I.T.O WD - 5(4),KOLKATA, KOLKATA vs. M/S VISAN BROTHERS PVT LTD, KOLKATA

This appeal of the revenue arises out of the order of the Learned CIT(A)-VI, Kolkata in Appeal No. 320/CIT(A)-VI/Wd-5(4)/11-12/Kol. dated 15.1.2013 against the order of assessment framed u/s 143(3) read with section 254 of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’).

1 M/s. Vinsan Brothers Pvt. Ltd by the assessee under the head ‘other sources’ by applying the provisions of Explanation to Section 73 of the Act. This action was confirmed by the Learned CIT(A) on first appeal, while granting reliefs to the assessee on other grounds. Aggrieved the revenue preferred an appeal before this tribunal and assessee preferred cross objections before tribunal. The Tribunal dismissed the revenue’s appeal and in respect of cross objections raised by the assessee, it directed the Learned AO to look into the funds deployment made by the assessee to understand whether the principal business of the assessee is granting of loans and advances so as to get out of the rigours of Explanation to section 73 of the Act.

3.1. The Learned AO passed an order u/s 143(3) read with section 254 of the Act on 30.12.2011 by treating the share trading loss as speculation loss going by the income composition of the assessee and concluding that the objects clause of the assessee do not contain the activity of lending and hence the interest income derived by the assessee on lending and funds deployment in money lending cannot be the determining factor for understanding the principal business of the assessee. Accordingly the Learned AO rejected the funds deployment theory of the assessee which was directed to be verified by the tribunal in the first round of appeal. The Learned AO also observed that the income from share trading business in absolute terms is more than the income from loans and advances and other sources and accordingly held that the principal business of the assessee is only share trading. On first appeal, the Learned CITA observed that the funds deployed in lending activity of the assessee is Rs. 635.67 lacs as against funds deployed in share trading activity of Rs. 187.24 lacs during the asst year under appeal. He also observed from the comparable chart of funds deployed in share trading and in lending activity that funds deployed in lending activity is more than that deployed in share trading activity. Accordingly he concluded that the principal business of asessee is granting of loans and advances and hence the assessee falls under the exception clause of Explanation to section 73 of the Act. Aggrieved, the revenue is in appeal before us on the following grounds:-

2 M/s. Vinsan Brothers Pvt. Ltd

“1. That the Ld. CITCA) has, on the facts and circumstances of the case, erred in holding that the loss from share trading business amounting to Rs.51 ,56, 183/- is not deemed speculation loss.

2. That the Ld. CIT(A) has failed to appreciate the fact that the share trading business is the main business of the assessee as per objects of the company stated in the Memorandum of Association of the company and therefore the loss from share trading business is covered by the explanation to section 73.

3. That the Ld. CIT(A) has erred in citing the decisions of the ITA T Kolkata in the case of ITO vs. Baibhav Credit & Portfolio (P) Ltd. and in the case of Valour Constructions Pvt. Ltd. with the observation that the assessee company's principal business is granting loans and advances whereas as per Memorandum of Association of the company, this is not included in the main objects and is only ancillary object.

5. That the appellant craves for leave to add. delete or modify any of the grounds of appeal before or at the time of hearing.”

4. The Learned DR vehemently supported the order of the Learned AO and argued that the Learned CIT(A) erred in granting relief to the assessee based on funds deployment made by the assessee in lending activity and accordingly erred in concluding that Explanation to section 73 of the Act is not applicable to the assessee. In response to this, the Learned AR vehemently supported the order of the Learned CIT(A) and also took us into the relevant operative portions of various judgements on the impugned issue which were relied upon by the Learned CIT(A) in his order.

3 M/s. Vinsan Brothers Pvt. Ltd

“3. To act, as investors, guarantors, underwriters, financiers and to lend or deal with the money either-with or without interest or security, including In current or deposit account with any Bank or Banks, other person or persons upon such terms, conditions and manner as may from time to time be determined and to receive money on deposit or loan upon such terms and conditions as the Company may approve. Provided that the Company shall not do any banking business as defined under the Banking Regulation Act, 1949”.

We also find from the paper book filed by the Learned AR that assessee is a Non- Banking Finance Company (NBFC in short) registered with Reserve Bank of India vide registration number B-05.05873 dated 28.11.2003. We find that this certificate would be issued by RBI only when the assessee is engaged in the lending activities. It is also seen from Clause 3 of Memorandum of Association (MOA) that one of the main objects of assessee company is to engage itself in lending activities apart from dealing in shares. We find that in the first round of appellate proceedings, the tribunal had set aside to the file of the Learned AO to ascertain whether the principal business of assessee is lending activity. The directions of the tribunal in ITA No. 1370/kol/2006

4 M/s. Vinsan Brothers Pvt. Ltd and CO No. 84/kol/2006 dated 18.3.2010 for Asst Year 2003-04 in the first round is reproduced herein below for the sake of convenience :-

“16. After hearing both the parties and perusing the material available on record, we find that the plea now taken before us and the statement showing fund deployment by the assessee company has been placed before us for the first time and the same was not before the lower authorities. Since the details now relied onby the assessee needs verification at the end of the AO, we deem it proper to restore the matter to the file of the AO for adjudicating afresh after affording a reasonable opportunity of being heard to the assessee. Therefore, these grounds of cross objection of the assessee are allowed for statistical purposes.”

Hence it could be safely concluded that the Learned AO has been directed by this tribunal to make verification of the veracity of the figures of fund deployment given by the assessee and decide the impugned issue. We find that the Learned AO had completely ignored this fund deployment position of the assessee which would prove beyond doubt that the principal business of the assessee is granting of loans and advances and accordingly the provisions of Explanation to section 73 of the Act cannot be applied to the facts of the case. For the sake of convenience, the details of funds deployed by the assessee in each of the years is given below:-

Funds deployed in (Rs in lacs) Year Ended Stock in Trade of shares Loans 31.03.2003 187.24 635.67 31.03.2004 234.45 790.04 31.03.2005 200.57 1009.08 31.03.2006 102.16 1378.31 We find that the Learned AO had decided the impugned issue based on the income composition of the assessee and accordingly concluded that the net results from share trading in absolute terms is more than the interest income on lending activities and 5 M/s. Vinsan Brothers Pvt. Ltd other sources and thereby applied the provisions of Explanation to Section 73 of the Act. It would be pertinent to reproduce the Explanation to section 73 of the Act at this juncture :-

Section 73 – Losses in Speculation Business Explanation – 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.

Hence it is very clear from the aforesaid section that when the principal business is that of granting loans and advances and if such company also engages itself in purchase and sale of shares, then the purchase and sale of shares activity would fall under the exception to Explanation to Section 73 of the Act. We have already held that one of the main objects of the assessee company is lending activity and more so the assessee is a NBFC registered with RBI having valid certificate of registration and the fund deployed in lending activity is much more than the fund deployed in share trading activity on a consistent basis over a period of time. Hence the principal business of assessee company is that of granting loans and advances and thereby outside the ambit of Explanation to Section 73 of the Act. Accordingly, the share trading loss of Rs. 51,56,183/- claimed by the assessee cannot be construed as speculation loss and accordingly we find no infirmity in the order of the Learned CIT(A) in this regard. Accordingly, the grounds raised by the revenue are dismissed.

6 M/s. Vinsan Brothers Pvt. Ltd