2015 (4) TMI 554 - HC - Income Tax

Determination of nature of business - where loss resulting out of dealing in shares is more than the income arising out of loans and advances it can be said that the principal business of the assessee is not of granting loans and advances in the light of explanation appended to Section 73 of the Income Tax Act - Held that - Income and business activity according to the legislative mandate are distinguishing factors. Therefore income alone cannot be taken into account in deciding whether the assessee is entitled to make a departure from the mandate appearing in Sub-section (1). In the case before us the activity of granting loans and advances is on a larger scale than the business of buying and selling shares. Both profit and loss are matters of chance in both the activities. Therefore profit alone was not made the distinguishing factor. Since business activity is also a distinct factor we are inclined to think that the principal business of the company/assessee is granting loans and advances as would appear from the volume indicated in the chart above for a number of years. Therefore the view taken by the learned Tribunal appears to be the correct view of the matter. - Decided in favour of assessee.

Summary

Issues:
Interpretation of Section 73 of the Income Tax Act regarding principal business classification based on fund deployment.

Analysis:
The case involved a question regarding the interpretation of Section 73 of the Income Tax Act, specifically focusing on whether a company's principal business could be determined based on the deployment of funds in acquiring shares versus granting loans and advances. The initial question raised at the time of admission was later reframed to address this issue more precisely.

The Tribunal presented a comparative statement of the deployment of funds, highlighting the amounts involved in granting loans and holding stock in trade of shares over several years. Similarly, a comparative statement of income detailed the earnings from interest on loans, commission, and brokerage, as well as losses from share trading during the relevant year.

The appellant argued that the principal activity of the assessee should be determined based on the profits earned during the year, emphasizing that profits were only derived from loans and commission, not from share dealings. On the other hand, the respondent referred to the Explanation appended to Section 73, which deems companies engaged in purchase and sale of shares as carrying on a speculation business to a certain extent.

The court considered both income and business activity as distinguishing factors in determining the principal business of the assessee. It was noted that the legislative mandate required a holistic view, where business activity, not just profits, played a crucial role. Given the larger scale of granting loans and advances compared to share trading, and the legislative emphasis on business activity, the court accepted the respondent's argument.

Ultimately, the court ruled in favor of the assessee, concluding that the principal business of the company was granting loans and advances based on the volume of activities over the years. The decision aligned with the view taken by the Tribunal, emphasizing the significance of business activity alongside income in determining the principal business classification under Section 73 of the Income Tax Act.