Income Tax Appellate Tribunal - Mumbai
Asstt. Cit, Circle 5(8) vs Tanna Electro Mechanics (P.) Ltd. on 26 October, 2005
Equivalent citations: [2006]7SOT121(MUM)
ORDER
K.P.T. Thangal, Vice-President These appeals are by the revenue and pertain to assessment years 1994-95 and 1995-96.
2. The common ground urged by the revenue for both the years is directed against the order of the learned Commissioner (Appeals) in treating the loss of Rs. 76,000 for assessment year 1995-96 and Rs. 9,01,455 for assessment year 1994-95 arising out of share trading activities as business loss as against speculation loss assessed by the assessing officer under Explanation to section 73 of the Income Tax Act, overlooking the fact that primary activity of the assessee could only be determined by number of transactions, turnover, capital deployed, etc. Assessment year 1994-95 :
3. The assessee is engaged in the business of leasing, giving loans and advances and deriving service charges from the premises and also engaged in the business of purchase and sale of shares /securities. The assessing officer held that during this year under consideration the assessee mainly dealt in shares and securities and it is trading company and not investment company. He held that assessee is not covered by the exception to section 73 and the loss arising out of trading in shares cannot be set off against other business income, since assessee- company has no speculative income or profit during the year. He held that it cannot be adjusted against the income from other sources. The assessing officer records that the assessee-company was incorporated on 24-11-1979 under the name and style of M/s. Tanna Electro-mechanics Pvt. Ltd. The assessing officer found that the assessee was deriving interest income alongwith other incomes like licence fees, dividend, rent etc. He held that the assessee cannot be treated as an investment company since their income exceeded the interest received for the year under consideration. So far as the loss suffered by the assessee from the share dealings, the assessing officer asked the assessee as to why the same should not be disallowed by resorting to Explanation to section 73, since the income from other activities were greater than the interest and also assessee was not an investment company. The assessee submitted before the assessing officer that provisions of Explanation to section 73 is not applicable inasmuch as assessee was engaged in the principal business of granting loans and advances. It was further submitted that during the year under consideration, income from Badla amounted to Rs. 1, 160 lakhs and after adding the interest income of Rs. 14.93 lakhs, it would amount to Rs. 26.53 lakhs, which was undisputedly greater than the other income. However, the assessing officer did not accept the above view canvassed. Aggrieved by the above order, assessee approached the first appellate authority.
4. The assessee contended that assessee is a dealer in dyes and chemicals and also derived income from dividends, sub-letting the premises. It was contended that assessing officer went wrong in coming to the conclusion that Badla income did not arise out of loans and advances. It was submitted that the opinion given by the Institute of Chartered Accountants of India while interpreting section 272 of the Companies Act, governs the issue of investment and granting of loans and advances by the companies. It was submitted that assessee's main source of income is interest on the loans including Badla transactions which amounted to Rs. 26.53 lakhs, whereas the other income was much less in comparison to the income of interest and Badla together. Hence, it was contended that the principal business of the assessee was granting loans and advances. The Explanation to section 73 hence, cannot be applied to the assessee's business. An alternative plea was also taken to the effect that, if the Badla income was not considered as interest income, in that case income from Badla ought to be treated as arising out of the share dealings and evidently the loss have been allowed to set off with Badla income. He allowed the claim of the assessee by observing at Para No. 4 of his order as under :
"I have given careful consideration to the submissions made by the learned Authorised Representative. I also carefully went through the paper-book, the opinion of the Institute of Chartered Accountants, as also perused the balance-sheet and P & L account of the appellant for the various years. I find that the main reason given by the assessing officer in not setting off the loss of Rs. 9,01,455 is that the appellant company is a"Trading Company". After going through all the facts and circumstances of the case, I am afraid the stand taken by the assessing officer is not sustainable in law. I find that the assessing officer has not given any finding as to whether "BADLA" income was interest income arising out of the loans and advances or similar nature thereof. In my considered view, the proviso to Explanation to section 73 is not applicable to the facts of the appellant's case inasmuch as the major source of income of the appellant during the year was out of interest and "BADLA" income. In view of the specific opinion given by the Institute of Chartered Accountants with regard to nature of 'Badla' income, this in substance 'Badla' income is fundamentally a nature of lending operation, goes to support the case of the appellant. Having come to this conclusion i.e., that 'Badla' income is arising out of lending operations, the natural corollary will be that the major activity of the appellant company during the year was that of granting of loans and advances and therefore, the loss arising out of the share trading activities is outside the purview of the provisions of Explanation to section 73. The appellant thus succeeds on this issue."
5. Aggrieved by the above order, revenue is in appeal before the Tribunal.
6. We have heard the rival submissions and gone through the orders of the revenue authorities and decisions, the opinion given by the Institute of Chartered Accountants of India while interpreting section 272 of the Companies Act, which governs the issue of investment and granting loans and advances by the company.
7. Under section 73 of the Income Tax Act, any loss computed in respect of speculation business carried on by the assessee, shall not be set off except against profits and gains, if any, of another speculation business. The assessing officer's view was that assessee falls within the scope of section 73, since income from other activities were greater than the interest and the assessee was also not an investment company. Hence, assessing officer disallowed the assessee's claim of set off of loss against other income. The learned counsel submitted that the main business of the assessee is granting loans and advances. In our opinion, the assessing officer has failed to understand the significance of the Badla transactions. The Badla transaction is nothing but interest income earned from granting loans and advances. The nature of Badla income is nothing but an advance to purchase certain shares through the brokers on the stock exchange. Suppose a person does not have necessary finance and he also does not want to square off the transaction by a corresponding sale. As per the settlement procedure of the stock exchange, the transaction had necessarily to be gone through and, therefore, he had to make payment for the delivery of shares. At this stage, the badla financier comes to provide the necessary finance through his broker and gets the said shares by way of security for providing necessary finance. He earns badla charges at the rates fixed by the Stock Exchange. The financier is not entitled to the profit or loss in respect of the shares he is entitled to badla charges. The learned counsel submitted that badla income is nothing but income earned in the course of granting loans and advances and the assessee played a role of a badla financier and earned badla income on the amount advanced by it. The learned counsel further submitted that in the badla income there could never be a loss because he has earned interest. This dealing does not have any relation with the market price because he is getting the fixed badla charges; it is exactly the receipt on loans and advances. The share will be sold to the same person and it does not go back to any other party. The opinion of the Institute of Chartered Accountants of India, regarding the accounting for the badla transaction has been placed on record. One of the query reads as under :
"Whether this badla transaction should be shown as investments or as loans and advances and whether in Profit and Loss account the same should be shown as purchase and sale or, only differential income should be accounted for."
The opinion of the committee was that "The badla transaction should be shown as loans and advances and in Profit and Loss account, the additional margin i.e., badla should be accounted for as income".
8. From the above facts it is clear that the order of the first appellate authority does not call for any interference on the facts and circumstances of the case. Appeal by the revenue fails and dismissed.
Assessment year 1995-96 :
9. Coming to the assessment year 1995-96, the facts are identical, hence appeal by the revenue for assessment year 1995-96 also fails and dismissed.
10. In the result, both the appeals of the revenue are dismissed.