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TMI Blog2009 (11) TMI 668X X X X Extracts X X X X X X X X Extracts X X X X ..... ore than income from other sources, therefore, Explanation to section 73 was made applicable in the case of the assessee and the case was held to be not covered by the exceptions provided therein. He, therefore, held that assessee is deemed to be carrying on speculation business to the extent to which the business consists of sale and purchase of shares. Accordingly, loss of Rs. 94.21 lakhs was held to be loss in speculation business and was not allowed to be set off against any other head of income. However, carry forward of same was allowed for setting off in accordance with the provisions of section 73 of the Act. By the impugned order, the CIT(A) allowed the assessee s claim by holding that assessee s case does not fall within the ambit of Explanation to section 73. The CIT(A) relied on the order dated 24-10-2008 of ITAT Delhi Bench in assessee s own case for the immediately preceding assessment year 2004-05. Aggrieved by the same, the revenue is in appeal before us. 3. We have considered the rival contentions, carefully gone through the orders of the lower authorities, relevant provisions of the law vis-a-vis order of ITAT in assessee s own case for the immediately p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing of loans and advances, the Assessing Officer observed that major part of the assessee s turnover was from sale of paper. In respect of assessee s contention regarding amount of loan of Rs. 3.76 crores advanced by the assessee, the Assessing Officer observed that assessee has taken a whopping sum of Rs. 12.74 crores as a loan. Accordingly, he held that assessee cannot be said to be a company, the principal business of which is banking and granting of loans and advances. Thus, the assessee s case was held to be not covered by any of the exceptions to Explanation to section 73 of the Act. 5. Provisions of section 73 of the Act deal with carry forward and set-off of loss from the business of speculation. Explanation to section 73 is a deeming provision wherein on fulfilment of specified conditions, purchase and sale of shares are deemed to be speculative activities. As per Explanation to section 73, where any part of a business of a company (other than company whose gross total income consists mainly of income which is chargeable under the heads Interest on securities , Income from house property , Capital gains and Income from other sources ), or a company the princ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... falls outside the ambit of Explanation to section 73. For determining the principal business of the assessee-company, one has to find out the money invested in granting of loans and advances vis-a-vis money invested in business of share transaction. For determining the principal business of the assessee, the memorandum of association of the company, its past history, current deployment of its capital, break-up of income earned during the year would all help in determining the principal business of the company. Merely because income/loss in dealing in shares in one particular year is more than income/loss from principal business of the assessee of granting loans and advances, it cannot be said that principal business of assessee is not that of granting loans and advances. This issue has been considered in great detail by the ITAT Special Bench in the case of Venkateswar Investment Finance (P.) Ltd. ( supra ) wherein it was held that in view of the provisions of Explanation to section 73, loss in purchase and sale of shares shall not be treated as speculation loss in case of a company principal business of which is granting of loans and advances. Following was the observati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the Articles of Association of the company, past history of the assessee, current and past year s deployment of the capital of the assessee, break-up of the income earned during the relevant and past years and the nature of activities of the assessee will all help in determining the principal business of the assessee. If in any particular year, the assessee has nominal business income and has substantial interest income, it does not imply that the assessee s principal business is of finance or granting of loans and advances. Similarly the assessee, the principal business of which is the granting of loans and advances, may earn a comparatively high income from other activities in any particular year and still the principal business of the assessee may remain granting of loans and advances. The Explanation to section 73 is in the nature of a deeming provision and as such has to be strictly construed. The decisive factor is the true nature of activities of the company during the relevant period as well as in the past or succeeding periods. Considering the objects of the assessee-company as stated in the Memorandum of Association and the fact that the income from interest and lea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The net working capital of the assessee in its activity of paper trading and real estate was Rs. 6.04 crores. Even if we club the net capital employed in the business of share, paper trading and real estate which works out to be Rs. 6.66 crores as against net capital employed in the activity of loans and advances which is Rs. 6.85 crores, we found that highest deployment of capital was in the activity of loans and advances. Thus, we found that highest capital employment was in the business of loans and financing which was Rs. 6.85 crores as compared to all the other business activity of the assessee which clearly demonstrate that the main activity of assessee was giving loans and advances. As per the audited balance sheet placed on record, the assessee had given loans and advances of Rs. 5.53 crores whereas stock of shares was just Rs. 62.28 lakhs. 12. The audited balance sheet placed on the record indicates details of funds invested in investment activity and other business activity which shows that investment of more capital is in the investment activity. Total funds available as on balance sheet date, i.e., 31-3-2005 comprises of as under : (Rs.) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Gross Block 5,526,947 5,183,437 Less : Depreciation 2,458,285 2,021,723 Net Block 3,068,662 3,161,714 Investments 4,510,000 4,510,000 Current Assets Loans Advances Inventories 32,758,238 48,613,623 15,855,385 Reduction in stock level. Sundry debtors 44,913,642 83,167,131 38,253,489 Reduction in debtors level. Cash Bank Balances 8,333,979 5,924,273 Loans Advances 55,309,768 34,410,998 (20,898,770) More funds to Investment Activity. 141,315,627 172,116,025 Less: Current liabilities Provisions Net Current Assets 127,795,767 141,935,093 135,374,429 149,606,807 31-3-2005 31-3-2004 Diversion Remarks Rs. Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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