2005 (5) TMI 254 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of loss on the sale of shares under Section 74 read with Section 73 Explanation of the IT Act, 1961.
2. Claim of depreciation on trucks leased by the assessee.
3. Disallowance under Section 43B of the Act in respect of contribution to provident fund and ESIC.

Detailed Analysis:

1. Disallowance of Loss on Sale of Shares:
The core issue pertains to whether the loss on the sale of shares should be treated as a capital loss under Section 74 or as a deemed speculative loss under the Explanation to Section 73 of the IT Act, 1961. The assessee, engaged in multiple business activities including money lending, leasing, finance, and trading in shares, reported losses on the sale of shares for the assessment years 1997-98, 1998-99, and 1999-2000. The Assessing Officer (AO) disallowed the set-off of these losses against other incomes, classifying them as capital losses or deemed speculative losses. The assessee contended that it was a finance company as per RBI guidelines and thus fell under the exception in the Explanation to Section 73. However, the AO rejected this claim, noting that the assessee's primary business was not granting loans and advances. The CIT(A) ruled in favor of the assessee, stating that the principal business was indeed finance-related, but the Tribunal reversed this decision, emphasizing that the income and capital employed in financing activities were insufficient to classify the assessee's principal business as granting loans and advances. Consequently, the Tribunal upheld the AO's decision to treat the losses as speculative.

2. Claim of Depreciation on Leased Trucks:
The second issue involved the assessee's claim for higher depreciation on trucks leased to customers. The Tribunal referenced the jurisdictional High Court's decisions in Kotak Mahindra Finance Ltd., which clarified that higher depreciation is allowable only if the lessees used the vehicles in the business of running them on hire. Since there was no evidence that the lessees used the trucks for such purposes, the Tribunal remitted the matter back to the AO for further investigation and fresh adjudication.

3. Disallowance under Section 43B:
The final issue concerned the disallowance of contributions to provident fund and ESIC under Section 43B for the assessment year 1997-98. The assessee argued that the payments were made within the grace period, referencing the Tribunal's decision in Fluid Air (India) Ltd. and the Madras High Court's judgment in CIT vs. Shri Ganapathy Mills Co. Ltd. The Tribunal agreed with the assessee and directed the AO to allow the claim if the payments were indeed made within the grace period.

Conclusion:
The Tribunal partly allowed the appeals, reversing the CIT(A)'s decision on the treatment of share losses and remanding the depreciation claim on leased trucks for further inquiry. The disallowance under Section 43B was set aside, subject to verification of payment within the grace period.