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Off-shore India Ltd. Vs. Income-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Kolkata
Decided On
Judge
Reported in(1986)15ITD549(Kol.)
AppellantOff-shore India Ltd.
Respondentincome-tax Officer
Excerpt:
.....year 1979-80.2. the assessee is a limited company deriving income from business in share dealings, money-lending and dividends. though five different grounds were taken in this appeal, ground nos. 1, 2, 4 and 5 were not pressed before us at the time of hearing. the only ground pressed before us was ground no. 3 which reads as below : without prejudice to the above, the commissioner (appeals) erred in upholding the application of explanation to section 73 of the income-tax act, 1961, to the appellant's case and in treating the loss as 'speculation loss' on the facts and in the circumstances of the case.3. dr. d. pal, the learned representative for the assessee, urged before us that the short issue that is raised in this appeal is whether the case of the assessee is hit by the explanation.....
Judgment:
1. This appeal has been filed by the assessee against the order dated 10-8-1983 of the Commissioner (Appeals) relating to the assessment year 1979-80.

2. The assessee is a limited company deriving income from business in share dealings, money-lending and dividends. Though five different grounds were taken in this appeal, ground Nos. 1, 2, 4 and 5 were not pressed before us at the time of hearing. The only ground pressed before us was ground No. 3 which reads as below : Without prejudice to the above, the Commissioner (Appeals) erred in upholding the application of Explanation to Section 73 of the Income-tax Act, 1961, to the appellant's case and in treating the loss as 'speculation loss' on the facts and in the circumstances of the case.

3. Dr. D. Pal, the learned representative for the assessee, urged before us that the short issue that is raised in this appeal is whether the case of the assessee is hit by the Explanation to Section 73 of the Income-tax Act, 1961 ('the Act') or the case of the assessee is saved by one or the other of the two exceptions staled in the said Explanation. He took us through the said Explanation to Section 73 which reads as below : Explanation : Where any part of the business of a company (other than an investment company, as defined in Clause (ii) of Section 109, 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.

Dr. D. Pal stated that the assessee is not hit by the said Explanation as it comes within the ambit of both the exceptions stated therein. In other words, according to Dr. D. Pal, the assessee was an investment company as defined in Section 109(ii) of the Act and/or the assessee is a company the principal business of which is the business of granting of loans and advances. Hence, he urged that the revenue authorities erred in not allowing the loss suffered by the assessee in its share dealing business against the income earned by it from money-lending business on the ground that the loss from the share dealing business becomes speculation loss due to the fiction enacted in the aforesaid Explanation to Section 73.

4. It may be stated here that the ITO disallowed the claim of the assessee to set off the loss suffered in the share dealing business on the ground that it was speculation loss as envisaged in the Explanation to Section 73. On appeal, the Commissioner (Appeals) also came to the same conclusion. Before the Commissioner (Appeals) the assessee's case was that it was a company whose principal business was the business of granting of loans. The other ground now taken before us by Dr. D. Pal, viz., that the assessee also came under the first exception envisaged in Section 109(ii) was not taken before the Commissioner (Appeals). The Commissioner (Appeals) considered the contention taken before him with reference to the amount of money invested in the share dealing business and money-lending business carried on by the assessee and came to the conclusion that the money-lending business was not the principal business of the assessee. Consequently, the assessee did not come under the exception and was hit by Section 73. In this view of the matter, the Commissioner (Appeals) confirmed the action of the ITO.5. Dr. D. Pal contended before us that the assessee-company was an investment company as envisaged in Section 109(ii). He stated that the gross total income of the assessee consisted mainly of income which is chargeable under the heads other than 'Profits and gains of business or profession' or 'Salaries'. He pointed out that the assessee suffered a loss of Rs. 2,59,667 in its business in share dealing while it earned an income of Rs. 2,19,446 in its money-lending business. If these two amounts are set off against each other there is a net loss from business amounting to Rs. 40,221. As against this amount, the assessee had an income of Rs. 28,125 from other sources. He urged that the income from other sources is a positive figure while the income from business is a negative figure so that the gross total income of the assessee mainly consisted of income chargeable under the head 'Income from other sources'.

6. Next, Dr. D. Pal urged that the assessee-company also satisfies the conditions of the other exception contained in the Explanation to Section 73, viz., the principal business of the assessee-company was granting of loans. He referred to the memorandum of association of the company. One of the main objects in the memorandum refers to the lending of money (Clause 4). Another object in the memorandum which has been described as 'incidental or ancillary to the attainment of the main objects', states that the business of the assessee was to deal in shares (Clause 20). He urged that the above fact shows that the main object of the assessee was money-lending and not share dealing. In this connection, he referred to the decision in the case of CIT v. J.K.Eastern Industries {P.) Ltd. [1965] 55 ITR 376 (Cal.). He urged that though the memorandum of association of a company is not always conclusive of the nature of business carried on by the company, yet if a particular object stated in the memorandum is translated into practice, that object has to be taken as acted upon. In other words, what is stated in the memorandum is not material but what the company actually does in practice is material. He then referred to the profit and loss account of the assessee-company and urged that the assessee earned more money from its money-lending business than its share dealing business. Regarding the amount invested also, he stated that more money was invested in the money-lending business than in the share dealing business. Hence, he urged that the assessee-company was principally engaged in the business of lending money so that the aforesaid Explanation did not apply to it.

7. Shri A. Singh, the learned representative for the department, on the other hand, supported the order of the Commissioner (Appeals) on the grounds stated by the latter in his order under appeal. He urged that the assessee-company could not become a company envisaged in Section 109(77) merely because the net figure after set off is a loss under the head 'Profits and gains of business or profession'. He urged that whether the assessee is entitled to the aforesaid set off is the basic question which could not be assumed away by the assessee. In other words, the assessee had not shown that its gross total income chargeable under the head 'Profits and gains of business or profession' is nil or negligible without taking the help of the setting off provision. If one looks at the income from money-lending business alone on the ground that the said amount is chargeable to tax because the loss from the share dealing business was not chargeable to tax nor could be set off then, the gross total income of the assessee chargeable under the head 'Profits and gains of business or profession' becomes much more than that chargeable under the head 'Income from other sources'. Consequently, the case of the assessee goes out of Section 109(ii). In this connection, he pointed out that if the argument of the assessee is to be accepted, then the net loss of Rs. 40,221 from business should be set off against the other source of income of Rs. 28,125 so that the net result would be a loss and under such circumstances it cannot be said that the assessee was having mainly income from sources other than those chargeable under the head 'Profits and gains of business or profession' or 'Salaries'.

8. Next, Shri A. Singh contended before us that the assessee did not come even under the second exception as its principal business was share dealing, and not money lending. He pointed out from the balance sheet that the amount which remained invested in stocks and shares as at the end of the previous year was Rs. 32,14,063 as against the sum of Rs. 9,84,800 invested in loans and advances. Coming to the statements filed by the assessee, he stated that the maximum amount invested in the share business was Rs. 40.65 lakhs as on 31-8-1978 as against the maximum amount invested in the money-lending business was Rs. 26.75 lakhs as on 28-2-1978. Thus, he stated that the principal business of the assessee was share dealing as is evident from the amount invested therein. He contended that it is only an accident that in this particular year the assessee suffered a loss from the share dealing business. The mere fact that the assessee suffered loss in a particular year from a business will not make that business a subsidiary or a secondary one if there are strong factors to point to the contrary.

According to Shri A. Singh, to find out as to what is the principal business of the assessee, one has to look to the amount of investment made and not to the profit earned or loss suffered in this year or that year. Hence, he urged that the assessee is not saved by either of the two exceptions and so it is squarely hit by the Explanation to Section 73. Consequently, the revenue authorities were correct in applying the said Explanation and declining to set off this speculation loss against the income of the money-lending business because of the provisions of Section 73(1).

9. We have considered the contentions of both the parties as well as the facts on record. As stated at the outset of this order, the only question that is raised in this appeal is whether the case of the assessee is or is not saved by the exceptions enacted in the Explanation to Section 73. In our opinion, the case of the assessee does not come under Section 109(7). The income chargeable under the head 'Profits and gains of business or profession' becomes less than the income chargeable under the head 'Income from other sources' only after the set off of the loss suffered in share dealing business. If the assessee is not entitled to such set off, then the assessee will not come under Section 109(ii) because, in that case the income chargeable under the head 'Profits and gains of business or profession' will be much more than that chargeable under the head 'Income from other sources' as loss is not chargeable at all. We find force in the contentions raised for the department that the aforesaid set off cannot be taken for granted especially when that is the central issue in this case. In our opinion, the assessee has to show that even without such set off, the income assessable under the head other than business is much more. This has not been done. In point of fact, the assessment order passed by the ITO shows income from money-lending business of Rs. 2,19,446 as against a sum of Rs 28,125 under the head 'Income from other sources'.

10. Coming to the other exception, we find that the case of the department is well-founded. In our opinion, the objects in the memorandum are not conclusive of the nature of business carried on by the assessee-company. As has been observed by the Supreme Court in the case of CIT v. Dharmodayam Co. [1977] 109 ITR 527, it is notorious that the memoranda and articles of association of companies usually cover a variety of activities but the activity which the company actually engages alone determines the nature of its business. We do find that the maximum amount invested in the share business was Rs. 40.65 lakhs as on 31-8-1978 which is much more than the maximum amount of Rs. 26.75 lakhs invested in the money-lending business as on 28-2-1978.

Similarly, as on the last date of the previous year under consideration, the amount invested in the share business was more than three times the amount invested in the money-lending business. Hence, it is evident that the assessee was not engaged principally in the business of granting loans. Thus, we come to the conclusion that the assessee was not saved by either of the two exceptions enacted in the Explanation to Section 73 and, therefore, the revenue authorities were quite justified in treating the loss from the share dealing business as speculation loss and in refusing to set off the same against the income earned from money-lending business. For the above reasons, we uphold the order of the Commissioner (Appeals).


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