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TMI Blog2004 (12) TMI 310X X X X Extracts X X X X X X X X Extracts X X X X ..... is on the revenue to show that the case of the assessee falls within the four corners of the deeming provision of law. This view is fortified by the decisions of the Hon'ble Supreme Court in Vegetable Products Ltd.'s case, Laxmi Industries Ltd. Co.'s case [ 1997 (3) TMI 55 - RAJASTHAN HIGH COURT] , Mayank Poddar (HUF)'s case [ 2003 (2) TMI 45 - CALCUTTA HIGH COURT] and R.J. Trivedi Sons' case [ 1990 (3) TMI 63 - MADHYA PRADESH HIGH COURT] . Merely because the loss in dealing in shares in one particular year is more than the income from the principal business of the assessee of granting loans and advances, it cannot be said that the principal business of the assessee is not that of granting loans and advances. Considering the objects of the assessee-company as stated in the Memorandum of Association and the fact that the income from interest and lease rentals were the only income in the past years and the loss from share dealings was incurred only during the year under consideration and considering the position of deployment of funds in loans and advances and leasing business which is more than 3 times of the fund deployed in share business as on 31-3-1997 and to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 92 ITR 365. (3) That the order of the Ld. CIT(A) deserves to be vacated and that the order of the Assessing Officer deserves to be restored. 3. The Ld. CIT D.R. submitted that the loss on purchase and sale of shares during the relevant year has been claimed by the assessee at Rs. 51,28,005, which is more than the lease rental and interest income shown by the assessee and the assessee has filed a loss return at Rs. 34,03,960. He argued that the Explanation to section 73 of the Act is clearly applicable in the present case and the Assessing Officer has rightly held the loss of Rs. 51,28,005 as speculation loss of the assessee not qualified for set off against any other income. He argued that the CIT (Appeals) has ignored the judgment of the jurisdictional High Court in the case of Eastern Aviation Industries Ltd. v. CIT [1994] 208 ITR 1023. He argued that the share dealings is one of the main objects of the assessee company as per para 3 of the Memorandum of Association of the assessee company. The loss claimed by the assessee on purchase and sale of shares is more than the income of the assessee under the head Income from other sources and, therefore, the case of the assessee is cov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... distinguishable since in those cases the principal business of the assessee was not that of granting of loans and advances. He argued that merely because numerical value of the loss in purchase and sale of shares is more than the income of the assessee under the head Income from other sources during the relevant period, does not mean that the principal business of the assessee ceased to be that of granting of loans and advances. He argued that the granting of loans and advances is, in fact, the Core business of the assessee which is carried on year after year. He relied on the decision of the Kolkata Bench of the Tribunal in the case of Jayshree Nirman Ltd. v. ITO [IT Appeal No. 1351 (Kol.) of 2002] for the assessment year 1998-99 dated 24-7-2003 wherein it was held that what constitutes principal business will depend on facts and circumstances of each case. Further held that the memorandum and the articles of association of the company, past history of the company, current deployment of the capital of the company, break-up of the income earned during the relevant year will all help in determining the principal business of the company. If in any particular year, the manufacturing o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and Income from other sources , or a company the principal business of which is the business of banking or the granting of loans and advances) consists in the purchase and sale of shares of other companies, such company shall, for the purposes of this section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares. As per the above Explanation, in the case of a company, business of purchase and sale of shares shall be deemed to be speculation business. However, certain companies are excluded from this Explanation which are: (i) a 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 . (ii) a company the principal business of which is the business of banking or the granting of loans and advances. The assessee-company was incorporated as a private limited company on 29th September, 1992. Since its inception the company has been engaged in the business of financing by way of granting loans and advances and earning interest income therefrom. During the financial year 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... volves around the question as to whether the principal business of the assessee-company during the relevant period is that of granting of loans and advances. What constitutes the principal business has not been defined anywhere in the Act. Therefore, what constitutes principal business will depend on the facts and circumstances of each case. The Memorandum of Articles of Association of the company, past history of the company, current deployment of the capital of the company, break-up of the income earned during the relevant year will all help in determining the principal business of the company. The company, whose principal business is that of granting of loans and advances may earn a comparatively high income from some other activity in any particular year. Merely because the income/loss from share trading in the year under consideration is higher than the interest income, that itself would not be sufficient to conclude that the principal business of the company is not that of granting of loans and advances. Even then the principal business of the company can remain granting of loans and advances. There may be a case where in any particular assessment year the income from interes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court in Vegetable Products Ltd.'s case, Laxmi Industries Ltd. Co.'s case, Mayank Poddar (HUF)'s case and R.J. Trivedi Sons' case. Merely because the loss in dealing in shares in one particular year is more than the income from the principal business of the assessee of granting loans and advances, it cannot be said that the principal business of the assessee is not that of granting loans and advances. We hold that considering the totality of facts and circumstances of the case, the principal business of the assessee is that of granting of loans and advances and the provisions of Explanation to section 73 are not attracted to the case and accordingly the loss incurred in the business of purchase and sale of shares is not to be treated as speculative loss within the meaning of Explanation to section 73 of the Act. In the case of Jayshree Nirman Ltd v. ITO [IT Appeal No. 1351 (Cal.) of 2002, dated 24-7-2003] held as follows: Admittedly, the phrase principal business has not been defined anywhere in the Act. What constitutes principal business will, therefore, depend on the facts and circumstances of each case. The Memorandum and Articles of Association of the company, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O [2003] 262 ITR 633 (Cal.), the Hon'ble jurisdictional High Court held The subject is not to be taxed unless the charging provision clearly imposes the obligation. Equally important is the rule of construction that if the words of a statute are precise and unambiguous, they must be accepted as declaring the express intentions of the Legislature. A property, which is not otherwise taxable, cannot become taxable because of misunderstanding or wrong understanding of law by the assessee or because of his admission or on his misapprehension. If in law an item is not taxable, no amount of admission or misapprehension can make it taxable . In the case of Laxmi Industries Ltd. Co. v. ITO [1998] 231 ITR 514 (Raj.), the Hon'ble High Court held as under: An Explanation brought on the statute book is ordinarily clarificatory in nature and has retrospective effect, as the Explanation so brought to a provision in the statute simply explains the law as it has always been in the main provision. However, the rule governing the construction of the provisions imposing penal liability upon the subject is that such provisions should be strictly construed. When a provision creates some penal li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee was that of dealing in shares and some dividend income was also earned and declared by the assessee. In the case of the assessee before us, the whole business of the assessee is not that of dealings in shares and the assessee has been doing the business of advancement of loans and advances in the relevant year as well as in the past years. In the case of CIT v. Arvind Investment Ltd. [1991] 192 ITR 365(Cal.), the entire business activity of the assessee company consisted of dealing in shares and in these facts the Hon'ble High Court held that the Explanation to section 73 applied to the case of the assessee whose entire business consisted of dealing in shares and the loss incurred by the assessee was speculation loss. In the case of the assessee before us, admittedly the entire business of the assessee-company is not consisting of dealing in shares and accordingly the decision of the Hon'ble High Court is distinguishable. 9. We have the benefit of going through the decision of the Hon'ble Apex Court and also of the Hon'ble Bombay High Court. In CIT v. Distributors (Baroda) (P.) Ltd. [1972] 83 ITR 377 at 384-385 (SC), the shares of two companies were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erty, other sources and capital gains. Therefore, the Assessing Officer held the assessee-company to be investment company undersection 109(ii) on the ground that more than 51 per cent of the gross total income was income from house property. On appeal, the CIT(Appeals) and the Tribunal did not agree with the finding of the Assessing Officer. The Revenue was in reference before the Hon'ble High Court. Their Lordships of the Hon'ble High Court, after considering the definition of investment company and trading company provided under section 109, have laid down the text which is to be applied for determining whether a company can be termed as investment company or not. It is given at page 545 of the report, which is as under: From the definition of investment company set out above, it is evident that a company can be held to be an investment company only if its gross total income consists mainly of income which is chargeable under the heads specified therein. It is not the actual income arising in a particular year under those heads vis-a-vis income falling under other heads that is determinative of the real character of the company. The decisive factor is the nature of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s more than the profit earned in the Core business of the assessee of advancement of loans and advances, does not mean that the business of advancement of loans and advances is not the principal business of the assessee. In the past years the assessee has no share dealings whatsoever and clearly the principal business of the assessee in the preceding years was that of advancement of loans and advances. 10. We hold that to decide whether the case of an assessee falls in exceptions provided in Explanation to section 73 of the Act or not and to decide whether the principal business of the assessee is that of granting of loans and advances, the decisive factor is the nature of the activities of the assessee and not the actual income from such activities during a particular year. Merely because the numerical value of the profit/loss in purchase and sale of shares is more than the interest income during the relevant period, does not mean that the principal business of the assessee ceases to be that of granting of loans and advances. What constitutes the principal business has not been defined anywhere in the Act. What constitutes the principal business will depend on the facts and circum ..... X X X X Extracts X X X X X X X X Extracts X X X X
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