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2016 (10) TMI 990 - AT - Income TaxDetermination of principal business of the assessee - Held that - In the instant case, the principal business of the assessee is trading in shares as held that there was loss of ₹ 1.80 crores from the trading of the shares and income from the other activities are lower than the loss claimed by the assessee. Therefore we conclude that principal business of the assessee is the business of trading in shares.
Issues Involved:
1. Legality of the order passed under Section 263 of the Income Tax Act. 2. Application of Explanation to Section 73 of the Income Tax Act. 3. Examination of the principal business of the assessee. 4. Computation of book profit under Section 115JB of the Income Tax Act. Detailed Analysis: 1. Legality of the Order Passed Under Section 263 of the Income Tax Act: The primary issue in this appeal is whether the Commissioner of Income Tax (CIT) erred in passing the order under Section 263 of the Income Tax Act by holding the Assessing Officer's (AO) order as erroneous and prejudicial to the interest of revenue. The CIT observed that the AO did not consider the applicability of Explanation to Section 73 while assessing the loss from share trading as speculation loss, which could not be set off against Short Term Capital Gain (STCG). The CIT issued a notice under Section 263 and directed the AO to re-examine the case, deeming the AO's order erroneous and prejudicial to the interest of revenue. 2. Application of Explanation to Section 73 of the Income Tax Act: The CIT held that the loss from share trading should be considered as speculation loss under Explanation to Section 73 of the Act. The assessee argued that the principal business was not trading in shares but lending loans and advances, and thus, fell under the exception clause of Explanation to Section 73. The CIT disregarded this claim, stating that only income chargeable to tax should be considered, excluding Long Term Capital Gain (LTCG) and dividend income. The Tribunal, however, concluded that the assessee's principal business was indeed lending loans and advances, and the income from LTCG should be considered, thus falling outside the purview of Explanation to Section 73. 3. Examination of the Principal Business of the Assessee: The Tribunal examined the principal business of the assessee based on income and fund deployment over several years. It was found that the principal business was lending loans and advances, supported by the chart of business activities. The Tribunal relied on the judgment in CIT Vs. M/s Savi Commercial Pvt. Ltd. to conclude that the assessee's principal business was lending loans and advances, thus not falling under the Explanation to Section 73. 4. Computation of Book Profit Under Section 115JB of the Income Tax Act: The CIT also noted that while computing book profit under Section 115JB, the AO erroneously reduced the brought forward unabsorbed depreciation, although the brought forward profit/loss as per books was positive. The assessee did not press this ground in the appeal, effectively accepting the CIT's observation as meritorious. The Tribunal noted that Section 263 does not differentiate between substantial and smaller matters of revenue; thus, even if one issue stands, the order under Section 263 is justified. Conclusion: The Tribunal concluded that the AO's order was neither erroneous nor prejudicial to the interest of revenue. The assessee's principal business was lending loans and advances, and the income from LTCG should be considered, thus falling outside the purview of Explanation to Section 73. The Tribunal quashed the CIT's revision order under Section 263 and allowed the assessee's appeal. The order was pronounced in the open court on 24/08/2016.
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