue contended that the principal business of the company was not granting loans and advances and the principal business of the company was to be looked into from the memorandum of association. Exclusionary clause of the Explanation being not applicable, the purchase and sale of shares was a speculation business, losses of which could not be set off against other income of the assessee and speculation losses could be set off only against the profits of the speculation business. For determining the principal business of a company, the profit and loss account of one year is not relevant and the said issue can be determined while taking into consideration the trend of business activities of last several years.
Assessee contended that the only income, which was received in the assessment year in question, was income from loans and advances which thus had to be treated as the principal business of the company. Thus, the loss suffered from purchase and sale of shares had been rightly set off against the income received from loans and advances. Reliance was placed on the judgment of Bombay High Court in the case of Commissioner of Income Tax vs. Darshan Securities P. Ltd. and PCBL Industrial Ltd. vs. Commissioner of Income Tax and another.
After hearing both the parties, the High Court held that,
++ section 73 provides that any loss computed in respect of speculation business carried on by the assessee, shall not be set off except against profits and gains, if any, of another speculation business. Section 73(1) of the Act uses the words “business carried on”. The Explanation also uses the phrase “where any part of the business of the company..... consists in the purchase and sale of shares of other companies”. Section 28(1) provides for charging of income tax on profits and gains of any business or profession which was carried on by the assessee at any time during the previous year. Section 28(1) read with Section 73(1) which also uses the words “business carried on” clearly indicate that what is chargeable to the income tax is the business actually carried on and profits and gains of the said business. Explanation to Section 73 of the Act mentions “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 granting of loan and advances....”. The Explanation to Section 73 of the Act contains a deeming clause which is to the effect that where any part of the business of a company consists in the purchase and sale of the other companies, such company shall, for the purpose of this section, be deemed to be carrying on a speculation business. The Explanation to Section 73 of the Act contains an exclusionary clause, according to which following companies are excluded from the operation of the deeming clause – (i) 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”, (ii) or a company the principal business of which is the business of banking or granting of loans and advances”. In first category of exclusionary clause the phrase used is “whose gross total income consists mainly of income”. In second exclusionary category, the phrase used is “a company the principal business of which is the business of banking or granting of loans and advances”. The question to be considered is as to whether a company, which fulfils the conditions as mentioned in the exclusionary categories, can be denied the benefit, if the income consists mainly of income as used in first category and the principal business of which as used in the second category from the activities and business which are not the part of the memorandum of association of the company;
++ Section 28(1), Section 73(1) and the Explanation to Section 73 of the Act indicate that the income which is chargeable is the income in the relevant year arising from business or profession carried on by the company. The words “carried on” mean actual carrying of the activity. The words “carried on” has to be read in context of what actually was done by the company in the relevant year, rather than what was main object in the memorandum of association of the company. Thus the submission of counsel for the revenue that since in the memorandum of association the activity or business, which is shown to have been carried on by the assessee, is not included, it is not entitled to be considered in exclusionary clause, has to be rejected;
++ for qualifying the exclusionary category, the condition to be fulfilled is that gross total income consists mainly of income which is chargeable under the heads – (a) “Interest on securities”, (b) “Income from house property”, (c) “Capital gains” and (d) “Income from other sources”. The said provision uses the words “mainly of income”. The words “mainly of income” and similarly in the second category the words “principal business of which” mean substantially or primarily. The total gross income of the assessee, which has been shown in the assessment order is interest income of Rs.9,59,252/-. The assessment order does not refer to any other income, hence the condition that income consists “mainly of income” is completely fulfilled. One of the heads of the income for exclusionary category is income from other sources. The second category consists of the phrase “a company the principal business of which is granting of loans and advances”. The income, which has been treated to be gross income, is income from interest of the assessee from granting loans and advances. Thus the assessee was covered by exclusionary clause of Explanation to Section 73 of the Act and the Tribunal has rightly set off the losses from sale and purchase from the income of the assessee from loans and advances.
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