Income Tax Appellate Tribunal - Mumbai
Joint Cit vs Alchemic Financial Services Ltd. on 10 May, 2005
Equivalent citations: [2006]7SOT616(MUM)
ORDER
K.C. Singhal, Judicial Member.
All these appeals were heard together and are being disposed by the common order for the sake of convenience since the issues are almost common.
2. The first issue common to all the appeals relates to the disallowance of loss on the sale of shares under section 74 read with section 73 Explanation of the Income Tax Act, 1961 (Act).
3. Briefly stated the facts are, that the assessee was engaged in the business of money lending, leasing, finance and trading in shares as well as fabrication of chemical equipments. In all the years under consideration, the assessee incurred loss on sale of shares and securities to the extent of Rs. 22,54,544 in assessment year 1997-98, Rs. 6,48,793 for assessment year 1998-99 and Rs. 5,08,699 for assessment year 1999-2000. The requisite details regarding losses on sale of shares were filed by the assessee before the assessing officer vide letter dated 21-1-2000, as is apparent from para-7 of the assessment order pertaining to the assessment year 1997-98. It was noticed by the assessing officer that purchase of shares had been shown by the assessee in the Balance Sheet under the head "Investments". Considering this fact, the assessing officer was of the view that loss arising on the sale of such shares was capital loss assessable as short-term or long-term capital losses. As a result thereof, such loss could be set-off only against the Capital Gains in view of section 74 of the Act and against no other income. Alternatively, he was of the view that even presuming the loss to be business loss, such loss has to be considered as deemed speculative loss in view of the provision of Explanation to section 73 of the Act and, therefore, could not be set-off against the other income of the assessee. Thus, on both the grounds, the assessee's claim to set-off such losses against other income was disallowed by the assessing officer for all the three years.
4. At this stage, it may also be mentioned that in assessment year 1998-99, the assessee had raised a plea that the assessee-company was a finance company as per the guidelines of Reserve bank of India (RBI) and, therefore, the exception provided by the Legislature in the Explanation to section 73 of the Act applied to the present case and, therefore, the loss on sale of shares could not be considered as speculative loss. However, the assessing officer, after examining the facts of the case, rejected such contentions of the assessee by observing as under :-
" 1. The total capital outlay including all the liabilities is of Rs. 418 lakhs and Rs. 475 lakhs as at 31-3-1997 and 31-3-1998 respectively. The loans and advances granted are of Rs. 113 lakhs and Rs. 176 lakhs as at 31-3-1997 and 31-3-1998 respectively. Thus, in operational terms, the appellant cannot be said to be a company whose business mainly consists of granting of loans and advances though it may be registered as a Finance Company. The assessee is also not a banking company as defined in Banking Services Regulation Act.
2. The assessee's other main activities are manufacturing activities at Dadra for fabrication of chemical equipments. The gross profit from this unit is of Rs. 61.57 lakhs on turnover of Rs. 3.03 crores. The other income is of Rs. 61.57 lakhs from leasing, Rs. 4.15 lakhs from financial consultancy, Rs. 37.61 lacs as other business income (total Rs. 114.94 lakh's). Against this, the interest income is of Rs. 19.86 lakhs only compared to Rs. 10.07 lakhs in the last year.
Out of total capital outlay of Rs. 475 lakhs as at 31-3-1998, capital outlay of Rs. 164 lakhs is in the manufacturing division. These facts clearly evidence that the assessee's main business is not of granting of loans and advances. It is basically a manufacturing and consultancy company than a finance company in real operation terms. Hence exception provided under Explanation to section 73 (1) is not applicable to the fact of assessee and loss derived on sale of shares is liable to be treated as deemed speculation loss which cannot be set off against any other income."
The claim of the assessee for the assessment year 1999-2000 was also disallowed on the basis of findings given in the earlier two years.
5. The aforesaid assessments were challenged before the learned Commissioner (Appeals) by arising various submissions - (i) that the assessee-company is a finance company duly recognized by the RBI and assessee has obtained the requisite certificate from RBI granting the status of Non Banking Finance Company (NBFC) and, therefore, the provisions of Explanation to section 73 of the Act, were not applicable, (ii) the main object of the assessee-company as per the Memorandum of Association and Articles of Association clearly state that the assessee is a finance company, (iii) the assessee had not received any secured loans but had unsecured loans of Rs. 17,01,414 against which, the loans granted were to the tune of Rs. 1,13,49,046 (figures relating to the assessment year 1997-98) and (iv) that the capital employed in the finance activities was Rs. 2,62,37,690 whereas in other business, it was only Rs. 89,28,541 (figures relating to assessment year 1997-98). Reliance was also placed on the CBDT Circular No. 204 dated 24-7-1976 and certain decisions namely Offshore India Ltd. v. ITO (1986) 15 ITD 549 (Cal.) and Hon'ble Supreme Court judgment in the case of Investment Ltd. v. CIT (1970) 77 ITR 533 (SC).
6. The learned Commissioner (Appeals), after considering the judgment of the Hon'ble Supreme Court in the case of Investment Ltd. (supra), held that the assessee was engaged in the business of purchase and sale of shares and accordingly the provisions of section 74 of the Act, were not applicable. Besides this, he was also of the view that the assessee -company fell within the exception provided in the Explanation to section 73 of the Act, inasmuch as the principal business of the assessee was that of granting loans and advances. In coming to this conclusion, he relied on the facts that the object of the assessee-company included the business of granting loans and advances and assessee-company was also registered as NBFC by RBI. On examination of statement of accounts, he gave a finding that the main income of the assessee-company was from finance activity. Further, the capital employed was more in the finance activities rather than the other business activity. Therefore, by any standard, the principal business of the assessee was of banking or granting of loans and advances. At this stage, it would be appropriate to refer to para 2.5 of the order of the learned Commissioner (Appeals) wherein he had appreciated the various aspects of the financial statements.
"2.5 From the details of capital employed, it is observed that in the finance activity, the appellant company had deployed capital of Rs. 2,62,37,690 as against capital of Rs. 89,28,541 deployed in the "Amulya Unit". The appellant company has insecured loans of Rs. 17,01,414 as against loan granted of Rs. 1,13,49,046. Even by income criteria, the appellant company income of Rs. 82,03,887 which included an amount of Rs. 50,47,554 from the finance activity, after a set off of loss on sale of shares amounting to Rs. 22,54,544. The gross income from the finance activity was Rs. 73,02,096 and the above net income of Rs. 50,47,554 is after deducting the loss on shares. Thus, in view of above discussion and applying both the criteria i.e., capital deployed as well as income criteria, the appellant company has to be termed as a company, whose principal business is business of banking or granting of loans and advances. The appellant company's case is thus squarely covered under exception to Explanation 73 of the Income Tax Act. The amount of Rs. 22,54,544 being the loss in shares is allowed and addition is deleted."
Similar orders were also passed for other years. Aggrieved by the same, the revenue is in appeal before the Tribunal.
7. The learned Departmental Representative has strongly assailed the orders of the learned Commissioner (Appeals) by making various submissions. Firstly, it was submitted that the assessee himself had shown the purchase of shares under the head "Investment" and not as "Stock-in-trade". Therefore, any profit or loss on the sale of such shares would be Capital Gain or loss as the case may be and consequently, the provisions of section 74 of the Act, would be applicable. Secondly, it was contended that even assuming that the assessee was dealing in shares, it cannot be said on facts that the principal business of the assessee was either banking or granting of loans and advances. According to him, the object in the Memorandum of Association only suggested that the assessee is entitled to carry on the business with reference to such objects but whether the principal business of the assessee was that of Banking or granting of loans and advances would depend on the facts of each case. It was also submitted that registration by RBI as non-banking financial company does not mean that the assessee was engaged principally in the business of banking or granting of loans and advances. He drew our attention to para 4 of the orders of the learned Commissioner (Appeals) wherein the provisions of section 45 of the RBI Act have been quoted. He also drew our attention to the definition of "Financial Institution" given in section 45(1)(c) of the RBI Act, which includes various activities including acquisition of shares, stock, bonds, debentures, securities, etc., letting or delivery of any goods on the hire purchase agreement, carrying on of any insurance business; managing, conducting or supervising, as foreman, agent or in any other capacity; of chits or kuries as defined in any law which is for the time being in force in any State or any business, which is similar thereto, etc., etc. It was strongly contended by him that the exception provided in the Explanation to section 73 of the Act is restricted to the business of Banking or granting of loans and advances and does not extend to other type of business mentioned in section 45(1) of the RBI Act. Therefore, for example, the income from leasing of assets cannot be considered either as business of banking or business of granting of loans and advances. He also drew our attention to Profit & Loss Account to point out that in the assessment year 1997-98, the income from granting loans and advances was only Rs. 10,07,041 as against total income of Rs. 80,10,841. Therefore, it was pleaded that the learned Commissioner (Appeals) was factually incorrect in coming to the conclusion that income from financing was Rs. 50,00,000 and odd out of the total income of Rs. 80,00,000. Similarly, it was pleaded by him that the capital employed in the business other than the loans and advances was much more than the capital employed in business of granting loans and advances. Hence, it was prayed that the order of the assessing officer must be upheld.
8. On the other hand, the learned counsel for the assessee has strongly relied on the orders of the learned Commissioner (Appeals). He relied on the facts that the object of the company included the object of granting loans and advances and the fact that the RBI registered the assessee as NBFC. He drew our attention to the press release issued by the RBI to point out that RBI grant such status only when it is satisfied on the basis of income as well as capital employed, that principal business of the company is that of Financial Institution as defined in section 45(1) of the RBI Act. It was also stated by him the facts and figures given by the assessing officer are factually incorrect while the facts and figures noted by the learned Commissioner (Appeals) gives the correct picture with reference to the income as well as the capital employed. It was also submitted by him that entries in the balance sheet are not determinative of the nature of business carried on by the assessee. He also drew our attention to the list of companies of which shares were purchased and sold. Considering, the voluminous purchases and sales, it was pleaded by him that the assessee was carrying on the business of purchase and sale of shares and no adverse inference can be drawn merely because the shares were shown under the head "Investment". Hence, the provision of section 74 of the Act could not be applied. Finally, it was concluded by him that the assessee's case fell within the exception provided in the Explanation to section 73 of the Act.
9. At the end of hearing, we directed the learned counsel for the assessee to furnish the copies of balance sheets for all the years along with complete details of schedules and audited report as well as the complete details of purchase and sales of shares for all the years. In response to the said direction, the learned counsel for the assessee has filed the details in the additional paper book numbering pages 53 to 184.
10. Rival submissions of both the parties have been considered carefully in the light of the material placed before us. The first question to be considered is, whether purchase of shares by the assessee was by way of "Investments" or by way of "Stock-in-Trade". It is the settled legal position that the entries in the books of account or the manner in which the accounts are prepared are not determinative of the nature of transactions carried on by the assessee. The question whether the shares were purchased as an "Investor" or as a "Trader" can be answered on the basis of facts and circumstances of each case. The only ground on which the assessing officer held that the shares were purchased as an "Investor", was that the assessee had shown in the balance sheet under the head "Investment". This ground is not tenable in view of the settled legal position. We have examined the details filed by the assessee appearing at pages 129 to 135 in the paper book. The perusal of the same shows that the assessee had been purchasing shares from time to time in respect of various companies and the duration of holding the shares was for a short period. Sometimes, these were purchased and sold in the same year. While in other cases, the gap was 1 and 1/2 years. Considering the frequency and volume of the transactions as well as period of holding of the shares, we are of the view that the assessee was engaged in the business of purchase and sale of shares and, therefore, the assessing officer was not justified in holding that the loss arising on the sale of shares was capital loss. Consequently, the provision of section 74 of the Act could not be invoked and, therefore, in our opinion, the learned Commissioner (Appeals) had rightly vacated such findings of the assessing officer.
11. The next question, which arises for our consideration is, whether the loss on sale of shares can be considered as deemed speculative loss in view of the provisions of Explanation to section 73 of the Act. The contention of the learned counsel for the assessee is that the case of the assessee fall within the exception provided in the Explanation itself inasmuch as the principal business of the assessee consist of financing and granting of loans. On the other hand, the stand of the department is that on the facts of the case, the assessee cannot be said to be engaged mainly in the business of granting loans and advances as per the provisions of Explanation to section 73. Considering the material placed before us, we are in agreement with the stand taken by the department and are unable to uphold the order of the assessing officer for the reasons mentioned hereafter.
12. The learned Commissioner (Appeals) has decided the issue in favour of the assessee by taking into consideration 4 factors namely - (i) the objects stated in the Memorandum of Association; (ii) registration of NBFC by RBI; (iii) the capital employed by the assessee in the finance activities; and (iv) income earned from the financing business. As far as the first two factors are concerned, they merely suggest or indicate that the assessee is entitled to carry on the business of financing including granting of loans and advances. But these two factors by itself cannot lead to conclusion that the principal business of the assessee is that of granting of loans and advances so as to fall within the ambit of exception provided in the Explanation to section 74 of the Act.
13. Coming to the other two factors, we find that the income of the assessee from the activity of granting loans and advances is very low as compared to the total business income of the assessee. The learned Commissioner (Appeals) has mentioned in his order pertaining to assessment year 1997-98 that the total income of the assessee-company of Rs. 82,03,887 which included the amount of Rs. 50,47,554 from the finance activity after setoff of loss on sale of shares amounting to Rs. 22,54,544. We have gone through the financial statement given by the assessee in the paper book. The perusal of the Profit & Loss Account for the assessment year 1997-98 appearing at page 76 of the paper book shows that the profit before depreciation and tax amounted to Rs. 80,10,841 but the income from interest was only Rs. 10,07,041 which is very low as compared to the total profits i.e., 12.5 per cent approximately. It appears that the learned Commissioner (Appeals) has taken into consideration the income from leasing, finance consultancy fees and other income including income from project consultancy, income from data processing, bills discounting, delayed payment charges, dividend, brokerage, house property income, etc. In our considered opinion, these incomes, on the face of it, cannot be considered as income from the activity of granting of loans and advances. It appears that the assessee as well as the learned Commissioner (Appeals) has considered the entire income other than the income from manufacturing activity as income from financing activity. We are unable to approve the approach of the learned Commissioner (Appeals) in considering such income as income from granting of loans and advances. It is pertinent to note that the Legislature has not used the words "Income from Finance Activities". The words used by the Legislature in the exceptions provided in the Explanation to section 73 of the Act are "Business of Banking or Granting of Loans and Advances". Admittedly, the assessee is not carrying on the business of banking. Therefore, the assessee can fall within the scope of exception if it can be established that the principal business of the assessee is that of granting of loans and advances. We have already mentioned above that the income by way of interest from granting of loans and advances was only Rs. 10,07,041 out of the total income of Rs. 80,10,841 (before depreciation). Even if the depreciation is excluded, the profits before the tax amounted to Rs. 50,62,195 as per the Profit and Loss Account appearing at page 76 of the paper book. If the interest income is compared to this figure, the ratio of interest income comes to around 20 per cent only. Similarly, financial statement for the assessment year 1998-99 shows that interest income was only of Rs. 19,86,874 against the total income before tax of Rs. 75,83,789. The interest income was, therefore, around 26 per cent of the total income. Similarly, the interest income for assessment year 1999-2000 was Rs. 28,29,924 as against the total income before tax of Rs. 87,03,239. Thus, the interest income was 32.5 per cent approximately of the total. Thus, it is seen that the income from granting of loans and advances in all the three years was less than 35 per cent.
14. Coming to the aspect of employment of capital, we find that in the assessment year 1997-98, the loans and advances as per Schedule-VI amounted to Rs. 1.14 crores approximately while the total capital including borrowed funds and reserved amounted to Rs. 3.44 crores approximately. This also shows that employment of capital in the activity of granting loans and advances was much less than the capital employed in other fields. The learned counsel for the assessee in his written submissions has taken the figure of Rs. 2.62 crores approximately as net capital employed in the finance division, which in our opinion, is not attributed towards loans and advances only. Schedule VI shows that Rs. 1.47 crores approximately was employed in various other current assets and the same cannot be considered as part of the capital employed towards loans and advances. Similarly, the capital employed in the activity of granting of loans in assessment year 1998-99 was Rs. 1.76 crores approximately as per Schedule VI of the balance sheet as against the total funds available amounting to Rs. 3.26 crores approximately. In respect of assessment year 1999-2000, we find that the loans and advances as per Schedule VI of the balance sheet is Rs. 2.14 crores approximately as against total availability of funds of Rs. 4.26 crores approximately. The above figures clearly shows that the capital employed by the assessee in the business of granting loans and advances were also less than 50 per cent. In all the orders, the learned Commissioner (Appeals) had adopted the figures rolating to other activities, which are not in the nature of granting loans and advances. Thus the findings of the learned Commissioner (Appeals) were vitiated.
15. The counsel for the assessee relied on the judgment of Special Bench in the case of Concord Commercial (P.) Ltd. for the proposition that if the principal business carried on by the assessee is that of banking or granting of loans and advances, then provisions of the Explanation to section 73 of the Act cannot be applied. There cannot be any dispute to this legal position. However, the facts of the case have to be examined to ascertain whether the principal business of the assessee is that of banking or granting of loans and advances. Admittedly, in the present case, the assessee was not carrying on any banking activity. Therefore, the entire burden is on the assessee to prove that the principal business of the assessee was that of granting loans and advances. In our opinion, the assessee has failed miserably to prove that the assessee was carrying on the business of granting of loans and advances. The assessee has created confusion by pleading before the lower authorities to the effect that it was carrying on a financing business including leasing and other activities. In wider sense and as per the requirement of section 45-I of the RBI Act, the assessee can be said to be carrying non banking financial activity but that is not a requirement of law in the provisions of Explanation to section 73 of the Act. For the purpose of this Explanation, only the activity of granting of loans and advances can be taken into consideration and no other activity even if such other activities are financing activities. If this aspect is taken into consideration then it has to be held that the case of assessee does not fall within the exception provided in the Explanation to section 73 of the Act.
16. At this stage, reference may also be made to another Special Bench decision in the case of Dy, CIT v. Venkateshwar Investment& Finance (P.) Ltd (2005) 93 ITD 177 (Cal.), wherein it was held that overall situation should be taken into consideration including objects mentioned in the memorandum of association, the capital employed and the income derived from the activity of granting loans and advances. In that case, it was found on facts that entire funds available with the assessee were employed in the business of granting loans and advances and the major income related to such business. But in the present case, the capital employed as well as the income derived from the business of granting loans and advances was much less than the capital employed and income derived from other business activities and, therefore, the provision of Explanation to section 73 of the Act squarely applies to the case of the assessee.
17. In view of the above discussions, we hold that the learned Commissioner (Appeals) was not justified in holding that the provisions of Explanation to section 73 were not applicable to the assessee's case. Consequently, the orders of the learned Commissioner (Appeals) are reversed on this issue and, therefore, the orders of the assessing officer are restored on this issue.
18. The next issue arising in these appeals relates to the claim of depreciation on trucks leased by the assessee. After hearing both the parties, we find that this issue has been examined by the Hon'ble Jurisdictional High Court in two cases in the case of Kotak Mahindra Finance Ltd. which were reported as 265 ITR 114 and 265 ITR 119, Both the decisions were rendered on the same date by the same Bench. In Kotak Mahindra Finance Ltd.'s case (supra) it was held that merely because the assessee let out Motor Buses and Motor Trucks to its customers, it could not be said that the assessee was using the said vehicles in the business of running them on hire. The combinded reading in the business of running them on hire. In other case it was held that the assessee would be entitled to higher depreciation if it can be established that the lessees had used the vehicle in the business of running them on hire. The combined reading of both these judgments shows that higher rate on depreciation is allowable only if it can be shown by the assessee that the lessees had used the vehicles in the business of running them on hire. In the present case, there is no material on the record to suggest that lessees used the vehicle in the business of running the same on hire. Perhaps, no enquiry has been made in this regard. Therefore, in the interest of justice, we set aside the orders of the learned Commissioner (Appeals) on this issue and remit the matter to the file of the assessing officer for fresh adjudication after making enquiry as to whether the trucks leased out by the assessee were used by the lessees in the business of running them on hire. The assessee would be at liberty to place material in this regard before the assessing officer.
19. The last issue relates to the disallowance under section 43B of the Act in respect of contribution to Provident Fund and ESIC. This issue arising only in the assessment year 1997-98 but by mistake, such ground has been taken in all the appeals. The contention of the learned counsel for the assessee is ' that the payment was made within the grace period and, therefore, no disallowance could be made in view of the decision of the Tribunal reported as Fluid Air India Ltd. v. Dy. CIT ( 1997) 63 ITD 182 (Mum.) and the Hon'ble Madras High Court judgment in the case of CIT v. Shri Ganpati Mills Co. Ltd. (2000) 243 ITR 879 (Mad). We are in agreement with the submissions of the learned counsel for the assessee. Accordingly, the order of the learned Commissioner (Appeals) is set aside on this issue and the assessing officer is directed to allow the claim of the assessee if it is found that the payment was made within the grace period.
20. In the result, the appeals are partly allowed.