2009 (11) TMI 668 - AT - Income Tax

Summary

Issues Involved:
1. Applicability of Explanation to Section 73 of the Income-tax Act.
2. Determination of the principal business of the assessee-company.

Summary:

1. Applicability of Explanation to Section 73 of the Income-tax Act:
The Assessing Officer (AO) found that the assessee-company, engaged in trading in paper, shares, financing, and real estate, incurred a loss from share transactions exceeding its income from other sources. Consequently, the AO applied Explanation to Section 73, deeming the company to be carrying on speculation business and disallowed the set-off of the loss against other income heads, though allowing its carry forward u/s 73. The CIT(A) reversed this decision, holding that the assessee's case did not fall within the ambit of Explanation to Section 73, relying on a prior ITAT order for the assessment year 2004-05.

2. Determination of the Principal Business of the Assessee-Company:
The Tribunal examined whether the principal business of the assessee was granting loans and advances, which would exempt it from Explanation to Section 73. The assessee's memorandum of association, past history, and current deployment of capital were considered. The Tribunal noted that the highest capital employment was in the business of loans and financing (Rs. 6.85 crores) compared to other business activities. The Tribunal emphasized that the principal business should be determined by the nature of activities and not merely by the income/loss from share transactions in a particular year. The Tribunal concluded that the principal business of the assessee was indeed granting loans and advances, thus exempting it from the deeming provisions of Explanation to Section 73.

Conclusion:
The Tribunal upheld the CIT(A)'s decision, dismissing the revenue's appeal and confirming that the assessee-company was not hit by Explanation to Section 73 due to its principal business of granting loans and advances. The loss from share transactions was to be treated as a business loss and not a speculation loss. The appeal of the revenue was dismissed.