2014 (4) TMI 481 - HC - Income Tax

Applicability of Explanation to section 73 of the Act - Set off of interest on amounts borrowed for purchase of shares Speculation business - Whether a particular company dealing in shares could be brought within the mischief of Explanation or saved by the excluded categories specified under the Explanation - Held that - A company, whose principal business is that of banking or financing, is excluded from the provisions of Section 73 the business of the assessee was finance and granting of loans and advances, which fell under the excepted clause in Explanation to Section 73 - merely because the loss is more than the income earned from the business of loans and advances, the AO would not be justified in looking at the results alone for the purpose of invoking Explanation to Section 73 of the Income Tax Act Explanation to Section 73 is in the nature of deeming provision and has to be strictly construed - the onus is on the Department to show that the assessee falls within the mischief of the provisions Section 73. The Tribunal rightly observed that when the assessments for the years had become final, it is not open to the AO to disturb those findings in a subsequent assessment proceedings and hence the same was binding on the AO - there is no definition of the word principal business , which is of relevance, particularly to a company carrying on the business of banking or granting loans and advances - in the absence of a definite definition of what a principal business is, one has to go only by the memorandum of articles of association of a company - its principal business is finance and granting loans and advances - The memorandum of the Company clearly points out the nature of business as an investment and finance company Decided against Revenue.

Issues Involved:
1. Explanation to Section 73 of the Income Tax Act applicability.
2. Set-off of interest on borrowed amounts against other income.
3. Set-off of carried forward losses against current year income.
4. Reopening of assessment based on change of opinion.

Issue-wise Detailed Analysis:

1. Explanation to Section 73 of the Income Tax Act Applicability:
The primary issue was whether the assessee company was hit by the Explanation to Section 73 of the Income Tax Act. The Tribunal held that the principal business of the assessee was finance and granting loans and advances, which fell under the excepted clause in Explanation to Section 73. The Tribunal reasoned that merely because the loss was more than the income earned from the business of loans and advances, the Assessing Officer would not be justified in looking at these results alone for invoking Explanation to Section 73. The Tribunal emphasized that the onus was on the Department to show that the assessee fell within the mischief of the provisions of Section 73. The Tribunal concluded that the assessee was engaged in the business of financing and that there was no material on record to show that the dealing in shares was with a view to manipulate and reduce taxable income.

2. Set-off of Interest on Borrowed Amounts Against Other Income:
The Tribunal held that interest on amounts borrowed for the purchase of shares could be set off against other income, even when trading in shares resulted in a loss. The Tribunal found that the assessee's principal business was finance, and therefore, the interest expenses were allowable as a deduction.

3. Set-off of Carried Forward Losses Against Current Year Income:
The Tribunal held that the losses of earlier years allowed to be carried forward could be set off against the income of the current year, even if the losses arose in speculation business. The Tribunal pointed out that the Assessing Officer could not disturb the assessments of the earlier years, which had become final. The Tribunal emphasized that when the order had reached finality, it was not open to the Assessing Officer to disturb those orders in the assessment year 1998-99.

4. Reopening of Assessment Based on Change of Opinion:
The Tribunal held that the reassessment proceedings for the assessment years 1996-97 and 1997-98 were based on a change of opinion, as the provisions of Section 73 and the explanation thereto were not considered in the original assessment. The Tribunal found that there was no fresh material available with the Assessing Officer to justify the reopening of the assessment. The Tribunal viewed that there was no failure on the part of the assessee to disclose all material facts necessary for the assessment. Consequently, the reopening of assessment for the assessment years 1996-97 and 1997-98 was held to be bad in law.

Conclusion:
The Tribunal's findings were upheld, and the appeals filed by the Revenue were dismissed. The Tribunal's conclusion that the assessee's principal business was finance and granting loans and advances was based on the memorandum of articles of association. The Tribunal's decision was supported by the Supreme Court's ruling in CIT Vs. Kelvinator of India Limited, which held that reopening of assessment based on a mere change of opinion was not legally sustainable. The Tribunal's decision was also distinguished from the Calcutta High Court's decision in Paharpur Cooling Towers Ltd. Vs. CIT, as the facts of the case were different.

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