Girish Chandra Gupta And Arindam Sinha JJ.

ORDER

The Court :- The appeal was admitted on 28th March, 2007 pertaining to the Assessment Year 2001-02. The question formulated at the time of admission reads as follows :-

“Whether on the facts and in the circumstances of the case a company carries as its principal business, acquisition of shares, debenture, debenture stock or securities issued by the Government local authority or other marketable securities of like nature could be termed as any other company as contemplated under Section 73 of the Income Tax Act, 1961.” After the appeal was taken up for hearing both the learned counsel suggested that the question formulated at the time of admission should be reframed. After hearing them the question, to be decided, has been reformulated as follows :

“Whether in a case where loss resulting out of dealing in shares is more than the income arising out of loans and advances it can be said that the principal business of the assessee is not of granting loans and advances in the light of explanation appended to Section 73 of the Income Tax Act.” The fund deployment position has been indicated by the learned Tribunal in its impugned judgment and order as follows :-
Comparative Statement of Deployment of Funds :

Comparative Statement of Income :

We are concerned with the year ended on 31st March, 2001. It would appear from the chart that during the aforesaid year the assessee had a loss of a sum of Rs. 32.31 lakhs approximately arising out of trading in shares whereas the assessee had earned a sum of Rs. 13.48 lakhs approximately from out of interest on loans and commission and brokerage.

Mr. Nizamuddin, learned Advocate appearing for the appellant submitted that the question as to which one is the principal activity of the assessee should depend upon the profits earned during the relevant year. Profits were earned only from the loans and commission and brokerage. There was no profit earned from the dealings in shares. Therefore he submitted that the principal business of the assessee is granting of loans and advances and not dealing in shares.

Mr. Poddar, learned Senior Advocate drew our attention to the Explanation appended to Section 73 of the Income Tax Act which reads as follows :-

“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.”

He submitted that under Sub-Section 1 of Section 73 it has been provided that speculation loss shall be set off only from out of income arising out of speculation. The aforesaid stipulation has, however, been qualified by the Explanation wherein two exceptions have been made. The two exceptions are really two distinguishing factors. One is a factor based on income and the other is a factor based on activity as would appear from the Explanation underlined by us. The submission advanced by Mr. Poddar, prima facie, appears to be correct.

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 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.