2004 (12) TMI 310 - AT - Income Tax

Speculation Business - principal business - granting loans and advances Or Not - Whether the loss suffered by the assessee in purchase and sale of share can be set off against the business income - HELD THAT - What constitutes the principal business has not been defined anywhere in the Act. Therefore, what constitutes principal business will depend on the facts and circumstances of each case. The Memorandum of Articles of Association of the company, past history of the company, current deployment of the capital of the company, break-up of the income earned during the relevant year will all help in determining the principal business of the company. The company, whose principal business is that of granting of loans and advances may earn a comparatively high income from some other activity in any particular year. The Explanation to section 73 is in the nature of deeming provision and as such has to be strictly construed and the onus is on the revenue to show that the case of the assessee falls within the four corners of the deeming provision of law. This view is fortified by the decisions of the Hon'ble Supreme Court in Vegetable Products Ltd.'s case, Laxmi Industries Ltd. Co.'s case 1997 (3) TMI 55 - RAJASTHAN HIGH COURT , Mayank Poddar (HUF)'s case 2003 (2) TMI 45 - CALCUTTA HIGH COURT and R.J. Trivedi Sons' case 1990 (3) TMI 63 - MADHYA PRADESH HIGH COURT . Merely because the loss in dealing in shares in one particular year is more than the income from the principal business of the assessee of granting loans and advances, it cannot be said that the principal business of the assessee is not that of granting loans and advances. Considering the objects of the assessee-company as stated in the Memorandum of Association and the fact that the income from interest and lease rentals were the only income in the past years and the loss from share dealings was incurred only during the year under consideration and considering the position of deployment of funds in loans and advances and leasing business which is more than 3 times of the fund deployed in share business as on 31-3-1997 and totality of the facts and circumstances of the case, we hold that the principal business of the assessee is that of granting loans and advances and as such the case of the assessee falls in exception to Explanation to section 73 of the Act and the provision of Explanation to section 73 are not applicable to the instant case. In this view of the matter, we hold that there is no mistake in the order of the CIT (Appeals) in holding that the case of the assessee-company is not hit by Explanation to section 73 and the loss so suffered shall be treated as business loss and not speculation loss and question referred to is answered in favour of the assessee and the grounds of appeal of the Revenue are dismissed. In the result, the appeal of the Revenue is dismissed.

Summary

Issues Involved:
1. Applicability of Explanation to section 73 of the Income-tax Act, 1961.
2. Classification of loss from share dealing as business loss or speculation loss.
3. Determination of principal business activity of the assessee.

Summary:

1. Applicability of Explanation to section 73 of the Income-tax Act, 1961:
The primary issue was whether the loss in share dealing suffered by the assessee, which exceeded its income from other sources in the assessment year 1997-98, should be classified as speculation loss u/s 73 of the Income-tax Act. The Revenue argued that the Explanation to section 73 was applicable, treating the loss as speculative. The assessee contended that its principal business was granting loans and advances, thus falling under the exception provided in the Explanation to section 73.

2. Classification of loss from share dealing as business loss or speculation loss:
The Revenue contended that the loss of Rs. 51,28,005 from share dealings should be treated as speculation loss, citing various judicial precedents. The assessee argued that the loss should be considered a business loss, as the principal business was lending and advancing loans. The Tribunal emphasized that the Explanation to section 73, being a deeming provision, must be strictly construed. It concluded that merely because the share dealing loss was higher than the income from other sources, it does not change the principal business of the assessee from lending to share dealing.

3. Determination of principal business activity of the assessee:
The Tribunal examined the nature of the assessee's business activities, deployment of funds, and income sources over several years. It found that the principal business of the assessee was indeed granting loans and advances, supported by the Memorandum of Association and historical financial data. The Tribunal noted that the business of share dealing was initiated only in the relevant assessment year and was not the principal activity. It held that the principal business of the assessee remained the granting of loans and advances, thus falling under the exception to the Explanation to section 73.

Conclusion:
The Tribunal concluded that the principal business of the assessee was granting loans and advances, and therefore, the provisions of Explanation to section 73 were not applicable. The loss incurred in the business of purchase and sale of shares was to be treated as a business loss and not a speculation loss. The appeal of the Revenue was dismissed.