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Income Tax Appellate Tribunal, MUMBAI BENCH “C”, MUMBAI
Before: SHRI G.S.PANNU & SHRI PAWAN SINGH
O R D E R PER PAWAN SINGH, JM: 1. These two appeals filed by the assessee against the order (s) of CIT (A) dated 18/05/2010 for Assessment Year (AY) 2001-02 & 2002-03 were heard together as common grounds of appeal s are raised and being decided by a common order.
2. First we are taking up the Appeal No. 5688/M/2010 wherein the following grounds of appeal was raised by the assessee: Ground No. 1: On the facts and in the circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals) - 9, Mumbai erred in confirming the decision of the Ld. Assessing Officer that the loss incurred by the appellant from purchase and sale of shares is speculative loss applying the provisions of Explanation 1 to section 73. The appellant prays that loss arising on account of share transactions should be treated as normal business loss and not as speculative loss as the appellant falls within the exception provided in the said explanation 1 to section 73. Ground No. 2:
On the facts and in the circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals) - 9, Mumbai erred in confirming the decision of the learned AO to apportion 70% of the expenses incurred by the appellant company towards share business carried by the appellant company. The appellant prays that such allocation to the tune of 70% of total expenses is illegal and requires to be quashed. Ground No. 3: On the facts and in the circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals) - 9, Mumbai erred in confirming the decision of the learned AO to charge interest u/s. 220(2) of the Income-tax Act. The appellant prays that interest charged u/s. 220(2) of Rs. 3,73,930/- may kindly be deleted.
Further, the assessee raised the following grounds of appeal vide application dated 12.08.2014: On the facts and in the circumstances of the case and in law, the learned AO and the learned CIT(A)-9 erred in allocating the interest expenses towards share trading business at gross amount of Rs. 51,51,212/- instead of net amount of Rs. 34,96,457/- after adjusting the interest income of Rs. 16,54,755/-. The appellant prays that the interest allocation should be made net of interest income.
Brief facts of the case are that the assessee-company, which is engaged in the business of investment and share trading, filed its return of income on 14.12.2010 declaring total loss of Rs. 3,29,63,204/- The return of income was selected for scrutiny. In the return of income the assessee has shown interest income of Rs.48,63,912/-, income from Vyajbadla and brokerage of Rs. 14,70,119/- and share trading loss of Rs. 2,75,64,828/- and loss was set off against the income from Vyajbadla. During the assessment proceeding, the Assessing Officer (AO) observed that the main income of the assessee is loss from dealing in share of other company. AO seek the explanation as to why the provision of Explanation to section 73 of the Act, regarding the loss of assessee from dealing in share should not be treated as speculation loss. The assessee explained to the AO that the provisions of Explanation to section 73 are not applicable as the assessee is in the business of advancing loan. Therefore covered by the exception mentioned in the said Explanation. The contention of the assessee was not accepted by and AO concluded that main source of income of assessee from dealing in share, therefore, loss of the assessee from purchase and sale of share of other company is to be treated as speculation loss and determined the business income of assessee at Rs. 28,03,975/- and speculation loss at Rs. 3,57,67,171/-. The assessee carried appeal before the CIT(A) wherein the CIT(A) upheld the order of AO in its order dated 05.06.2003. The assessee filed 2nd appeal before the ITAT, ITAT restored the issue to the file of AO holding that the issue should be decided in accordance with the ratio laid down by Special Bench of Calcutta Tribunal in case of DCIT vs. Venkateshwar Investment & Finance Pvt. Ltd. (93 ITD 177) after giving reasonable opportunity to the assessee. The AO while giving effect to the order of ITAT observed that assessee filed statement showing utilization of funds from AY-1999-2000 to AY 2003-04. The perusal of utilization fund for AY 2001-02 reveals that assessee utilized found of Rs. 1,41,65,901/- towards the loan and advances and amount of Rs. 3,56,35,905/- in respect of shares and concluded that in the year under consideration utilization of funds in respect of share is more than the loan and advances and hold that no changes called for in the assessment order passed on 20.01.2003 u/s. 143(3) of the Act in its order dated 15.12.2008. Against the order dated 15.12.2008, the assessee filed an appeal before the CIT(A). The CIT(A) while discussing the issue, if the loss of the assessee from trading in share can be treated as speculation loss in accordance with ratio laid down in the case of Venkateshwar Investment & Finance Pvt. Ltd.(supra) decided by ITAT, Calcutta on 01.12.2004 wherein it was held that Explanation to section 73 will not be applicable to:
1. 1. A company whose gross total income consists mainly for income which is chargeable under the heads “Interest on securities”, “Income from house property”. “Capital gains” and “Income from other sources”.
2. A company the principle of which is the business of banking or the grating of loans and advances.” While considering the issue, the CIT(A) observed that the following factors should be taken into consideration by deciding the issue: 1) Object as per memorandum of article of association 2) Past history of the company 3) Current deployment capital of the company. 4) Breakup of income earned 5) Nature of activity of the company.
And further observed that in the said case it was clarified that this question cannot be decided by taking into consideration income or loss earn in a particular year. Income from business on giving advances and loans may be less in a particular year that compared with loss from trading in share; it was held that nature of 4 & 5689/M/2010 M/s Puja Agencies Pvt. Ltd. activities of the company during the relevant period as well as in the past or subsequent year should be taken into consideration for deciding the issue.
The Ld. CIT (A) further observed that if the ratio of special bench of ITAT, Calcutta in case of Venkateshwar Investment & Finance Pvt. Ltd.(supra) is applied to the case of assessee, it cannot be said that assessee is in the business of granting loans and advances and further observed that most of the advances given by assessee to the related concern in which the assessee is a shareholder company and Directors. Giving loans and advances only to those concerns cannot be called as business advances. The CIT(A) further observed that as per Tax Audit Report, the assessee-company is stated to be in investment only and the audit report nowhere mentioned that assessee carried out the business of giving loans and advances. The transaction of giving loans and advances are very few and in some of the cases, the loan includes staff loan in the current year. As per Memorandum of Association, main business of assessee is not of giving loans and advances and concluded that assessee-company is not in the business of giving loans and advances and assessee is not covered by the exception provided to the Explanation to section 73 of Income-tax Act, and upheld the finding of AO. Aggrieved by the order of CIT (A) this appeal is filed before us.
Ground No.1 raised is the present appeal is, if the loss incurred by the appellant from purchase and sale of shares is speculative loss applying the provisions of explanation 1 to Section 73. We have heard the Ld Authorised Representative (AR) of the assessee and Departmental Representative (DR) for the revenue and perused the material available on record. AR of the assessee has argued that that the CIT (A) erred in confirming the action of AO and considered the business loss as a speculation loss. And further argued that assessee falls within the exception as provided under Explanation to the proviso of section 73. The assessee has granted loan to the related concern and the interest income received from loan given to sister concern has been offered at the business income by the assessee, which has been accepted by the Department consistently for all the years. There is no legal bar that one must deal only with outsider. It cannot be said that granting of loan to sister concern is not business activities when interest income from the same is treated as business income. The ld CIT(A) has only pickup the closing balance as on 31st of March 2001 and not considered the loans which were given and squared off during the year. The assessee had 132 cumulative loan transaction during the year, has it cannot be said that during the year assessee had given loan is to only 10 persons. The assessee submitted that a chart has been filed, which shows the cumulative amount in share transaction is much lower than cumulative amount of loans and advances. In any case, no single year can be taken to determine the fact as to what is the principal business of the assessee. It is further argued that preceded and succeeding year has also to be taken into consideration while concluding as to what is the principal business of the assessee. If overall view is taken for a number of years. It is clearly evident that principal business of assessee is granting of loans and advances. The assessee-company has not traded in share of group companies and relied upon the order of Co-ordinate bench of Mumbai Tribunal in ACIT Vs Tanna Electro Mechanics (P.) Ltd. [2006] 7 SOT 121(Mum). The income from Vyajbadla transaction is interest from loan and is includable in chargeable interest. Ld AR for assessee further relied on order of Delhi Tribunal in Tulip Star Hotel Vs ITO (124 TTJ 173 Del). Ld DR for the revenue argued that none of the clause of Memorandum of Association of assessee deals with the financing by the assessee-company. The loans given by the assessee to the persons who were a Director of the assessee-company and majority of the loan were invested in one of the company and the exception of the Explanation to section 73 is not applicable for assessee. DR further argued that no basis for allocation was given by the assessee and the order of AO and CIT (A) be confirmed and the order of authority below does not require any interference at the end of this Tribunal.
We have considered the rival contentions of the parties and perused the material available on record. The CIT (A) while dealing with this ground has observed that the advances are not given as a part of business and most of the advances are given by the assessee to the related concern in which shareholder of the assessee- company are Director. We find that there is no bar under the law to advance the loan to the related concern under the law for business expediency. Admittedly the assessee is engaged in the business of Vyajbadla and during the year under consideration earned income from such activities. During the year, there are 132 loan transactions, transacted by assessee. Though the noting in the tax audit report is not the determining criteria for determining the business of assessee. We have also seen that clause 8 of the Tax Audit report dated 28/09/2001, wherein the 6 & 5689/M/2010 M/s Puja Agencies Pvt. Ltd.
auditor of the assessee has referred about granting loans, secured and unsecured, advances to company firms and others parties. Though the assessee claimed that clause 11 of the Memorandum of Association, one of the objects of assessee is to carry on the business of Financer and to execute all kind of financial and other operations. However the copy of MOA is not available on record. Thus, we are unable to comment on the Memorandum of Association the main business of assessee is of giving loans and advances. The co-ordinate bench of ITAT, Mumbai as well as Delhi Tribunal had already declared Vyajbadla income as income earned in course of granting loans and advances. In ACIT Vs. Tanna Electro Mechanics (P.) Ltd. [2006] 7 SOT 121(Mum) (supra) it was held: “that assessee-company engaged in business of leasing, giving loans and advances and deriving service charges from premises and also engaged in business of purchase and sale of shares/securities- It suffered certain loss from share dealings and claimed same to be set off against its other income – Assessing Officer held that since assessee's income from other activities exceeded its income during year consideration in terms of Explanation to section 73, assessee’s loss from share dealings was a speculation loss which could not be set off against its other income- Assessee also derived income from Vyajbadla transactions and after said income was added to assessee's income from interest, interest income of assessee was greater than its other income. Whether since interest income of assessee was greater than other income of assessee, loss in question was outside purview of provisions of Explanation to section 73”
And further Delhi Tribunal in case of Tulip Star Hotels Ltd. vs. ITO reported vide 308 ITR 410 (Del.) wherein while discussing the essence of Vyajbadla transaction it was held : “that Vyajbadla income is nothing but interest income and further held that essence of Vyajbadla transaction is not purchase and sale of share but to provide finance to smoothly carry on the transaction on the settlement date in respect of persons who were in an over-bought or over-sold position. In such a situation even after delivery taken, it would be only a security for finance provided by the assessee and the assessee never any intention to purchase of share subsequently sold them and the co-ordinate bench held that the income for providing finance to one of the contracting party for a short period for carrying all the transaction to the next settlement period and the income from such loan will be interest free loan, includible in the chargeable interest.
With the above observation, we may draw our inference that principal business of assessee is of granting of loans and advances and it falls within the exception as provided under explanation to section 73 of the Act. The purchase and sale of share by the assessee is not speculation loss and the loss suffered on account of 7 & 5689/M/2010 M/s Puja Agencies Pvt. Ltd. purchase and sale of the share is business loss. Thus, the Ground No. 1 raised in the present appeal is allowed.
Ground No. 2 is, if CIT (A) erred in confirming the decision of the AO to apportion 70% of the expenses incurred by the assessee company towards business of share. As we have already allowed. Ground number 1 in favour of assessee, thus this ground has become infructuous. As we have hold that the loss from activity of share transaction is business loss and not speculative loss of the assessee, and there would be no need for locating expenditure towards speculation business would not arise.
Ground No 3 is with regard to interest levied under section 220 (2) of the Act. Ld AR of the assessee argued that Learned CIT appeals wrongly applied the action of the assessing officer in charge interest under section 220 (2) of the act. It was argued that interest under section 220 (2) of the act has to be levied in respect of demand notice raised as per fresh assessment order. Ld AR for assessee relied upon the decision of tribunal in M/s. Narad Investments and Trading Private Limited versus DCIT in ITA No. 3360/M/2010, dated 19 October 2011. DR for revenue relied upon the order of authorities below.
We have considered the rival contention of the parties. The provisions of section 220 (2) of the Act are consequential in nature. We direct the AO to calculate the interest in accordance with law and the decision of M/s. Narad Investments and Trading Private Limited versus DCIT (supra). In the result, both the appeal filed by the assessee is allowed. ITA No 5689/M/2010 for AY-2002-03 10. The issues involved in this appeal is identical with the issue in ITA No. 5689/M/2010, though quantum may differ, therefore, on similar lines and similar reasons, the present appeal filed by the assessee for assessment year 2002-03 is also allowed.