Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, BENCH ‘C’ KOLKATA
Before: Hon’ble Shri N.V.Vasudevan, JM & Shri M.Balaganesh, AM ]
IN THE INCOME TAX APPELLATE TRIBUNAL, BENCH ‘C’ KOLKATA [Before Hon’ble Shri N.V.Vasudevan, JM & Shri M.Balaganesh, AM ] ITA No.1315/Kol/2014 Assessment Year : 2008-09
I.T.O., Ward-12(3), -versus- Amrabathi Investra Pvt. Ltd. Kolkata Kolkata (PAN:AACCA 1312 Q) (Appellant) (Respondent)
For the Appellant: Shri G.Mallikarjuna, CIT(DR) For the Respondent: Shri N.K.Poddar, Sr.Advocate & Shri Gautam M.Bavishi,FCA
Date of Hearing : 22.03.2017. Date of Pronouncement : 05.04.2017.
ORDER PER N.V.VASUDEVAN, JM:
This is an appeal by the Revenue against the order dated 18.03.2014 of CIT(A)-XII, Kolkata relating to A.Y.2008-09.
Ground Nos. 1 to 3 raised by the revenue read as follows :- “1.That is the facts and in law of the case the LD. CIT(A) erred in allowing share trading loss as business loss instead of speculation loss amounting to Rs.64725338/-.
That is the facts and in law of the case the LD. CIT(A) erred in deleting the addition made by the A.O. as per explanation to sec-73.
That is the facts and in law of the case the LD. CIT(A) erred in treating the interest income as main income of the assessee even though it is negative.”
The Assessee is a non banking finance company (NBFC) registered with the Reserve Bank of India (RBI). It is the claim of the Assessee that it’s principal business is granting of loans and advances. The assessee is also engaged in the business of trading in shares, commodities and other securities. For A.Y.2008-09 the assessee filed return of income declaring loss of Rs.4,48,14,300/-. This loss was arrived at by ITA No.1315/Kol/2014 Amrabathi Investra Pvt. Ltd. A.Y.2008-09
the assessee after considering a loss of Rs.6,47,25,338/- from share trading. According to the AO the assessee was a company and in view of the provision of Explanation to section 73 of the Income Tax Act, 1961 (act) which provides that where any part of the business of any company consists in the purchase and sale of shares of other companies such company shall for the purpose of section 73 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 loss from share trading i.e., purchase and sale of shares ought to be considered as “Speculation loss” and the same ought not to be set off against other income of the Assessee as provided u/s.73(1) of the Act. Sec.73(1) of the Act provides that any loss, computed in respect of a speculation business carried on by the Assessee, shall not be set off except against profits and gains, if any, of another speculation business. According to the AO therefore the loss from share trading had to be considered as speculation loss and ought not to have been set off against the other income.
The plea of the assessee before AO was that Explanation to section 73 of the act carves out certain companies out of purview of section 73 namely (i) companies whose gross total income consists mainly of income which is chargeable under the head “Interest on securities””Income from house property”, capital gains, income from other sources , (ii) a company the principal business of which is the business of banking or granting loans and advances. The assessee claimed that it was an NBFC and the principal business of it was granting loans and advances and therefore the loss from share trading had to be regarded as a normal business loss and not as a speculation loss.
The AO however rejected the aforesaid claim of assessee for the following reasons:- “...As per claim of the assessee, its principal business is granting & taking of loans & advances, and therefore, second exception is applicable. The decision about the second exception can be taken only after considering details of income earned and fund deployment by the assessee. It is seen from the above details that ITA No.1315/Kol/2014 Amrabathi Investra Pvt. Ltd. A.Y.2008-09
the assessee has interest income of (-) Rs. 99,33,533/-, while it has income from trading of shares of (-) Rs. 6,31,80,918/-. It is by now well- settled that the words "income" or "profits and gains" should be understood as including losses also so that in one sense "profits and gains" represent "positive income" whereas "losses" represent "negative income". In other words, "loss" is "negative profit". Both positive and negative profits are of revenue character. Both must enter into computation, wherever it becomes material, in the same mode of the taxable income of the assessee. Reliance is placed on decision taken by the Hon'ble jurisdictional High Court in the case of Eastern Aviation & Industries (208 ITR 1023). It is also found from the Balance Sheet as on 31.03.2008 that the assessee has taken loan of Rs. 86,23,31,867/-, out of which it has advanced loans of Rs. 64,58,36,547/- and therefore, the loan funds have not been utilized fully for advancement of interest bearing loans. The loans given is also only 34.20% of total of Balance Sheet i.e. Rs. 188,86,24,138/-. On the other hand, inventories are Rs. 55,56,52,816/- and investments are Rs. 97,82,183/- as on 31.03.2008. The volume of transactions in share trading i.e. sales is also very high i.e. Rs. 179,59,32,368/-. In view of the above findings, the assessee's claim that second exception is applicable in its case, is not accepted. In view of the above, a sum of Rs. 6,47,25,338/- is treated as speculation Loss and is not allowed to set off with business profit. However, the assessee is allowed to carry forward the Speculation Loss of Rs. 6,47,25,338/- to set off with Speculation profit in subsequent years.”
Before CIT(A) the assessee submitted that it was a company whose principal business was granting loans and advances and therefore outside the purview of Explanation to Section 73 of the Act. The assessee gave the details of deployment of funds as on 31.3.2008 Balance Sheet, which were as follows:-
Amount in Rs.crores (i) Inventories (shares) 55.57 (ii) Sundry Debtors .05 (iii) Cash in Hand and at Bank 8.79 (iv) Loans & Advances 124.46 (v) Investments 0.98
It was submitted that the aforesaid details would show that the assessee was carrying on two types of business i.e., share trading business and the business of granting of loans and advances although it has kept part of its funds in the form of cash / bank balance and also in the form of investment. The Assessee pointed out that between the ITA No.1315/Kol/2014 Amrabathi Investra Pvt. Ltd. A.Y.2008-09
two types of business carried- on by the assessee, deployment of its funds in the business of granting of loans and advances (Rs. 124.46 crores) was substantially higher than in share business (Rs. 55.57 crores). It was argued that in the circumstances, there can be no doubt that the principal business of the assessee was granting of loans and advances following the ratio laid down by the jurisdictional High Court in the case of CIT vs. Kanoria Investment (P) Ltd. 232 ITR 7(Cal) wherein it was held that the principal business is determined on the basis of fund deployed in a particular business and not on the basis of income earned from the particular business. It was pointed out that in the context of Explanation to section 73, Hon'ble Kolkata bench of the Tribunal in the case of Off-Shore India Ltd. vs. ITO 15 ITD 549 has also recognized the principal that the "Principal Business" is determined on the basis of fund deployment in the following words -. "In our opinion, the objects in the memorandum are not conclusive of the nature of business carried on . by the assessee-company. As has been observed by the supreme court in the case of CIT v. Dharmodayam Co. [1977] 109 ITR 527, it is notorious that the memorandum and articles of association of companies usually cover a variety of activities but the activity which the company actually engages alone determines the nature of its business. We do find that the maximum amount invested in the share business was Rs. 40.65 lakhs as on 31-8-1978 which is much more thon the maximum amount of Rs. 26.75 lakhs invested in the money lending business as on 28-2-1978. Similarly, as on the last date of the previous year under consideration, the amount invested in the share' business was more than three times the amount invested in the money-lending business. Hence, it is evident that the assessee was not engaged principalIy in the business of granting loans. Thus, we come to the conclusion that the assessee was not saved by either of the two exceptions enacted in the explanation to section 73 and, therefore the revenue authorities were quite justified in treating the loss from the share dealing business as speculation loss and in refusing to set off the same against the income earned from Money lending business."
Attention of the CIT(A) was drawn to the Memorandum of Association of the Assessee and it was pointed out that the Assessee was authorised by the main objects clause, (clause-2) to carry on the business of money lending. It was pointed out that the Assessee has been granted NBFC Certificate on 26.07.2001 the RBI to carry on the business of -banking finance company. Attention was drawn to the decision in the case of ITO vs. M/s Vaishno Tradelink (P) Ltd., ITA No. 1666 (Kol) 2005, order ITA No.1315/Kol/2014 Amrabathi Investra Pvt. Ltd. A.Y.2008-09
dated 14.07.2006 wherein the Hon 'ble Kolkata Bench of ITAT held that where more funds were deployed in granting loans and advances than in shares and the said business is authorised by the Memorandum of Association of the company, the principal business of the company is granting of loans and advances and the provisions of explanation to section 73 will not apply in such cases. Reliance was also placed on the decision of the Special Bench (Kolkata) of ITAT in the case of DClT vs. Venkateshwar Investment & finance (P) Ltd. 93 ITD 177 (Cal.) (SB) where it was held as under- "What constitutes the ''principal business" has not been defined anywhere in the Act. What constitutes the principal business will depend on the facts and circumstances of each case. The memorandum 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".
It was submitted that the assessee conforms to all the factors specified by the special bench judgement for determining that a company carries on the principal business of granting of loans and advances. The assessee is authorised by its MOA to carry on the business of money lending. The assessee has been granted licence by the RBI to carry on the business of financing and that the funds deployed by the assessee in the business of money lending is more than the funds deployed in the business of share trading in the instant year as well as the preceding s (in majority of the years) and gave the following details:- Assessment 2008-2009 2007-2008 2006-2007 2005- Year 2006 (a)Money 124.46 74.14 22.33 12.38 Lending (b)Closing 55.56 15.34 21.00 33.43 stock
Copies of the relevant audited final accounts of the assessee company for the A Y.s: 2007-08, 2006-07 and 2005-06 were also filed before CIT(A).
ITA No.1315/Kol/2014 Amrabathi Investra Pvt. Ltd. A.Y.2008-09
With regard to the action of the AO in relying on the decision of the Hon'ble Calcutta High Court's in the case of M/s Eastern Aviation & Industries 208 ITR 1023, it was argued that the said decision was not applicable to the facts of the Assessee’s case. The Assessee had sought exception from the provisions of Explanation to Sec.73 only on the basis of "Income criterion" and not on the basis of "principal business" criterion. Without prejudice to the above submissions, it was submitted that the action of the AO in considering the loss incurred in share trading business of Rs. 6,31,80,9181- as falling within the ambit of Explanation to Sec.73 of the Act, without adjusting the profit earned on derivative transactions amounting to Rs. 3,04,18,813/- was wrong and against the provisions of law.
The CIT(A) after considering all the above submissions upheld the plea of the assessee and he held as follows :- “5.1.5. Decision : I have used the assessment order, written submissions of the appellant as well as the remand report. I find that in the instant case, the principal business of the appellant is granting of loans and advances since the fund deployed in loans and advances is more than the stock of shares. Further, it is observed that in the relevant year, the appellant earned interest income of Rs.7,45,43.913/- and incurred a loss of Rs.6,31.80.918/- in share trading business. The case of Eastern Aviation & Industries (supra) relied upon by the A.O in the assessment order is not applicable to the instant case as the second exception to Explanation to sec.73 relating to principal business criterion was not an issue before the Hon'ble High Court. I am of the view that the appellant's case is fully covered by the decision of the Hon' ble IT AT, Kolkata Bench in the case of M/s Vaishno Tradelink (supra) and the special bench judgement in the case Venkateshwar Investment & finance (P) Ltd. (supra) . I find that the appellant company is authorized by its MOA to carry on the business of money lending. It has also been granted license by the RBI to carry on NBFC activities. The funds deployed in the finance activity in the majority of preceding years as well as the present year is more than that invested in share trading business. In the remand report, the A.O. was also satisfied with the explanation given by the appellant that the appellant's principal business is that of granting of loans of advances. In my opinion. the appellant's case falls under the second exception clause of Explanation to sec. 73 since the appellant’s principal business is the business of granting of loans and advances. Therefore, the appellant's case falls outside the ambit of the "explanation". Hence. these grounds of appeal of the appellant are allowed.” ITA No.1315/Kol/2014 Amrabathi Investra Pvt. Ltd. A.Y.2008-09
Aggrieved by the order of CIT(A) the revenue has raised ground nos. 1 to 3 before the Tribunal.
The ld. DR placed reliance on the order of AO. He submitted Non-Banking financial companies are registered with RBI and could get such registration only if the business consists of giving of loans and advances, acquisition of shares, stock etc issued by the Government or local authority or other marketable securities of a like nature, leasing, hire purchase etc. The financing activity should be the principal business of NBFC. It is only when the company’s financial assets constitute more than 50% of the total assets and income from financial assets constitute more than 50% of the gross income, it can be said that financial activity was the principal business of a NBFC. According to him the CIT(A) had not examined the issue from the aforesaid requirements and therefore the issue should be remanded to the AO for fresh consideration. The ld. Counsel for the assessee, on the other hand submitted that in the light of clear finding of CIT(A) that the financial activities in terms of funds deployed continuous to be more than the value of shares held as the last date of A.Y.s 2005-06 to 2008-09 and hence the principal business of the Assessee was giving loans and advances was correct and no fault can be found with the order of CIT(A) in this regard. Our attention was drawn to the decision of Hon’ble Calcutta High Court in the case of CIT vs Savi Commercial P. Ltd., 373 ITR 243 (cal) wherein the Hon’ble Calcutta High Court on identical facts came to the conclusion that if granting of loans and advances was on a larger scale than the business of buying and selling shares then that would be a criteria to decide the principal business of the company as being one of granting loans and advances. The Hon’ble Court held that income alone cannot be taken into consideration for the purpose of deciding the principal business of a company. Our attention was drawn to the facts of the aforesaid case which are narrated in para – 3 of the aforesaid judgment and it was submitted that the facts of the assessee’s case are identical to the case decided by the Hon’ble Calcutta High Court. Our attention was drawn to para-8 of the aforesaid decision which reads as follows :- ITA No.1315/Kol/2014 Amrabathi Investra Pvt. Ltd. A.Y.2008-09
“8. Mr. Nizamuddin was unable to make any suitable reply to the aforesaid submission of Mr. Poddar. Speaking for ourselves we are inclined to accept the submission advanced by Mr. Poddar. Because both income and business activity, according to the legislative mandate, are distinguishing factors. Therefore, income alone cannot be taken into account in deciding whether the assessee is entitled to make a departure from the mandate appearing in sub-section (1). In the case before us the activity of granting loans and advances is on a larger scale than the business of buying and selling shares. Both profit and loss are matters of chance in both the activities. Therefore, profit alone was not made the distinguishing factor. Since the business activity is also a distinct factor, we are inclined to think that the principal business of the company/assessee is granting loans and advances as would appear from the volume indicated in the chart above for a number of years. Therefore, the view taken by the learned Tribunal appears to be the correct view of the matter. " (emphasis supplied) It was submitted that in the ratio laid down by the Hon’ble Calcutta High Court is squarely applicable to the assessee’s case and therefore the order of CIT(A) in treating the loss in question as normal business loss has to be upheld.
We have given a very careful consideration to the rival submissions. The admitted factual position in the present case is that the Assessee has been given a certificate by the RBI that it was NBFC ( copy of the certificate is at Page-31 of the paper book). The requirements of the rules of RBI can therefore be taken as satisfied in the case of the Assessee. The only aspect to be seen is as to whether for coming to a conclusion that the principal business of an Assessee is giving of loans and advances, whether the funds deployed would be the relevant criteria. The decision of the Hon’ble Calcutta High Court in the case of Savi Commercial (supra) clearly lays down the proposition that volume of loans and advances would be decisive to come to a conclusion that the principal business of a company was granting loans and advances. It is undisputed that the funds deployed in the business of granting loans and advances by the Assessee was more over a number of AYs as per the details given below:
Assessment 2008-2009 2007-2008 2006-2007 2005- Year 2006 (a)Money 124.46 74.14 22.33 12.38 ITA No.1315/Kol/2014 Amrabathi Investra Pvt. Ltd. A.Y.2008-09
Lending (b)Closing 55.56 15.34 21.00 33.43 stock
In the given facts and circumstances, we are of the view that the conclusion of the CIT(A) that the principal business of the Assessee was giving of loans and advances and therefore the Assessee was outside the mischief of Explanation to Sec.73 of the Act, is just and proper and calls for no interference. The reliance placed by the AO on the decision of the Hon’ble Calcutta High Court in the case of Eastern Aviation (supra) was rightly held to be not applicable to the facts of the present case by the CIT(A). As we have already seen there are two exceptions to applicability of Explanation to Sec.73 viz., (i) companies whose gross total income consists mainly of income which is chargeable under the head “Interest on securities” “Income from house property”, “capital gains”, “income from other sources”; (ii) a company the principal business of which is the business of banking or granting loans and advances. The first exception is based on "Income criterion" and the second exception is based on "principal business" criterion. The second exception to Explanation to sec.73 relating to principal business criterion was not an issue before the Hon'ble High Court and it was only the income criterion that was in dispute before the Hon’ble High Court. We are of the view that there is no merit in the submission of the learned DR that the case should be re examined by the AO in the light of the RBI guidelines with regard to NBFC. We do not find any merits in the relevant grounds raised by the Revenue and accordingly dismiss the same.
Ground No.4 raised by the revenue reads as follows :- “4. That is the facts and in law of the case the LD. CIT(A) erred in deleting the bogus sundry creditors amounting to Rs.25,00,000/- added by the A.O.”
In the course of assessment proceedings the AO noticed that the assessee had received Rs.25,00,000/- from M/s. Swagatam Lefin Pvt. Ltd in the financial year 2002-03 as advanced for sale of shares. The transaction did not take ultimate take
ITA No.1315/Kol/2014 Amrabathi Investra Pvt. Ltd. A.Y.2008-09
place. There were dispute with the parties and negotiation took place with the aforesaid customer. The AO was of the view that the aforesaid advance which continued to be shown as a liability by the assessee was no longer in existence and the assessee had derived a benefit by the aforesaid party not making a claim for the return of the aforesaid amount. The AO was therefore of the view that under the provision of section 41(1) of the Income Tax Act, 1961 (act) the aforesaid sum should be brought to tax as income of the assessee. Accordingly the AO added a sum of Rs.25,00,000/- to the total income of the assessee.
Before CIT(A) the assessee pointed out that in the financial year 2012-13 relevant to A.Y.2013-14 this liability was written back in the books and shown as income by the assessee and it was also offered to tax by the Assessee and brought to tax by the revenue. The assessee pleaded that the same income cannot be taxed twice. In the remand report filed before CIT(A), the AO accepted the factual position as stated by the assessee before CIT(A). In the given circumstances the CIT(A) was of the view that the additions made in the present A.Y.2008-09 cannot be sustained as the same income has been taxed with A.Y.2013-14. The CIT(A) also came to the conclusion that there was no material to show that the assessee received the benefit of liability by way of remission or cessation as contemplated u/s 41(1) of the Act. Therefore the addition made by AO was deleted by CIT(A).
Aggrieved by the order of CIT(A) the revenue has preferred ground no.4 before the Tribunal.
Before us the ld. DR relied on the order of AO. We are of the view that in the light of the findings of CIT(A) that the income in question has been written back in A.Y.2013-14 and offered to tax, the action of AO in bringing the said amount to tax in A.Y.2008-09 cannot be sustained. Moreover, there was no material on record to show that the assessee’s liability to re-pay M/s. Swagatam Lefin Pvt. Ltd was remitted by the other party or the liability ceased to exist. Therefore the condition for invoking the ITA No.1315/Kol/2014 Amrabathi Investra Pvt. Ltd. A.Y.2008-09
provision of Section 41(1) of the Act was not satisfied. The CIT(A) was therefore fully justified in deleting the addition made by AO. Consequently ground no.4 raised by the revenue is dismissed.
In the result the appeal by the revenue is dismissed. Order pronounced in the open Court on 05.04.2017.
Sd/- Sd/- [M.Balaganesh] [ N.V.Vasudevan ] Accountant Member Judicial Member Dated : 05.04.2017. [RG PS] Copy of the order forwarded to: 1.Amrabathi Investra Pvt. Ltd., 50/6A, Harish Mukherjee Road, Kolkata-25. 2.I.T.O., Ward-12(3), Kolkata.. 3. CIT(A)-XII, Kolkata. 4. CIT-IV, Kolkata. 5. CIT(DR), Kolkata Benches, Kolkata. True Copy By order,
Asst. Registrar, ITAT, Kolkata Benches
ITA No.1315/Kol/2014 Amrabathi Investra Pvt. Ltd. A.Y.2008-09