2019 (11) TMI 1151 - AT - Income Tax

Benefit of set off of loss in share dealing by treating the same as business loss - whether the principal business of the assessee was granting loans advances and therefore the case of the assessee came within the exception set out in the Explanation to Section 73 ? - HELD THAT - No additional rider or covenant has been attached by their Lordships which would in any manner suggest that such principal business of granting loans advances must be inter-related with the business of share dealing so as to avail the benefit of the exception set out in Explanation to Section 73. DR's argument that the exception provided in Explanation to Section 73 i.e. a company the principal business of which is the business of banking or the granting of loans and advances is required to be read along with phrase 'consists in the purchase and sale of shares of other companies' and therefore only when the activity of granting loans advances is inter-linked or inter-connected with business of purchase sale of shares that the Explanation to Section 73 is not applicable, is wholly unsustainable. What constitutes the 'principal business' has not been defined anywhere in the Act. Accordingly what constitutes principal business will essentially depend on the facts and circumstances of each case. We however note that certain guiding principles and factors have been laid down by the Special Bench of this Tribunal at Kolkata in the case of Dy. CIT v. Venkateshwar Investment Finance 2004 (12) TMI 310 - ITAT CALCUTTA-E Amongst the two, the principal or dominant business of the assessee was granting loans advances and thereby the assessee falls outside the ambit of the Explanation to Sec. 73 of the Act. Consequent thereto, the loss incurred by the assessee in the business of share dealing cannot be construed as speculation loss. We therefore have no hesitation in holding that the loss incurred by the appellant during the relevant year was assessable as business loss and which the appellant could set-off against its business income inter alia including interest income derived from the business of granting loans. Appeal of the assessee is allowed.

Issues Involved:
1. Classification of Interest Income
2. Applicability of Explanation to Section 73
3. Determination of Principal Business Activity

Issue-Wise Detailed Analysis:

1. Classification of Interest Income:
The primary issue revolves around the classification of interest income. The assessee declared an interest income of ?1,56,21,609/- under the head 'Other Sources'. However, the Assessing Officer (AO) reclassified this income under 'Profits & Gains of Business', asserting that the assessee was engaged in an organized business activity of granting loans and advances. This reclassification was pivotal as it influenced the subsequent application of Explanation to Section 73 of the Income Tax Act.

2. Applicability of Explanation to Section 73:
Explanation to Section 73 deems a company engaged in share trading as carrying on a speculation business unless it falls under specified exceptions. The AO concluded that the assessee did not meet the exceptions, as the principal business was not the granting of loans and advances but rather investment in shares. Consequently, the AO treated the share trading loss of ?1,48,61,635/- as speculation loss, disallowing its set-off against other business income. The CIT (A) initially disagreed, but the Tribunal reversed this decision, restoring the AO's order.

3. Determination of Principal Business Activity:
The High Court remitted the matter back to the Tribunal to ascertain whether the principal business of the assessee was indeed granting loans and advances, which would exempt it from the Explanation to Section 73. The Tribunal was directed to scrutinize relevant facts and evidence, including the Audit Report and Balance Sheet, to determine the principal business activity.

Tribunal's Analysis and Conclusion:
Upon remand, the Tribunal considered the following:
- The assessee was a non-banking financial company registered with the Reserve Bank of India, with one of its main objects being the granting of loans and advances.
- Financial statements revealed that the funds deployed in loans and advances (?13.03 crores) significantly exceeded those in share trading (?2.33 crores).
- The Tribunal emphasized that the correct comparison was between funds deployed in share dealing and loans & advances, not investments.
- Historical data showed consistent fund deployment in loans and advances surpassing share trading in preceding and succeeding years.
- Income derived from loans and advances (?156.28 lacs) also exceeded the negative profit from share trading (?148.61 lacs).

The Tribunal concluded that the principal business of the assessee was indeed the granting of loans and advances, thereby falling within the exception to Explanation to Section 73. Consequently, the loss from share trading was deemed a business loss, not speculation loss, allowing its set-off against other business income.

Final Judgment:
The appeal of the assessee was allowed, and the Tribunal directed that the loss incurred in share dealing be assessed as a business loss, permitting its set-off against the business income, including interest income from loans and advances.

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