What is principal business of assessee is very tricky question-High Court

What is principal business of assessee is very tricky question-High Court remands case to ITAT to examine applicability of exception u/s 73 of the Act

ABCAUS Case Law Citation:
ABCAUS 2905 (2019) (05) HC

Important Case Laws Cited/relied upon by the parties
Commissioner of Income Tax west Bengal-II Calcutta Vs. Middleton Investment & Trading Co. Ltd
Commissioner of Income Tax, Kolkat-II Vs. M/s. Savi Commercial Pvt. Ltd.
PCBL Industrial Ltd. Vs. Commissioner of Income-Tax and Another
Aryasthan Corporation Ltd. Vs. Commissioner of Income-Tax
Paharpur Cooling towers Ltd. Vs. Commissioner of Income-Tax
R.P.G. Industries Ltd. Vs. Commissioner of Income Tax and Another
Prem Chand Shaw (Jaiswal) Vs. Assistant commissioner of Income Tax

This appeal was filed by the assessee against the order passed by the learned Income Tax Appellate Tribunal (Tribunal).

The case of the assessee company was that apart from the business of purchase and sale of shares it carried on the business of granting loans, advances etc. and had a significant income from other sources as shown in their profit and loss account for the relevant financial year. Therefore, the business of purchase and sale of shares was not their principal business. Hence it was entitled to adjust the loss incurred by them by trading in shares against their business income.

The question to be answered was therefore as to whether principal business of the assessee was that of granting loans and advances and the case of the appellant comes within the exceptions to the Explanation under Section 73 of the Income Tax Act, 1961 (the Act), and whether assessee is entitled to the benefit of set off of loss in shares dealing by treating the same as business loss?

The judgment given by the Division Bench was first judgment of the Hon’ble High Court with Special Jurisdiction (Income Tax).

While finalizing the assessment, the Assessing Officer held that the loss claimed by the assessee in the business of purchase and sale in shares was speculation loss as per the provisions of explanation to Section 73 of the Act. He, therefore, did not allow its set off against the income from interest on granting loans and advances etc. declared by the assessee by holding that neither of the exceptions provided in Explanation to Section 73 of the Act were applicable to the case of the assessee.

The CIT (Appeals) allowed the appeal of the assessee by holding that the case of the assessee was covered by the exceptions provided in Explanation to 73 of the Act and the loss in purchase and sale of shares should be allowed to be set off as business loss.

However the Tribunal allowed the appeal of the revenue and reversed the order of CIT (Appeals) and restored the order of the Assessing Officer.

The Hon’ble High Court considered possibilities of various factors, i.e. Is the principal business of the assessee to be determined on the basis of the businesses mentioned in its memorandum of association? Whether turnover of the assessee is an indication of its principal business? Suppose an assessee makes substantial capital expenditure in a year for promotion of a particular business which it claims to be its principal business but its turnover in that year is much less than the turnover from other business, could the assessee claim the former business to be its principal business? Suppose the assessee carries on more than one business and the turnover of one business is less than the others but the profit of that business is more because the expenses are less. Would that business become the principal business?

His lordship opined that all the above factors have to be judiciously analysed and assessed to determine the principal business of a Corporate assessee.

The Hon’ble High Court noted that as per the Notes on Clauses, appended to the relevant Finance Bill, the object of section 73 is to curb the device sometimes resorted to by business houses controlling groups of companies to manipulate and reduce the taxable income of companies under their control.

The Hon’ble High Court summarized the ambit and scope of Section 73 of the Act and Explanation under it as under:

(i) Section 73 of the Act deals with carry forward and set off of losses from speculation business and Explanation to Section 73 of the Act is a deeming provision wherein if specified conditions are satisfied, purchase and sale of shares are deemed speculation activities.

(ii) Explanation to Section 73 of the Act does not attract any company if the gross total income of the company includes income mainly from “Interest on securities,” “Income from House property,” “capital gains” and “Income from other sources Or the principle business of the company is the business of banking or the granting of loans and advances.

(iii) Explanation to Section 73 of the Act provides that a company if fulfills any one of the aforesaid two conditions shall be exempted from the purview of the provisions of explanation.

(iv) The Explanation to Section 73 of the Act is not applicable in case the whole of the business of a company consists of purchase and sale of shares.

The Hon’ble High Court observed that the reliance placed by the assessee into certain facts and evidence like Audit Report, Balance Sheet etc. by alleging that the same had not been referred, discussed and considered by the Tribunal which was apparent on perusal of the impugned order of the Tribunal.

The Hon’ble High Court opined that the above allegation could not be brushed aside simply on the ground of matter of facts and evidence because it was directly related to application of the provisions of law i.e. Section 73 of the Income Tax Act, 1961 and Explanation under it.

The Hon’ble High Court opined that what is the principal business of the assessee is a very tricky question of fact which needs to be determined by the tribunal threadbare. The Tribunal would be the appropriate forum to scrutinize the said relevant facts and evidence to come to a definite conclusion as to whether principle business of the assessee was of granting of loans and advances or dealing in shares and whether case of the assessee falls within the exception under Section 73 of the Act and whether loss from shares dealing was speculation loss or not in the facts and circumstances of this case.

Accordingly the Hon’ble High Court set aside the impugned order of the Tribunal and remand to it on the aforesaid issues with direction to decide the aforesaid issue afresh.

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