2019 (5) TMI 39 - HC - Income Tax

Losses in speculation business - Interpretation given to the words principal business - what is the principal business of the Assessee/Appellant? - Whether it is granting of loans and advances or share dealing and whether case of the Assessee/Appellants falls within the exceptions to the Explanation under Section 73? - HELD THAT - Assessee wants us to look into certain facts and evidence like Audit Report, Balance Sheet etc. by alleging that the same have not been referred, discussed and considered by the Tribunal which is apparent on perusal of the impugned order of the Tribunal. According to us this allegation cannot be brushed aside in the present appeal simply on the ground of matter of facts and evidence because it is directly related to application of the provisions of law i.e. Section 73 and Explanation under it. We think Tribunal would be the appropriate forum to scrutinize the said relevant facts and evidence to come to a definite conclusion as to whether principle business of the assessee is of granting of loans and advances or dealing in shares and whether case of the assessee falls within the exception under Section 73 and whether loss from shares dealing was speculation loss or not in the facts and circumstances of this case. Accordingly we set aside the impugned order of the Tribunal and remand to it on the aforesaid issues with direction to decide the aforesaid issue afresh after hearing the parties and examining the relevant records including the records of the assessment proceeding but it would not allow the assessee to file any fresh or new document and on consideration of the same if the Tribunal comes to the conclusion that the principle business of the assessee is of granting of loans and advances and not dealing in shares in that event Tribunal would allow the set off of the loss in shares dealing as business loss as permitted under Section 71 72. Tribunal shall dispose the appeal within 6 months from the date of communication of the this order.

Issues Involved:
1. Interpretation of "principal business" for the purpose of Section 73 of the Income Tax Act, 1961.
2. Determination of whether the assessee's principal business was granting loans and advances.
3. Eligibility of the assessee to set off losses incurred from share trading against business income.
4. Examination of relevant facts and evidence by the Tribunal.

Issue-wise Detailed Analysis:

1. Interpretation of "Principal Business":
The primary issue in this case revolves around the interpretation of the term "principal business." The appellant contends that apart from trading in shares, the company also engages significantly in granting loans and advances, which should be considered its principal business. The court noted that determining the principal business involves principles from general law, corporate law, accountancy, and revenue law. Factors such as the businesses mentioned in the memorandum of association, turnover, capital expenditure, and profit margins need to be judiciously analyzed to determine the principal business. This determination is complex and must be assessed by the tribunal.

2. Determination of Principal Business - Loans and Advances:
The appellant argued that the deployment of funds in the business of granting loans and advances was significantly higher than in share trading, as evidenced by the auditor's report and balance sheet. The Assessing Officer, however, categorized the loss from share trading as speculation loss and did not allow its set off against other business income. The CIT (Appeals) sided with the appellant, but the Tribunal reversed this decision, leading to the current appeal.

3. Eligibility for Set Off of Share Trading Losses:
The appellant seeks to set off the loss incurred from share trading against its business income, claiming that the principal business of granting loans and advances should exempt them from the Explanation to Section 73 of the Income Tax Act, 1961. The Tribunal's decision to classify the share trading loss as speculation loss was contested by the appellant, who cited various judgments supporting their stance that their principal business was indeed granting loans and advances.

4. Examination by the Tribunal:
The court highlighted that the Tribunal did not adequately consider the auditor's report, balance sheet, and other relevant documents. The appellant's claim that these documents were not discussed by the Tribunal cannot be dismissed as it directly impacts the application of Section 73. The court remanded the case back to the Tribunal for a thorough examination of the relevant records to determine the principal business of the assessee and whether the case falls within the exceptions to the Explanation under Section 73.

Conclusion:
The court set aside the Tribunal's order and remanded the case for fresh consideration. The Tribunal is directed to scrutinize the relevant facts and evidence, including the audit report and balance sheet, to determine whether the principal business of the assessee is granting loans and advances or share trading. If the Tribunal concludes that the principal business is granting loans and advances, it should allow the set off of the share trading loss as business loss. The Tribunal is instructed to dispose of the appeal within six months from the date of communication of this order. No order as to costs was made.

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