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TMI Blog2015 (12) TMI 38X X X X Extracts X X X X X X X X Extracts X X X X ..... treating the same as speculation loss and thereby not allowing set off against other business profits by invoking Explanation to section 73 of the Act . On first appeal, it was pleaded before the Learned CITA that the assessee is a non banking financial company as per certificate of registration granted by Reserve Bank of India to that effect ; that it carries on business of non banking finance company in addition to delivery based trading in shares ; that it also carries on share transactions in future and options and both are inter dependent and identical business activities ; that the assessee had earned profit from derivatives trading (future & options) amounting to Rs. 2,26,12,179/- and the Learned AO had invoked Explanation to section 73 to a part of the transaction only i.e only for physical transactions wherein share trading loss of Rs. 1,71,52,934/- was incurred , but whereas the transactions related to F&O are also of the same nature wherein profits were earned and there is only effective surplus out of the same if profit from F & O are considered and hence there is no loss available with the assessee ; that alternate submissions of the assessee also holds good that the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5,921/- which includes interest free lending to the tune of Rs. 9.58 crores ; that the NBFCs are not mandated to issue advances unless it is part of its routine activity ; that the assessee had declared interest income from loans at Rs. 2,21,917/- only which is indicative of the fact tht the assessee is not doing a NBFC business of giving loans and advances ; that the turnover from derivative business and share business is much more than the activity of giving of loans and advances and the assessee is therefore covered under Explanation to Section 73 of the Act. He further argued that explanation to section 73 of the Act deems the business of a company consisting of purchase and sale of shares as speculation business. This explanation applies to a company, notwithstanding the fact that the transactions may otherwise not have been regarded as speculative transactions by applying the provisions of section 43(5) of the Act. As mentioned above, the derivatives are distinct securities, separate from shares. Transactions of purchase and sale of derivatives therefore cannot be regarded as transactions in shares and the provisions of Explanation to section 73 would therefore not apply to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omplied with the Prudential Norms of RBI directions regarding NBFC as certified by its auditors and part of the profits have been transferred to General Reserve in pursuance to requirement of RBI for NBFC. 2.3.3. The assessee has advanced monies to various persons. Such advances clearly indicates its principal activities and in view of substantial investment by way of such advances, it is not hit by the Explanation to Section 73. 2.3.4. He argued that F&O transactions are based on "shares" as admitted by the Learned DR. Thus , there is no bar on the assessee to submit that such transactions were in the nature of hedging. The transactions in the derivatives have been carried on simultaneously with purchases. He submitted that hedging may be carried out in items different than the items purchased / sold. 2.3.5. In view of the fact that the assessee does not differentiate between its business of share trading of delivery based shares and non-delivery based shares, it arrived at the figure of net business income for the relevant assessment year after setting off the loss incurred in the business of purchase and sale of delivery based shares with income earned from derivative transac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es of this section, be deemed to be carrying on a speculation business to the extent to which the business consist of the purchase and sale of such shares.] We find that it is clear that in the case of a company whose business consists mainly or partly of purchase and sale of shares of other companies, it will amount to speculation business unless such company's gross total income consists mainly of income under the heads of "Interest on securities " , "Income from house property", "Capital Gains" and "Income from other sources", or where the principal business of the company is the business of banking or of granting loans and advances. Hence from this, the following points emerge :- * It applies to companies whose business consists of purchase and sale of shares of other companies. * It applies to all purchase and sale of shares. * It does not differentiate between 'Delivery based transactions' and 'F&O' operations. * It applies to the entire business of purchase and sale of shares, whether such trading is delivery based or non-delivery basis and whether there is profit or loss from such business deemed as "speculation". We find that the assessee had treated the entire activ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hould be done before the Explanation to section 73 of the Act, is applied. 2.12. Now, analyzing the present case in the light of the above explanation, it is submitted that during the relevant assessment year, the assessee arrived at the figure of net business income after setting off the loss incurred in the business of purchase and sale of delivery based shares with income earned for, derivative transactions. Thereafter, the provisions of explanation to section 73 of the act would be applied having no impact in the present case since the net result of the business is a profit. We find that the Learned AO has completely ignored the fact that the assesssee being a dealer in shares (which is not disputed) considers the entire business consisting of purchase and sale of shares as one composite business. 2.13. We also find that that the Learned AO had completed the scrutiny assessment u/s 143(3) of the Act for the Asst Year 2010-11 on 14.2.2013 wherein the transactions in share trading has not been considered by invoking the Explanation to Section 73 of the Act in view of the fact that the advances have been given by the assessee. This goes to prove that the stand taken by the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lcutta High Court, while considering he application of Explanation to section 73 to the case where the entire business of the assessee was in share-dealing, held that: " The phrase "to the extent to which the business consisted of purchase and sale of such shares" also does not indicate that the Legislature had several other actual and existing non-speculative activities of business in mind. It merely indicates that the business activity which consists of purchase and sale of shares will be treated as speculation business. If the entire business activity of a company consists of purchase and sale of shares of other companies, then the entire business will be treated as speculation business." c) Nine International Securities Pvt Ltd vs ITO in the case of Mumbai Tribunal in ITA No. 5902/Mum/2005 dated 10.11.2010 held as under: "......The Explanation consist of a deeming provision. It deems to actual purchase and sale of shares, the profits or losses arising out of which would be otherwise dealt with as business profits or losses in the normal way under the normal provision of the IT Act, to be result of speculation. The result would be that sub-s.(1) of s. 73 would apply and any l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld that the claim of the assesse for set off of loss from share dealing should be allowed from the profits from F & O in share transactions, the character of the income being the same and also hold that before application of the Explanation to section 73, aggregation of the business profit or loss is to be worked out irrespective of the fact whether it is from share delivery transaction or derivative transactions. Accordingly, the ground no. 1 raised by the revenue is dismissed. 3. The next issue to be decided in this appeal is whether in the facts and circumstances of the case, the interest on borrowed funds is to be disallowed as not meant for business purposes when loans and advances were advanced without interest. 3.1. The brief facts of this issue is that the assessee debited a sum of Rs. 62,84,112/- towards interest on loans in its profit and loss account. The Learned AO during the course of assessment proceedings found that the assessee on one hand had made borrowings to the tune of Rs. 5,92,05,572/- and suffered interest thereon , whereas on the other hand had advanced monies to parties free of interest which is more than the borrowed funds and hence disallowed the entire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there is no bar against advancing of loan interest-free or at a low rate of interest. There may be very many considerations, including business considerations, for not charging interest or charging interest at a low rate. Dispute between the Revenue and the assessee often arises when money is borrowed with interest and loan is advanced interest-free or at a low rate of interest. In such a case the tendency of the AO generally is to disallow the interest paid on the money borrowed either in full or proportionately depending upon the quantum of loan advanced and interest, if any, charged. But whether the assessee charged interest on loan advanced or not is not at all a relevant consideration for determining allowability of interest paid under section 36(1)(iii) of the Act. As already explained, the relevant consideration is whether the moneys have been borrowed for the purposes of business or profession and whether interest paid. In the interest of maintain good business relation, interest-free loans or loans at a low rate of interest may be given to others with whom the assessee has business relation or with whom he expects to establish business connection or with whom he has other ..... X X X X Extracts X X X X X X X X Extracts X X X X
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