2010 (8) TMI 39 - HC - Income Tax

Business Loss or speculative loss explanation to section 73 The assessee had pleaded before the AO that the principal business of the assessee was of granting of loans and advances and earning the income therefrom and therefore, the Explanation to Section 73 of the Act would not apply in the case of the assessee. It is in this backdrop that the AO went into the question as to whether the principal business of the assessee was that of lending money and earning the income therefrom. He concluded in the negative, i.e., he held that the principal business of the assessee was not of money lending. The CIT(A) relying upon the judgment of the Supreme Court in the case of K.P. Varghese v. Income Tax Officer, Ernakulam and Anr. 2008 -TMI - 5862 - SUPREME Court concluded that the principal business of the assessee was that of money lending and allowed the adjustment of losses suffered on account of sale/purchase of shares from other business income. ITAT accepted the order of CIT(A) Held that - that assessee s case fails under exception clauses of Explanation to 73. - principal business of the assessee is money lending is based on cogent evidence and material on record, it being a finding of fact and therefore, it cannot be treated as perverse.

Summary

Issues:
1. Whether the loss claimed by the assessee on sale/purchase of shares is a business loss or speculative loss.
2. Whether the principal business of the assessee is that of money lending.
3. Whether the Explanation to Section 73 of the Income Tax Act applies to the assessee.

Analysis:

1. The Assessing Officer (AO) considered whether the loss claimed by the assessee on sale/purchase of shares was a business loss or speculative loss. The AO invoked the Explanation to Section 73 of the Income Tax Act, deeming the loss as speculative and denying adjustment against other business income. The assessee argued that its principal business was granting loans and advances, exempting it from the Explanation's provisions. The AO's decision was based on the company's Memorandum of Association and lack of changes in its objects. However, within four months of incorporation, the company amended its objects to include consultancy and money lending as main businesses, rendering the AO's reasons invalid.

2. The AO's fifth reason, stating that the interest income was only 27% of the total income, was also considered. The assessee contended that consultancy income and income from bill discounting were related to lending loans and advances, constituting 52% of total income. The CIT (Appeals) analyzed this in detail, concluding that the principal business of the assessee was money lending, allowing adjustment of losses from share transactions against other income.

3. The Income Tax Appellate Tribunal (ITAT) upheld the CIT (A)'s decision, emphasizing that interest and leasing income constituted the principal business of the assessee. The ITAT reviewed the company's amended objects, approval from the Reserve Bank of India, and financial details to support its finding. The ITAT's detailed analysis, considering relevant material and case laws, confirmed that the assessee's principal business was money lending, as evidenced by the allocation of funds and income. The ITAT's decision was based on substantial evidence and was not deemed perverse, leading to the dismissal of the appeal.

In conclusion, the judgments of the CIT (A) and ITAT regarding the principal business of money lending were well-founded on factual evidence and legal analysis, resulting in the denial of the appeal.