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These are the latest case laws decided by various Income Tax Appellate Tribunals (ITAT) of India on Income Tax which have been published recently. The case laws are open for discussion and we invite expert comments from our members on its applicability and effect on relevant issues.

06-09-2019, Shankar Sales Promotion, Section 73, 71, 72, Tribunal Kolkata

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5 days 5 hours ago #10765 by amit
Section - 73, 71, 72
Order Date - 06-09-2019
Favouring - Assessee
Court - Tribunal Kolkata
Appellant - ITO
Respondent - Shankar Sales Promotion (P) Ltd.
Justice - A. T. VARKEY, JM & DR. A.L.SAINI, AM
Citation - 919Taxpundit86
Appeal No. - I.T.A. No. 2283/Kol/2007
Asstt. Year - 2004-05

Order

PER : A.T.Varkey, JM

This appeal preferred by the revenue is against the order of the Ld. CIT(A)-V, Kolkata dated 18.09.2007 for AY 2004-05.

2. Brief facts of the case are that the appellant during the relevant year was engaged in the business of share trading and financing. For AY 2004-05 the appellant had declared total income of Rs.8,61,245/- which inter alia comprised of loss of Rs.1,48,61,635/- incurred in the business of share trading and interest income of Rs.1,56,21,609/- declared under the head ‘Other Sources . In the assessment completed u/s 143(3) the AO observed that the assessee company was engaged in the business of granting loans & advances, which it was carrying on by way of an organized business activity, and therefore 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 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 (b) a company the principal business of which is the business of banking or the granting of loans and advances. According to AO, the assessee did not fall within the first limb of exception in as much as the aggregate of the sum assessable under the head ‘Business Income’ exceeded the aggregate of the sum assessable under the head ‘Other Sources’, ‘Capital Gains’ and ‘House Property’. The AO further held that even the second limb of exception was not applicable in the assessee’s case because in his view its activity of money lending could not be said to be company’s principal business activity because the majority of funds were deployed in Investment in shares rather than loans & advances. The AO therefore concluded that the Explanation to Section 73 was applicable in the given facts of the present case.Accordingly the AO disallowed the set off of share trading loss of Rs.1,48,61,635/- against normal business income treating it to be in the nature of deemed speculation loss. On appeal, the ld. CIT(A) deleted the impugned disallowance by observing that the case of the assessee fell within the first limb of the exception provided in Explanation to Section 73. Aggrieved by the order of the Ld. CIT(A), the Revenue preferred an appeal before this Tribunal, which by its order dated 12.09.2008 in ITA No. 840/Kol/2008 reversed the order of the Ld. CIT(A) and restored the order of the AO.

Para 14 of ITAT order

We, therefore, hold that since the business income is more than the income under the head house property, capital gain and other sources, the business loss of Rs. 1,48,61,635/- suffered in purchase and sale of shares by the assessee has been rightly held as speculation loss by the Assessing Officer. In our considered opinion, the decision of the ld. CIT(A) is based on the wrong reasonings that the interest income should be taken as ‘income from other sources’ on the basis of computation of income and not as income from business as per the finding given by the Assessing Officer in view of the detailed discussion in the assessment order. The decision of the ld. CIT(A) therefore, cannot be sustained for the reasons discussed 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 fact and law and to adjudicate this issue assessee wants us to look into certain facts and evidence like Audit Report, Balance Sheet etc. by alleging that the same have not been referred, discussed and considered by the Tribunal which is apparent on perusal of the impugned order of the Tribunal. According to us this allegation cannot be brushed aside in the present appeal simply on the ground of matter of facts and evidence because it is directly related to application of the provisions of law i.e. Section 73 of the Income Tax Act, 1961 and Explanation under it. We think Tribunal would be the appropriate forum to scrutinize the said relevant facts and evidence to come to a definite conclusion as to whether principle business of the assessee is of granting of loans and advances or dealing in shares and whether case of the assessee falls within the exception under Section 73 of the Income Tax Act, 1961 and whether loss from shares dealing was speculation loss or not in the facts and circumstances of this case. Accordingly we set aside the impugned order of the Tribunal and remand to it on the aforesaid issues with direction to decide the aforesaid issue afresh after hearing the parties and examining the relevant records including the records of the assessment proceeding but it would not allow the assessee to file any fresh or new document and on consideration of the same if the Tribunal comes to the conclusion that the principle business of the assessee is of granting of loans and advances and not dealing in shares in that event Tribunal would allow the set off of the loss in shares dealing as business loss as permitted under Section 71 & 72 of the Act. Tribunal shall dispose the appeal within 6 months from the date of communication of the this order.

Justice I.P. Mukherji

No authority has been shown to us which would give a guidance to determine the principal business of the assessee for the purpose of taking benefit under Section 73 of the Income Tax Act, 1961. Is the principal business of the assessee to be determined on the basis of the businesses mentioned in its memorandum of association? Whether turnover of the assessee is an indication of its principal business? Suppose an assessee makes substantial capital expenditure in a year for promotion of a particular business

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