M/S. MRIGANAYANI SUPPLIERS PVT. LTD.,,KOLKATA vs. ITO, WARD-11(1), KOLKATA, KOLKATA

The assessee in the present case is a company which is engaged in the business of dealing in shares and keeping money in fixed deposits. The return of income for the year under consideration was filed by it on 16.09.2004 declaring a total income of Rs. 75,040/-. In the assessment originally completed under section 143(3) vide an M/s. Mrigyanayani Suppliers Pvt. Ltd. order dated 21.11.2006, the total income of the assessee was determined by the A.O. at Rs. 26,81,660/- after making addition of Rs. 26,06,615/- by way of disallowance of assessee’s claim for loss in trading of shares by treating the same as speculation loss under section 73 of the Act. On appeal, the Ld. CIT (A) confirmed the said addition made by the A.O. On further appeal, the Tribunal vide its order dated 30.04.2010 restored the matter to the file of the A.O. for deciding the same afresh in the light of its decision rendered in the case of Prasad Group Resources Pvt. Ltd. vs DCIT in ITA No. 1760/kol/2008. As per the direction of the Tribunal, the matter was again examined by the A.O. On such examination, he found that the facts involved in the case of Prasad Group Resources Pvt. Ltd. (supra) decided by the Tribunal were different from the facts involved in the case of the assessee in as much as the principal business of the assessee in the said case was granting of loans and advances and not share trading whereas the principal business of the assessee was not of granting of loans and advances. In this regard, he noted that majority of its funds were invested by the assessee in the fixed deposits and it had not granted any loans or advances during the year under consideration. He also noted that no loans or advances had been granted by the assessee company even in the earlier years and income from shares dealings as well as income from interest on fixed deposits was offered to tax under the head ‘income from business or profession’. He held that the case of the assessee thus was clearly covered by Explanation to Section 73 and loss suffered by it from the trading of shares was to be treated as speculation loss. He accordingly disallowed the claim of the assessee for adjustment of the said loss M/s. Mrigyanayani Suppliers Pvt. Ltd. against interest income and completed the assessment under section 143(3) r.w.s. 254 of the Act vide an order 13.12.2011 determining the total income of the assessee at Rs. 26,81,660/-.

Against the order passed by the A.O. under section 143(3) r.w.s. 254, an appeal was preferred by the assessee before the Ld. CIT (A) and the following submissions were made on behalf of the assessee before the Ld. CIT (A) in support of its claim for adjustment of loss suffered in the trading of shares against interest income: “The computation of the assessee company for the AY 2004-05 is summarized below: Particulars Amount (Rs) Income from other sources (FD Interest) 3107837 Income from Business (Loss) 3032794 Total Income 75043 It is also true that due to mistake of the accountant, the net result of all activities was put under the head Profit & Gains from business and profession but at the time of assessment correct computation was filed as acknowledged by the Ld. Income Tax Officer at page 5 of his order dated 21.11.2006. This matter regarding change in computation as per return and as submitted before Income Tax Officer at the time of assessment was considered by the Hon’ble ITAT, Kolkata Bench ‘D’ in the matter of ITO vs Royal Seeds & Fertilizers Pvt. Ltd. in appeal no 483/kol/2005 and the matter was adjudicated in favour of the assessee that even if in the return the income is not submitted under correct head, it can be rectified in the assessment (copy of order is enclosed). We humbly submit that Explanation to Section 73 is not applicable in the following two circumstances- i) Where the principal business of the assessee is of banking of granting of Loans and Advances ii) 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”. We also submit that interest on fixed deposits is “Income from Other Sources” as confirmed by the Hon’ble Supreme Court in so many judicial pronouncements M/s. Mrigyanayani Suppliers Pvt. Ltd. including that of Tutikorin Alakali Chemicals (1997) 141 CTR SC 387 and South Indian Shipping Corporation Ltd. (Madras High Court dated 09.02.1998). There are more decisions of Hon’ble ITAT Kolkata Bench on similar issues wherein FD Interest was held to other income and loss from dealing in shares was allowed to set off ignoring provisions of Explanation to Section 73 of the Income Tax Act 1961 i) M/s. Megapode Vyapaar Pvt. Ltd. vs ITO Ward 2(3) in (Kol) of 2005 ii) ITO Ward 9(1) vs Dharmjyoti Vinimay Pvt. Ltd. in ITA No. 387/Kol/2003 (Copies of order enclosed) Without prejudice to the above, the assessee is a NBFC Company whose principal business is of granting of loans & advances cannot be overlooked. It was only a temporary phase wherein the directors did not have proper investment opportunities thus they decided to park the funds in Fixed Deposits. The status of the company can well be cross verified from latest Balance Sheet and NBFC Registration Certificate (copy enclosed) FD investment for a NBFC Company is akin to loans and advances and in that case the deployment of funds in FD would even satisfy the first exception to Explanation to Section 73. Fixed Deposits including interest accrued thereon 41614250/- (89.26%) Total of Balance Sheet 46619520/- (100%) Therefore it is prayed that appropriate relief may kindly be allowed in the matter.”

The Ld. CIT (A) did not find merit if the submissions made by the assessee and proceeded to uphold the order of the A.O. treating the loss suffered by the assessee in trading of shares as speculation loss for the following reasons given in paragraph no 7 of his impugned order: “After thorough examination of the matter, I find that the Ld. A.O. has in fact in obedience to the orders of the Hon’ble ITAT gone into the ratio of the decisions mentioned in the orders of the Hon’ble ITAT, and seen the applicability, if any to the facts of the present case. The Ld. ITAT had observed that in the other cases, relief was grated as the appellant- taxpayers were able to produce concrete and cogent evidence such as the contract notes, bank statements, details of demat account, purchase and the sale register etc. The Hon’ble ITAT has observed that in the present case, ‘since the assessee is not able to substantiate the rates on which the sale of shares has taken place, and whether they are accounted through banking channels or not. I find that the situation remains the same, and M/s. Mrigyanayani Suppliers Pvt. Ltd. the appellant has not been able to produce these documents even though he is making a claim that they were available with the Ld. A.O. No documents as mentioned by the Hon’ble ITAT were produced before the appellate forum to enhance the claims of the appellant, which accordingly remain mere unsubstantiated claims, and cannot be taken any cognizance of. I find absolutely no merit in the claim of the appellant / Ld. AR that the Ld. A.O. ignored the two exceptions to the explanation to Section 73. In fact they have been discussed by the Ld. A.O. and adjudicated that the appellant was not covered by any of them. I find that the appellant has not been able to bring on record even an iota of evidence to support the claim that it was an NBFC Company whose principal business was granting loans. The mere claim that the status can be verified through documents are just documentary evidence to try and dilute the fact that absolutely no loans were given by the company. In the circumstances of the case, I find myself in complete agreement with the reasoned finding of the Ld. A.O. that it is apparent that the assessee- company has treated keeping the money in fixed deposits as his principal business and such treatment is duly supported by the facts and figures disclosed by the assessee in its return, and that the finding reinforces the conclusion that it was only after being confronted with the question as to why Explanation below section 73 of the Act should not be applied that the assessee came up with the explanation that income computed under the head ‘Income from other sources’ in its case was greater than the business loss from share dealings and hence it claimed that it did not come within the purview of the Explanation below section 73 of the Act. The Ld. A.O. is absolutely correct, in my considered opinion in observing that as the entire income for the year had been computed under the head ‘Income from business or profession’, the explanation furnished by the assessee is considered wholly untenable as it glaringly contradicts its own standards taken for all these earlier years. In the emergent circumstance, I confirm the reasoned finding of the Ld. A.O. that the assessee is held to be a company which is deeded to be carrying on speculation business to the extent to which the business consists of the purchase and sale, of shares within the meaning of the Explanation below section 73 of the Act and consequently, the loss suffered from such business amounting to Rs. 26,06,615/- was to be created as speculation loss. In summary this ground taken by the appellant assessee stands dismissesd.

M/s. Mrigyanayani Suppliers Pvt. Ltd. Aggrieved by the order of the Ld. CIT (A), the assessee has preferred this appeal before the Tribunal.

The learned counsel for the assessee submitted that the assessee company in the present case is a Non-banking Finance Company (NBFC) and it has generally utilised funds for in granting loans or advances. He submitted since the money market was not stable in the year under consideration as well as in the immediately preceding year, its funds were invested by the assessee company into fixed deposits. He contended that even though interest received on such fixed deposit was declared by the assessee as its business income, the same was actually chargeable to tax under the head ‘income from other sources’. He submitted that the assessee accordingly even filed a revised computation of income showing interest income as ‘income from other sources’ instead of ‘business income’. He contended that it was a case of investment of surplus funds by the assessee company temporarily in fixed deposits and the interest on such fixed deposits therefore was chargeable to tax under the head income from other sources as held by this Tribunal in the case of ITO vs Royal Seeds & Fertilizers Pvt. Ltd. vide its order dated 30.09.2005 passed in ITA No. 483/Kol/2005. He contended that once the interest income earned by the assessee on fixed deposits is held to be chargeable to tax as ‘income from other sources’, Explanation to Section 73 will have no application and the loss suffered by the assessee in trading in shares cannot be treated as speculation loss.

The learned DR, on the other hand, strongly supported the impugned order of the Ld. CIT (A) upholding the action of the A.O. in disallowing the claim of the assessee for set off of loss suffered in the trading of shares against interest income by treating the same as speculation loss. He read out the observations recorded by the Ld. CIT (A) in this regard in paragraph no 7 of his impugned order and strongly relied on the reasons given by the Ld. CIT (A) while deciding the issue against the assessee.

I have considered the rival submissions and also perused the relevant material available on record. It is observed that even though the assessee company has claimed itself as a non-banking finance company, nothing has been brought on record to establish that it was engaged in the business of banking or it had given loans or advances either during the year under consideration or even in the earlier years. The claim of the assessee company that its principal business is of banking or granting of loans or advances thus is not supported by any documentary evidence whatsoever. As noted by the authorities below its funds were mainly invested by the assessee company in fixed deposits and there is nothing to support and substantiate the contention raised by the learned counsel for the assessee that it was a case of investment of surplus funds by the assessee company in the fixed deposits. The interest income received on such fixed deposit was offered to tax by the assessee as its business income in the year under consideration and even in the earlier year. Moreover, as noted by the Assessing Officer, the deduction against the said income was claimed by the assessee on account of business expenditure and not under section 57(iii) of the Act. Keeping in view of these facts of the M/s. Mrigyanayani Suppliers Pvt. Ltd. case, it is difficult to accept the contention of the learned counsel for the assessee that the interest income received by the assessee company on fixed deposits is chargeable to tax under the head ‘income from other sources’ and the same being more than the loss suffered in the trading of shares, Explanation to Section 73 is not applicable. I, therefore, find no infirmity in the impugned order of the Ld. CIT (A) confirming the disallowance made by the A.O. on account of assessee’s claim for loss in the trading of shares by treating the same as speculation loss by virtue of Explanation to Section 73 and upholding this impugned order on this issue, I dismiss this appeal filed by the assessee.

In the result, the appeal of the assessee is dismissed. Order Pronounced in the Open Court on 10th November, 2017. Sd/- (P.M. Jagtap) ACCOUNTANT MEMBER Dated: 10/11/2017 Biswajit, Sr. PS Copy of order forwarded to: