THE ITO, Ward 1(4), Ahmedabad V. DEEP CAPITAL SERVICES LTD., Ahmedabad

ITA 462/AHD/2003

• Counselvise Citation: [2009] 114 COUNSELVISE.COM (IT) 7777 (ITAT-AHMEDABAD)
• Duration Of Justice: 6 year(s) 5 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-07-2009
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 29-07-2009
• Assessment Year: 1998-1999
• Appeal Filed On: 04-02-2003
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: GOVIND SINGHAL
• Assessee Lawyers: P M MEHTA; V R CHOKSHI
• Keywords: Business income; Speculation loss
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AT AHMEDABAD AHMEDABAD A BENCH (BEFORE S/SHRI R.V.EASWAR, VICE-PRESIDENT AND N.S. SAINI, ACCOUNTANT MEMBER) ITA.NO.462/AHD/2003 [ASSTT.YEAR : 1998-1999] ITO, WARD-1(4) AHMEDABAD. VS. DEEP CAPITAL SERVICES LTD. 8-E, SURYARATH PANCHAVATI ELLISBRIDGE, AHMEDABAD. REVENUE BY : SHRI GOVIND SINGHAL ASSESSEE BY : SHRI V.R.CHOKSHI, AND SHRI P.M.MEHTA O R D E R PER R.V.EASWAR, VICE-PRESIDENT : THIS IS AN APPEAL BY THE REVENUE AND IT RELATES TO THE AY 1998-99. THE RESPO NDENT-ASSESSEE IS A COMPANY. THE APPEAL ARISES OUT OF THE ASSESSMENT MA DE ON IT ON 25-1-2001 U/S 143(3) OF THE IT ACT. 2. THE FIRST GROUND IS THAT THE CIT(A) ERRED IN LAW IN DELETING THE DISALLOWANCE OF THE LOSS OF RS.473,581. IT IS STATE D IN THE GROUND THAT THE DISALLOWANCE IS SUPPORTED BY THE EXPLANATION TO SEC .73 AND BY THE SUBMISSION OF THE ASSESSEE THAT GRANTING OF LOANS AND ADVANCES IS NOT ITS MAIN BUSINESS. 3. THE BRIEF FACTS IN CONNECTION WITH THE FIRST GRO UND ARE THESE. IN THE RETURN OF INCOME, THE ASSESSEE DECLARED INCOME FROM BOTH S HARE TRADING AND LEASING ACTIVITIES. IN THE SHARE TRADING ACTIVITY THERE WAS ACTUALLY A LOSS OF RS.4,73,581 AND IN THE LEASING ACTIVITY THERE WAS A PROFIT OF R S.11,51,477. THE ASSESSING OFFICER TOOK THE VIEW THAT THE LOSS IN THE SHARE TR ADING ACTIVITY MUST BE DEEMED TO BE A SPECULATION LOSS BY VIRTUE OF THE EXPLANATI ON TO SECTION 73 AND THEREFORE IT CANNOT BE ADJUSTED AGAINST THE PROFIT FROM THE L EASING ACTIVITY. IT WOULD APPEAR THAT THE ASSESSEES CONTENTION BEFORE THE AS SESSING OFFICER WAS THAT IT FELL WITHIN THE EXEMPTED CATEGORY MENTIONED IN THE SAID EXPLANATION AS A PAGE - 2 ITA.NO.462/AHD/2003 -2- COMPANY WHOSE PRINCIPAL BUSINESS WAS THE GRANTING O F LOANS AND ADVANCES, ON THE FOOTING THAT THE LEASING ACTIVITY WAS IN SUBSTA NCE AN ACTIVITY OF GRANTING LOANS, BUT THE CLAIM WAS REJECTED BY THE ASSESSING OFFICER BY OBSERVING THAT THE MAIN BUSINESS WAS NOT THAT OF LEASING BUT IT WAS IN SHARE TRADING. IT WAS SUBMITTED BEFORE THE ASSESSING OFFICER THAT THE LEA SING INCOME CONSTITUTED 85% OF THE TOTAL INCOME OF THE ASSESSEE AND WAS THUS TH E PRINCIPAL BUSINESS BUT THIS SUBMISSION WAS ALSO REJECTED BY THE ASSESSING OFFIC ER WHO TOOK THE VIEW THAT THE VALUE OF THE SHARES SOLD BY THE ASSESSEE WAS MO RE THAN THAT OF THE LEASE RENT RECEIVED AND THUS IT CANNOT BE SAID THAT THE LEASIN G ACTIVITY WAS THE PRINCIPAL BUSINESS. IN THIS VIEW, HE HELD THAT THE LOSS OF RS .4,73,581 IN THE SHARE BUSINESS WAS TO BE TREATED AS SPECULATION LOSS NOT AVAILABLE FOR BEING SET OFF AGAINST THE OTHER INCOME. 4. ON APPEAL, THE CIT(A) HELD THAT THE LEASING ACTI VITY WAS BEING CARRIED ON IN A SYSTEMATIC AND REGULAR MANNER SO AS TO AMOUNT TO A BUSINESS THAT WAS BEING CARRIED ON AS A PRINCIPAL BUSINESS AND ACCORDINGLY DIRECTED THE ASSESSING OFFICER TO DELETE THE DISALLOWANCE OF THE LOSS FROM THE SHARE BUSINESS. HE THUS ALLOWED THE GROUND. 5. THE REVENUE IS IN APPEAL AND WE HAVE HEARD THE R IVAL CONTENTIONS. THE LEARNED DR REFERRED TO THE ORDER OF THE SPECIAL BEN CH (AHMEDABAD) OF THE TRIBUNAL REPORTED AS GUJARAT GAS FINANCIAL SERVICES LTD V ACIT (AND VICE- VERSA) (2008) 307 ITR (A.T.) 370 AND SUBMITTED THAT IN THIS ORDER, WHICH AROSE UNDER THE INTEREST TAX ACT, IT HAS BEEN HELD THAT L EASING ACTIVITY CANNOT AMOUNT TO GRANTING OF LOANS AND ADVANCES AND THE INTEREST THEREFROM CANNOT BE ASSESSED TO INTEREST-TAX, AND ACCORDINGLY, APPLYING THE RATI O OF THE ORDER TO THE PRESENT CASE, IT MUST BE HELD THAT THE LEASING ACTIVITY CAN NOT BE CONSIDERED TO AMOUNT TO A BUSINESS OF GRANTING LOANS AND ADVANCES, MUCH LES S TO A PRINCIPAL BUSINESS OF GRANTING LOANS AND ADVANCES. HE ALSO SUBMITTED, REL YING ON THE SAME ORDER, THAT IN ANY CASE THE ACTIVITY OF LEASING SHOULD HAVE BEE N CARRIED ON IN A SYSTEMATIC PAGE - 3 ITA.NO.462/AHD/2003 -3- AND ORGANISED MANNER SO AS TO AMOUNT TO A BUSINESS, A FEATURE WHICH IS ABSENT IN THE PRESENT CASE. HE THEREFORE CONTENDED THAT TH E VIEW TAKEN BY THE ASSESSING OFFICER SHOULD BE RESTORED. 6. THE LEARNED REPRESENTATIVE FOR THE ASSESSEE ON T HE OTHER HAND SUBMITTED THAT THE CONTROVERSY IS NOT WHETHER THE LEASING ACT IVITY AMOUNTED TO A BUSINESS ACTIVITY OR NOT, BUT THE ONLY QUESTION WAS WHETHER IT WAS THE PRINCIPAL BUSINESS OF THE ASSESSEE AND THEREFORE THE ORDER OF THE SPEC IAL BENCH CITED SUPRA WAS NOT RELEVANT FOR DECIDING THE PRESENT CASE. HE DREW OUR ATTENTION TO THE ASSESSMENT ORDER TO DEMONSTRATE THAT THE ONLY OBJECTION OF THE ASSESSING OFFICER WAS THAT THE VALUE OF THE SHARES SOLD BY THE ASSESSEE IS MO RE THAN THAT OF THE LEASE RENT RECEIVED BY THE ASSESSEE AND THEREFORE THE LEASING ACTIVITY WAS NOT THE PRINCIPAL BUSINESS AND THAT IT WAS NOT THE CASE OF THE ASSESSING OFFICER THAT THE LEASING ACTIVITY CANNOT AMOUNT TO THE BUSINESS OF G RANTING OF LOANS AND ADVANCES. HE SUBMITTED THAT THE ASSESSEE WAS REGIST ERED WITH THE RESERVE BANK OF INDIA AS A NON-BANKING FINANCE COMPANY AND THA T THE LEASE RENTALS AND HIRE- PURCHASE CHARGES FOR THE YEAR CAME TO RS.11,51,477 AS AGAINST THE LOSS OF RS.4,73,581 SUFFERED IN THE SHARE BUSINESS, THAT EV EN GOING BY THE VOLUME OF THE TRANSACTIONS THE SHARES HELD AS STOCK IN TRADE AS ON 31-3-1998 WERE RS.22,32,350 AS AGAINST THE SHARES OF RS.46,00,000 HELD AS INVESTMENTS, THAT THE COST OF LEASED ASSETS AS PER SCHEDULE 5 TO THE ANNU AL ACCOUNTS (PAGE 25 OF THE COMPILATION) AMOUNTED TO RS.30,35,852 WHICH WAS MUC H MORE THAN THE SHARES HELD AS STOCK IN TRADE AND THAT GOING BY ANY YARDST ICK IT WOULD BE CLEAR THAT THE LEASING ACTIVITY, WHICH AMOUNTED TO GRANTING OF LOA NS AND ADVANCES, WAS THE PRINCIPAL BUSINESS AND THEREFORE THE ASSESSING OFFI CER WAS WRONG IN NOT ALLOWING THE LOSS OF RS.4,73,581 SUFFERED IN THE SH ARE BUSINESS. HE POINTED OUT THAT THE ASSESSING OFFICER WAS INCONSISTENT WHEN HE COMPARED THE VALUE OF THE SHARES SOLD BY THE ASSESSEE WITH THE LEASE RENT REC EIVED AND CONTENDED THAT IF THE CAPITAL IS THE YARDSTICK, THEN THE VALUE OF THE SHARES SOLD SHOULD HAVE BEEN COMPARED WITH THE VALUE OF THE LEASED ASSETS AND NO T WITH THE LEASE RENT. HE PAGE - 4 ITA.NO.462/AHD/2003 -4- SUBMITTED THAT THE VALUE OF THE LEASED ASSETS WAS M ORE THAN THE VALUE OF THE SHARES SOLD AND EVEN IF INCOME IS THE CRITERION, TH E LEASING INCOME WAS MORE THAN THE LOSS SHOWN IN THE SHARE BUSINESS. IN SUPPO RT OF HIS CONTENTIONS, THE LEARNED REPRESENTATIVE FOR THE ASSESSEE RELIED ON T HE JUDGMENT OF THE HONBLE GUJARAT HIGH COURT IN BARKHA INVESTMENT & TRADING C O. VS. CIT, 281 ITR 316) AND THE ORDER OF THE CALCUTTA BENCH OF THE TRI BUNAL IN DCITV VENKATESWARA INVESTMENT AND FINANCE PVT LTD (93 ITD 177). 7. ON A CAREFUL CONSIDERATION OF THE FACTS AND THE RIVAL SUBMISSIONS, WE ARE INCLINED TO AGREE WITH THE DECISION OF THE CIT(A). AS RIGHTLY POINTED OUT ON BEHALF OF THE ASSESSEE, THE ASSESSING OFFICER HAS N O CASE THAT THE LEASING ACTIVITY IS NOT A BUSINESS ACTIVITY. WHAT HE HAS ST ATED IS THAT THE INCOME FROM THE LEASING ACTIVITY BY WAY OF RENT IS LESS THAN TH E VALUE OF THE SHARES SOLD AND THEREFORE IT CANNOT BE SAID THAT THE LEASING ACTIVI TY IS THE PRINCIPAL BUSINESS OF THE ASSESSEE. THEREFORE, WE CONSIDER THAT THE ORDER OF THE SPECIAL BENCH (SUPRA) OF THE TRIBUNAL IS NOT RELEVANT TO THE PRESENT CASE . THERE THE QUESTION CONSIDERED UNDER THE INTEREST TAX ACT WAS WHETHER T HE INCOME ARISING FROM THE LEASING ACTIVITY CAN BE CONSIDERED TO BE INTEREST O N LOANS AND ADVANCES AND CHARGED TO INTEREST TAX. WHILE DECIDING THE QUESTIO N IT WAS NECESSARY TO CONSIDER THE QUESTION WHETHER LEASING AMOUNTS TO GI VING OF LOANS AND ADVANCES. ON THIS ASPECT, THE SPECIAL BENCH CONCLUDED AS FOLL OWS (AT PAGE 402 OF THE REPORT, PARA.48): THE DEFINITION OF INTEREST AS IS EVIDENT FROM THE ABOVE SECTION 2(7) OF THE INTEREST-TAX ACT, 1974, IS AN EXHAUSTIVE DEFINI TION AS IT IS DEFINED BY USING THE WORD MEANS. THEREFORE EVEN THOUGH INTE REST IS THE TAXABLE EVENT AND BASIS FOR LEVY OF INTEREST-TAX, IT CAN BE ASSESSED ONLY IF IT WERE AN INTEREST ON LOANS AND ADVANCES AS STATED IN TH E DEFINITION AND NOT OTHERWISE. WHETHER A RECEIPT IS INTEREST OR NOT HA S TO BE JUDGED ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IF IN SUBST ANCE THE RECEIPT IS INTEREST ON LOAN OR ADVANCE, IT HAS TO HAVE THAT CH ARACTER IRRESPECTIVE OF THE NAME OR A FORM GIVEN TO IT OTHERWISE IN THE DOC UMENTS EVIDENCING THE TRANSACTION. WE HAVE ALREADY TAKEN NOTE OF THE FAC T WHILE DISCUSSING THE CHARGEABILITY OF THE ASSESSEE TO TAX THAT, IT BEING A FINANCIAL COMPANY PAGE - 5 ITA.NO.462/AHD/2003 -5- UNDER SECTION 2(5B), THE LEASE GRANTED BY THE ASSES SEE IS A FINANCIAL LEASE IN CONTRADICTION TO AN OPERATION LEASE. A FI NANCIAL LEASE IS A TRANSACTION OF PROVIDING FINANCE WHERE LEASE RENT I NCLUDES A RECOUPMENT OF CAPITAL/FINANCE PROVIDED BY THE ASSESSEE AS WELL AS INTEREST/FINANCE CHARGES FOR PROVIDING THE FINANCES. THE RECOVERY O F FINANCE CHARGES WOULD BE INTEREST ON LOANS AND ADVANCES WITHIN THE MEANING OF SECTION 2(7) OF THE ACT IN SUBSTANCE OF THE MATTER THOUGH G IVEN A NAME OF LEASE RENT. WE THEREFORE VACATE THE ORDER OF THE CIT(A ) IN HOLDING THAT LEASING IS OUTSIDE THE PURVIEW OF CHARGEABILTY OF I NTEREST-TAX AS THE DEFINITION OF INTEREST BEING NOT INCLUSIVE BUT REST RICTIVE IN SECTION 2 OF THE INTEREST-TAX ACT AND IN DIRECTING THE AO TO EXCLUDE FROM THE TOTAL AMOUNT OF CHARGEABLE INTEREST. THUS, EVEN ACCORDING TO THE SPECIAL BENCH, IT IS TH E SUBSTANCE OF THE MATTER THAT HAS TO BE LOOKED INTO AND NOT THE NAME GIVEN TO THE TRANSACTION BY THE PARTIES. IF IT IS FINANCIAL LEASE, A PART OF THE RENTAL CONSIST S OF INTEREST OR FINANCE CHARGES FOR PROVIDING THE FINANCE AND THE SAME WOULD REPRES ENT INTEREST ON LOANS AND ADVANCES CHARGEABLE TO INTEREST-TAX. THAT WOULD SET TLE THE POSITION SO FAR AS THE INTEREST TAX ACT IS CONCERNED. BUT UNDER SECTION 73 OF THE INCOME TAX ACT AND THE EXPLANATION THERETO, THE FURTHER QUESTION WOULD ARISE WHETHER THE FINANCIAL LEASE IS CARRIED OUT IN A MANNER THAT IT AMOUNTS TO A BUSINESS WITH THE SYSTEMATIC, REGULAR AND ORGANISED COURSE OF ACTIVIT Y SO THAT IT CAN BE CALLED THE BUSINESS OF THE ASSESSEE AND FURTHER WHETHER, IN CO MPARISON WITH THE OTHER ACTIVITIES OF THE ASSESSEE, IT COULD BE SAID TO BE THE PRINCIPAL BUSINESS ACTIVITY. THE ASSESSING OFFICER, AS POINTED OUT BY THE ASSESS EE, HAS NOT DISPUTED THE FACT THAT THE LEASING ACTIVITY IS A BUSINESS ACTIVITY OF THE ASSESSEE. ALL HE HAS POINTED OUT IS THAT IT IS NOT THE PRINCIPAL BUSINESS OF THE ASSESSEE. THESE QUESTIONS WHETHER THE LEASING ACTIVITY AMOUNTS TO A BUSINESS OR THE PRINCIPAL BUSINESS IN THE VERY NATURE OF THINGS CANNOT ARISE UNDER THE PR OVISIONS OF THE INTEREST TAX ACT AND THEREFORE THE DECISION OF THE SPECIAL BENCH (SUPRA), CITED BY THE REVENUE, IS NOT AN IMPEDIMENT FOR CONSIDERING THE Q UESTION WHETHER THE LEASING ACTIVITY IS THE PRINCIPAL BUSINESS OF THE ASSESSEE IN THE PRESENT CASE. PAGE - 6 ITA.NO.462/AHD/2003 -6- 8. ON THAT QUESTION, THE FACTS SUPPORT THE CLAIM OF THE ASSESSEE. THE DETAILS GIVEN IN PAGE 5 OF THE SYNOPSIS FILED BY THE ASSESS EE BEFORE US SHOW THAT THE PERCENTAGE OF THE INCOME FROM THE LEASING BUSINESS TO THE TOTAL BUSINESS INCOME (INCLUDING THE SHARE BUSINESS) WAS 74.01% FOR THE Y EAR UNDER APPEAL AND 99.4% AND 81.55% FOR THE IMMEDIATELY TWO PRECEDING YEARS. IF THE CAPITAL VALUE IS COMPARED, FOR THE YEAR UNDER APPEAL THE SHARES HELD AS STOCK IN TRADE AS ON 31- 3-98 WERE RS.22,32,350 AS AGAINST THE NET BLOCK OF LEASED ASSETS OF RS.30,35,852 (WITHOUT TAKING INTO ACCOUNT THE DEPRE CIATION). THIS FIGURE IS TAKEN BECAUSE IT REPRESENTS THE INVESTMENT MADE BY THE ASSESSEE. IF THE INCOME FIGURE IS COMPARED, THE INCOME FROM THE LEASING ACT IVITY IS RS.11,51,477 AS PER THE PROFIT AND LOSS ACCOUNT FOR THE YEAR AS AGAINST THE LOSS OF RS.4,73,581 FROM THE SHARE BUSINESS. IN THE EARLIER YEAR, THE CORRES PONDING FIGURES WERE RS.11,36,712 AND RS.18,096 RESPECTIVELY. THESE FACT S GO TO SHOW THAT THE LEASING BUSINESS, WHICH IN SUBSTANCE INVOLVES THE G RANTING OF LOANS, IS THE PRINCIPAL BUSINESS OF THE ASSESSEE. IF THAT IS SO, THE ASSESSEE FALLS UNDER THE EXEMPTED CATEGORY OF COMPANIES MENTIONED IN THE EXP LANATION BELOW SEC.73 AND THE LOSS FROM THE SHARE TRADING ACTIVITY CANNOT BE CONSIDERED TO BE A SPECULATION LOSS. IT HAS TO BE CONSIDERED AS NORMAL BUSINESS LOSS AND DEDUCTED IN THE COMPUTATION OF THE PROFITS AND GAINS OF BUS INESS. IN OTHER WORDS, IN THE PRESENT CASE THE DISALLOWANCE OF THE LOSS OF RS.4,7 3,581 WAS RIGHTLY DELETED BY THE CIT(A). HIS ORDER ON THIS POINT IS CONFIRMED AN D THE FIRST GROUND IS DISMISSED. 9. THE SECOND GROUND RELATES TO THE FOREIGN TRAVEL EXPENSES OF RS.93,917. WE HAVE CONSIDERED THE MATTER AND GONE THROUGH PAGE S 40-42 OF THE PAPER BOOK. THE REPORT OF THE MANAGING DIRECTOR SETTING O UT THE PURPOSE OF THE FOREIGN VISITS APPEARS TO US TO BE VAGUE. THE NEXUS BETWEEN THE EXPENSES AND THE BUSINESS THAT IS BEING CARRIED ON BY THE ASSESSEE, VIZ., THE SHARE TRADING AND LEASING, DOES NOT EMERGE FROM THE REPORT. WE THEREF ORE HOLD THAT THE CIT(A) PAGE - 7 ITA.NO.462/AHD/2003 -7- WAS NOT JUSTIFIED IN DELETING THE DISALLOWANCE. WE RESTORE THE DISALLOWANCE AND ALLOW THE GROUND TAKEN BY THE REVENUE. 10. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT THIS 31 ST OF JULY, 2009. SD/- SD/- (N.S. SAINI) ACCOUNTANT MEMBER (R.V.EASWAR) VICE-PRESIDENT PLACE : AHMEDABAD DATE : 31-07-2009 COPY OF THE ORDER FORWARDED TO: 1) : ASSESSEE 2) : RESPONDENT 3) : CIT(A) 4) : CIT CONCERNED 5) : DR, ITAT. BY ORDER DR, ITAT, AHMEDABAD