2012 (6) TMI 38 - HC - Income Tax

Deeming provision of carrying speculation business under Explanation to Section 73 - set off of loss incurred by assessee on purchase and sale of shares denied from other income on ground that said loss is speculation loss and assessee is not covered under exclusionary clause of Explanation to Section 73 - Revenue contended that principal business of the company is not granting loans and advances as the same is not specified in Memorandum of association - Held that - The words carried on stated in Section 73 mean actual carrying of the activity and it 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. Further Assessment order refers to only interest income and does not refer to any other income hence assessee mainly earned income from interest from granting loans and advances. Therefore assessee was clearly covered by the exclusionary clause of Explanation to Section 73 and the Tribunal rightly set off the losses from sale and purchase from the income of the assessee from loans and advances - Decided in favor of assessee.

Summary

Issues Involved:
1. Principal business determination under Explanation to Section 73 of the Income Tax Act.
2. Classification of losses from the purchase and sale of shares as speculation loss.
3. Applicability of the exclusionary clause in Explanation to Section 73 of the Act.

Issue-wise Detailed Analysis:

1. Principal Business Determination under Explanation to Section 73:
The primary issue was whether the assessee's principal business was granting loans and advances, thereby qualifying for the exclusionary clause in Explanation to Section 73 of the Income Tax Act. The Tribunal found that the principal business of the company was indeed granting loans and advances, based on the actual activities carried out during the relevant assessment year. The Tribunal noted that the company's income primarily consisted of interest from loans and advances, which was assessed as business income. This finding was supported by the fact that the company's gross total income mainly included interest income, fulfilling the conditions of the exclusionary clause.

2. Classification of Losses from Purchase and Sale of Shares as Speculation Loss:
The second issue was whether the losses incurred from the purchase and sale of shares should be treated as speculation losses, which could only be set off against profits from speculation business. The Tribunal held that since the principal business of the company was granting loans and advances, the deeming provision for speculation business under Explanation to Section 73 did not apply. Consequently, the losses from the purchase and sale of shares were not considered speculation losses and were eligible to be set off against other income, such as interest income.

3. Applicability of the Exclusionary Clause in Explanation to Section 73:
The Tribunal examined whether the assessee qualified for the exclusionary clause in Explanation to Section 73, which excludes companies whose principal business is banking or granting loans and advances. The Tribunal concluded that the assessee's principal business was indeed granting loans and advances, as evidenced by the significant interest income. This conclusion was supported by various judicial precedents, including the Bombay High Court's ruling in Commissioner of Income Tax v. Darshan Securities P. Ltd., which emphasized that the nature of the company's activities should determine its principal business.

Conclusion:
The High Court upheld the Tribunal's findings, affirming that the assessee's principal business was granting loans and advances, thereby qualifying for the exclusionary clause in Explanation to Section 73. Consequently, the losses from the purchase and sale of shares were not classified as speculation losses and were eligible to be set off against other income. The appeals were dismissed, and the questions of law were answered in favor of the assessee.