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Income Tax Appellate Tribunal, ‘SMC’ ‘A’ BENCH, CHENNAI
Before: Shri A. Mohan Alankamony
आदेश / O R D E R
This appeal by the Revenue is directed against the order passed by the Ld. Commissioner of Income Tax (Appeals)-6, Chennai dated 27.06.2016 in passed u/s. 250(6) r.w.s.143(3) of the Act for the assessment years 2001-02.
The Revenue has raised three grounds in its appeal, however the crux of the issue is that the Ld. CIT(A) had erred in deleting the addition made by the Ld. AO who had treated the loss on sale of shares as loss in speculation business invoking the explanation to section 73 of the Act.
The brief facts of the case are that the assessee is a private limited company engaged in the real estate business, trading in shares and money lending, filed its return of income admitting loss of Rs.1,93,68,860/- on 21.10.2011. Initially the return was processed u/s.143(1) of the Act and thereafter the case was taken up for scrutiny and the assessment was completed under 147 r.w.s. 143(3) of the Act on 21.11.2008. During the course of scrutiny assessment, it was observed by the Ld. AO that during the relevant assessment year the assessee had purchased the following shares:- Spic -300 shares, Reliance Petrol -760 shares, VSNL – 13164 shares, Essar Gujarat – 114643 shares, HFCL – 100 shares, ICICI – 10000 shares, MTNL – 427854 shares and Silver line industries – 120809 shares. It was also observed that the assessee had sold all these shares during the relevant previous year barring 300 shares of Spic. The entire purchase consideration paid for the shares was Rs.23,82,42,032/- and the sale consideration received against the sale of shares was Rs.21,53,73,752/-. Thus the assessee had declared loss on sale of share. The Ld. AO drawing strength from Explanation to Section 73 of the Act, treated the loss on sale on equity shares as speculation loss.
On appeal, the Ld. CIT(A) deleted the addition because the proportion of loan and advances as against the total current assets of the company works out to approximately 70%, hence for the year under consideration granting of loan and advances has to be treated as the principal business of the appellant company and therefore the appellant company will fall outside the scope of Explanation to Section 73 of the Act. While doing so, the Ld.CIT(A) has observed as follows:
“7.1 The matter is considered. In the order, the AO has not disputed that the share transactions have been settled by delivery of shares. The moot issue on which the decision on the recognition of loss hinges is whether granting of loans and advances can be construed to be 'principal business' of the appellant company. The case of the AO is that as per the Memorandum of Agreement, the main object of the appellant company was business of real estate, and not the business of banking or granting loan or advances. On the contrary, the case of the appellant is that since 'principal business' is not defined by the Act, therefore, the phrase should be given its usual dictionary meaning, and the identity of the appellant's business should be determined with reference to the facts and circumstances of the year under consideration.
7.2 In my considered opinion, the pattern of deployment of funds at the disposal of an entity for generation of income gives a definitive idea about its nature of business. Reliance in this regard is placed on the decision of the Id. Kolkata Tribunal in the case of ITO vs. Winsome Brothers Pvt. Ltd. reported in [2016] 46 CCH 0087 (Kol. Tribunal). Out of the total current assets of the company of Rs.6.22 crores, an amount of Rs.6.12 crores was given as loans, and an amount of Rs.75.19lakhs was held as stock in trade. The proportion of loans and advances to the total current assets of the company is roughly 70 per cent. Hence, for the year under consideration granting of loan and advances has to be construed as the 'principal business' of the appellant company within the meaning of Explanation to Section 73 of the Act. In view of the same, the case of the appellant gets covered by the exception provided by Explanation to Section 73 of the Act, and hence cannot be held as a speculation loss. The treatment of the AO in treating the impugned loss as speculative, is therefore, not sustainable and the same stands deleted. The grounds of appeal succeed and the AO is directed to allow the appellant consequential relief by setting off the impugned loss against the interest income.”
At the time of hearing none appeared on behalf of the assessee before us. On the earlier occasion on 14.12.2016 and 31.01.2017 also the assessee did not represent before the bench.
Therefore, I proceeded to hear the appeal of the Revenue on merits.
The Ld. DR argued before us by stating that the findings of the Ld. CIT(A) is erroneous because Explanation to Section 73 of the Act, clearly provides that the assessee’s trading business of equity shares shall be treated as losses in speculation business.
He therefore pleaded that the order of the Ld. AO may be upheld.
I have heard the Ld. DR and carefully perused the materials on record. The Ld. CIT(A) has granted relief to the assessee company based on the premises that the principal business of the assessee was advancing loan. At this juncture, for the sake of convenience, the Explanation to Section 73 of the Act is extracted herein below as it stood with respect to the relevant assessment year:
“Where any part of the business of a company ([other than 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”,] 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.”
The Ld. CIT(A) opined that since the proportionate of loan and advances as against the total current asset of the company is roughly 70%, therefore the principal business of the company is granting of loans and advances and will fall outside the ambit of Explanation to Section 73 of the Act. Before us, neither the assessee nor the Revenue has filed the balance sheet to examine these facts. Further the Ld. AO has also not made any finding with respect to these facts. Therefore, in the interest of justice, I hereby remit the matter back to the file of Ld. AO for de-nova consideration.
In the result, the appeals of the Revenue is allowed for statistical purposes.
Order pronounced on 21st March, 2017 at Chennai.