ITO, New Delhi V. M/s Bijay Paper Traders & Invt. Ltd, New Delhi

ITA 538/DEL/2009

• Counselvise Citation: [2009] 115 COUNSELVISE.COM (IT) 1309 (ITAT-DELHI)
• Duration Of Justice: 9 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-11-2009
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 23-09-2009
• Assessment Year: 2005-2006
• Appeal Filed On: 12-02-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: BK GUPTA
• Assessee Lawyers: T R TALWAR
• Keywords: Business income; Depreciation; Speculation loss; Capital Gains
• Section: 208

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH A : NEW DELHI BEFORE SHRI I.P.BANSAL, JM AND SHRI R.C.SHARMA, AM ITA NO.538/DEL/2009 ASSESSMENT YEAR : 2005-06 INCOME TAX OFFICER, WARD-3(1), NEW DELHI. VS. M/S BIJAY PAPER TRADERS & INVESTMENTS LIMITED, 4596/7, MAHABIR NIWAS, 2 ND FLOOR, 11, DARYA GANJ, NEW DELHI 110 002. PAN NO.AAACB0100F. (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI B.K.GUPTA, SR.DR. RESPONDENT BY : SHRI T.R.TALWAR, ADVOCATE. ORDER PER R.C.SHARMA, AM : THIS IS AN APPEAL FILED BY THE REVENUE AGAINST THE ORDER OF CIT(A) DATED 14.11.2008 FOR THE AY 2005-06, WHEREIN ACTION OF CI T(A) FOR TREATING THE LOSS ARISING OUT OF THE SHARE TRANSACTION AS NOT COVERED BY THE EXPLANATION TO SECTION 73 OF THE IT ACT, WAS ALLEGED. 2. RIVAL CONTENTIONS HAVE BEEN HEARD AND RECORD PER USED. DURING THE COURSE OF ASSESSMENT, THE AO FOUND THAT ASSESSEE COMPANY WAS ENGAGED IN THE BUSINESS OF TRADING IN PAPER, SHARES, FINANCING AND REAL ESTATE . SINCE THE ASSESSEE WAS DEALING IN MORE THAN ONE ITEM, IT WAS ASKED TO FILE SEPARAT E TRADING ACCOUNT OF ALL THE ITEMS TRADED. THE AO OBSERVED THAT ASSESSEE HAD PURCHASE D SHARES OF RS.1.60 CRORES AND SOLD SHARES WHICH RESULTED INTO LOSS AND THIS LOSS WAS MORE THAN INCOME FROM OTHER SOURCES, THEREFORE EXPLANATION TO SECTION 73 WAS MA DE APPLICABLE IN THE CASE OF THE ASSESSEE AND THE CASE WAS HELD TO BE NOT COVERE D BY THE EXCEPTIONS PROVIDED THEREIN. HE THEREFORE HELD THAT ASSESSEE IS DEEMED TO BE CARRYING ON SPECULATION BUSINESS TO THE EXTENT TO WHICH THE BUSINESS CONSIS TS OF SALE AND PURCHASE OF ITA-538/DEL/2009 2 SHARES. ACCORDINGLY, LOSS OF RS.94.21 LAKHS WAS HE LD TO BE LOSS IN SPECULATION BUSINESS AND WAS NOT ALLOWED TO BE SET OFF AGAINST ANY OTHER HEAD OF INCOME. HOWEVER, CARRY FORWARD OF SAME WAS ALLOWED FOR SETT ING OFF IN ACCORDANCE WITH THE PROVISIONS OF SECTION 73 OF THE ACT. BY THE IM PUGNED ORDER, THE CIT(A) ALLOWED THE ASSESSEES CLAIM BY HOLDING THAT ASSESS EES CASE DOES NOT FALL WITHIN THE AMBIT OF EXPLANATION TO SECTION 73. THE CIT(A) RELIED ON THE ORDER DATED 24.10.2008 OF ITAT DELHI BENCH IN ASSESSEES OWN CA SE FOR THE IMMEDIATELY PRECEDING ASSESSMENT YEAR 2004-05. AGGRIEVED BY TH E SAME, THE REVENUE IS IN APPEAL BEFORE US. 3. WE HAVE CONSIDERED THE RIVAL CONTENTIONS, CAREFU LLY GONE THROUGH THE ORDERS OF THE LOWER AUTHORITIES, RELEVANT PROVISIONS OF TH E LAW VIS--VIS ORDER OF ITAT IN ASSESSEES OWN CASE FOR THE IMMEDIATELY PRECEDING A Y. IN THE IMMEDIATELY PRECEDING YEAR ON THE GROUND OF EXPLANATION TO SECT ION 73, THE APPEAL OF THE REVENUE WAS DISMISSED BY THE TRIBUNAL VIDE ITS ORDE R DATED 24.10.2008. IN THIS ORDER, THE TRIBUNAL HAS OBSERVED THAT NOT ONLY IN T HE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER CONSIDERATION, BUT ALSO IN TH E ASSESSMENT YEARS 2001-02 TO 2003-04, THE ASSESSEE WAS MAINLY ENGAGED IN THE BUS INESS OF ADVANCING LOANS AND ADVANCES AND THE MAIN ACTIVITY OF THE ASSESSEE WAS EARNING INTEREST INCOME FROM THE LOANS AND ADVANCES. AFTER RELYING ON THE DECIS ION OF ITAT SPECIAL BENCH IN THE CASE OF DCIT VS. VENKATESHWAR INVESTMENT AND FI NANCE 93 ITD 177 AND ALSO DECISION OF HON'BLE CALCUTTA HIGH COURT IN THE CASE OF EASTERN AVIATION INDUSTRIES 208 ITR 1023 DISMISSED THE APPEAL OF T HE REVENUE FOR INVOKING EXPLANATION TO SECTION 73. DURING THE YEAR UNDER C ONSIDERATION, THE ASSESSEE COMPANY FALLS IN THE SECOND EXEMPTED CATEGORY OF TH E COMPANIES WHICH ARE NOT HIT BY PROVISIONS OF EXPLANATION TO SECTION 73 I.E. THE COMPANIES MAIN ACTIVITY WHICH IS GRANTING OF LOANS AND ADVANCES. WE OBSERVE ON A N ANALYSIS OF THE PAST HISTORY OF THE CASE THAT THE ASSESSEE WAS IN THE BUSINESS O F GIVING LOANS AND ADVANCES, THEREFORE EXPLANATION TO SECTION 73 WAS NOT APPLICA BLE. ITA-538/DEL/2009 3 4. FROM THE RECORD, WE FOUND THAT DURING THE RELEVA NT YEAR UNDER CONSIDERATION, THE ASSESSEE WAS CONTINUOUSLY ENGAGE D IN THE ACTIVITY OF FINANCING, TRADING AND REAL ESTATE AND HAD ALSO UNDERTAKEN TRA NSACTION OF PURCHASE AND SALE OF SHARES. IT HAD EARNED INCOME FROM PAPER TRADING IN CLUDING COMMISSION AND SERVICE CHARGES AMOUNTING TO RS.4.78 LAKHS, INTERES T INCOME OF RS.42.56 LAKHS, DIVIDEND INCOME OF RS.0.26 LAKHS, PROFIT ON SALE OF MUTUAL FUNDS RS.44.90 LAKHS AND SUFFERED LOSS IN PURCHASE AND SALE OF SHARES, D ELIVERY WHEREOF WERE TAKEN AMOUNTING TO RS.94.21 LAKHS. THE AO PROCEEDED TO A PPLY EXPLANATION TO SECTION 73 BY OBSERVING THAT NET RESULT OF THE ASSESSEE COM PANY WAS LOSS OF RS.2.61 LAKHS. AS PER AO, LOSS ON ACCOUNT OF SHARE TRANSACTION WAS MORE THAN ITS INCOME FROM OTHER SOURCES, THEREFORE EXCEPTION APPLICABLE FOR T AKING OUT ASSESSEES CASE FROM THE CLUTCHES OF EXPLANATION TO SECTION 73 IS NOT AP PLICABLE. WITH REGARD TO ASSESSEES PLEA THAT IT WAS MAINLY ENGAGED IN THE B USINESS OF GRANTING OF LOANS AND ADVANCES, THE AO OBSERVED THAT MAJOR PART OF THE AS SESSEES TURNOVER WAS FROM SALE OF PAPER. IN RESPECT OF ASSESSEES CONTENTION REGARDING AMOUNT OF LOAN OF RS.3.76 CRORES ADVANCED BY THE ASSESSEE, THE AO OBS ERVED THAT ASSESSEE HAS TAKEN A WHOPPING SUM OF RS.12.74 CRORES AS A LOAN. ACCOR DINGLY, HE HELD THAT ASSESSEE CANNOT BE SAID TO BE A COMPANY, THE PRINCIPAL BUSIN ESS OF WHICH IS BANKING AND GRANTING OF LOANS AND ADVANCES. THUS, THE ASSESSEE S CASE WAS HELD TO BE NOT COVERED BY ANY OF THE EXCEPTIONS TO EXPLANATION TO SECTION 73 OF THE ACT. 5. PROVISIONS OF SECTION 73 OF THE ACT DEAL WITH CA RRY FORWARD AND SET OFF OF LOSS FROM THE BUSINESS OF SPECULATION. EXPLANATION TO SECTION 73 IS A DEEMING PROVISION WHEREIN ON FULFILLMENT OF SPECIFIED CONDI TIONS, PURCHASE AND SALE OF SHARES ARE DEEMED TO BE SPECULATIVE ACTIVITIES. AS PER EXPLANATION TO SECTION 73 WHERE ANY PART OF A BUSINESS OF A COMPANY (OTHER TH AN COMPANY WHOSE GROSS TOTAL INCOME CONSISTS MAINLY OF INCOME WHICH IS CHARGEABL E UNDER THE HEAD INTEREST ON SECURITIES, INCOME FROM HOUSE PROPERTY, CAPITAL GAI NS AND INCOME FROM OTHER SOURCES), OR A COMPANY THE PRINCIPAL BUSINESS OF WH ICH IS THE BUSINESS OF BANKING OR THE GRANTING OF LOANS AND ADVANCES CONSISTS IN T HE PURCHASE AND SALE OF SHARES OF ITA-538/DEL/2009 4 OTHER COMPANIES, SUCH COMPANY SHALL, FOR THE PURPOS E OF THIS SECTION, DEEMED TO BE CARRYING ON A SPECULATION BUSINESS TO THE EXTENT TO WHICH THE BUSINESS CONSISTS OF THE PURCHASE AND SALE OF SUCH SHARES. 6. IT IS CRYSTAL CLEAR FROM THE PLAIN READING OF EX PLANATION TO SECTION 73 THAT IF ANY OF THE FOLLOWING CONDITIONS ARE SATISFIED THE P ROVISIONS OF EXPLANATION TO SECTION 73 WILL NOT BE ATTRACTED:- (I) IF THE GROSS TOTAL INCOME OF THE COMPANY INCLUD ES INCOME MAINLY FROM THE HEADS I.E. INTEREST ON SECURITIES, INCOME FROM HOUS E PROPERTY, CAPITAL GAINS AND INCOME FROM OTHER SOURCES. OR (II) THE PRINCIPAL BUSINESS OF THE COMPANY IS THE B USINESS OF BANKING OR THE GRANTING OF LOANS AND ADVANCES. 7. IF ANY ONE OF THE AFORESAID TWO CONDITIONS IS SA TISFIED, THE COMPANY WILL BE EXEMPTED FROM THE CLUTCHES OF THE PROVISIONS OF EXP LANATION TO SECTION 73. THE WORD OR WRITTEN IN BETWEEN THE TWO CONDITIONS SUG GESTS THAT EITHER FIRST OR SECOND CONDITION NEEDS TO BE SATISFIED FOR EXCLUDIN G A COMPANY FROM THE PURVIEW OF EXPLANATION TO SECTION 73. IN THE CASE OF FIRST CONDITION, THE HEAD OF INCOME IS TO BE VERIFIED AND IF IT IS FOUND THAT LOSS FROM TR ANSACTION OF PURCHASE AND SALE OF SHARE IS MORE THAN THE OTHER INCOME SPECIFIED THERE IN, THE ASSESSEE WILL BE DEEMED TO BE COVERED BY THE EXPLANATION TO SECTION 73. 8. THE SECOND CONDITION USED THE WORD PRINCIPAL R ELEVANT TO THE BUSINESS OF THE COMPANY. THIS CONDITION SPECIFIES THAT THE PRI NCIPAL BUSINESS OF THE COMPANY SHOULD BE BANKING OR GRANTING OF LOANS AND ADVANCES . IT MEANS THAT ANY COMPANY WHOSE PRINCIPAL BUSINESS IS BANKING OR GRANTING OF LOANS AND ADVANCES WILL NOT BE ATTRACTED BY THE EXPLANATION TO SECTION 73. ITA-538/DEL/2009 5 9. IF ANY ONE OF THE ABOVE TWO CONDITIONS ARE BEING SATISFIED, THE ASSESSEE COMPANY WILL NOT BE HIT BY THE DEEMING PROVISIONS O F SECTION 73. 10. IN THE INSTANT CASE BEFORE US, UNDISPUTEDLY THE LOSS ARISING OUT OF THE TRANSACTION OF PURCHASE AND SALE OF SHARES IS MORE THAN INCOME FROM OTHER SOURCES, THEREFORE ON THE PLEA OF QUANTUM OF INCOME THE ASSE SSEE IS NOT BEING TAKEN OUT OF THE AMBIT OF EXPLANATION TO SECTION 73. WITH REGAR D TO ITS PRINCIPAL BUSINESS WHICH IS GRANTING OF LOANS AND ADVANCES, THE ASSESS EE COMPANY CLEARLY FALLS OUTSIDE THE AMBIT OF EXPLANATION TO SECTION 73. FO R DETERMINING THE PRINCIPAL BUSINESS OF THE ASSESSEE COMPANY, ONE HAS TO FIND O UT THE MONEY INVESTED IN GRANTING OF LOANS AND ADVANCES VIS--VIS MONEY INVE STED IN BUSINESS OF SHARE TRANSACTION. FOR DETERMINING THE PRINCIPAL BUSINESS OF THE ASSESSEE, THE MEMORANDUM OF ASSOCIATION OF THE COMPANY, ITS PAST HISTORY, CURRENT DEPLOYMENT OF ITS CAPITAL, BREAK UP OF INCOME EARNED DURING TH E YEAR WOULD ALL HELP IN DETERMINING THE PRINCIPAL BUSINESS OF THE COMPANY. MERELY BECAUSE INCOME/LOSS IN DEALING IN SHARES IN ONE PARTICULAR YEAR IS MORE THAN INCOME/LOSS FROM PRINCIPAL BUSINESS OF THE ASSESSEE OF GRANTING LOANS AND ADVA NCES, IT CANNOT BE SAID THAT PRINCIPAL BUSINESS OF ASSESSEE IS NOT THAT OF GRANT ING LOANS AND ADVANCES. THIS ISSUE HAS BEEN CONSIDERED IN GREAT DETAIL BY THE IT AT SPECIAL BENCH IN THE CASE OF VENKATESHWAR INVESTMENT AND FINANCE (SUPRA) WHEREIN IT WAS HELD THAT IN VIEW OF THE PROVISIONS OF EXPLANATION TO SECTION 73, LOSS I N PURCHASE AND SALE OF SHARES SHALL NOT BE TREATED AS SPECULATION LOSS IN CASE OF A COMPANY PRINCIPAL BUSINESS OF WHICH IS GRANTING OF LOANS AND ADVANCES. FOLLOWING WAS THE OBSERVATION OF THE SPECIAL BENCH :- THUS, TO ARRIVE AT THE CONCLUSION WHETHER A COMPAN Y IS AN INVESTMENT COMPANY OR NOT, THE DECISIVE FACTOR IS T HE NATURE OF THE ACTIVITIES OF THE COMPANY WHICH GIVES RISE TO THE I NCOME AND NOT THE ACTUAL INCOME FROM SUCH ACTIVITIES DURING A PARTICU LAR YEAR. THE ABOVE TEST WOULD BE EQUALLY APPLICABLE WHILE DETERM INING WHETHER A COMPANY IS COVERED WITHIN THE EXPLANATION TO SECTION 73 OR IS A COMPANY WHICH IS OUTSIDE SUCH EXPLANATION BECAUSE OF THE ITA-538/DEL/2009 6 EXCEPTION PROVIDED TO CERTAIN TYPES OF COMPANIES UN DER THE EXPLANATION BECAUSE THE DEFINITION OF INVESTMENT COMPANY AND COMPANIES WHICH ARE TO BE EXCLUDED FROM THE APPLICA BILITY OF EXPLANATION TO SECTION 73 ARE IDENTICAL. THIS DECISION OF THE HONBLE HIGH COURT ALTHOUGH RELATES TO THE PROVISION OF SEC TION 104 READ WITH SECTION 109 OF THE INCOME-TAX ACT, BUT BEING IN PARI MATERIA WITH THE ISSUE BEFORE US, IS APPLICABLE AND OVERALL VIEW OF THE FUNCTION OF THE ASSESSEE-COMPANY OF THE RELEVANT PERIOD AS WELL AS OF THE PAST YEARS HAS TO BE TAKEN INTO ACCOUNT IN ORDER TO FIND OUT T HE PRINCIPAL BUSINESS OF THE ASSESSEE. MERELY BECAUSE THE LOSS I N SHARE DEALINGS IS MORE THAN THE PROFIT EARNED IN THE CORE BUSINESS OF THE ASSESSEE OF ADVANCEMENT OF LOANS AND ADVANCES, DOES NOT MEAN TH AT THE BUSINESS OF ADVANCEMENT OF LOANS AND ADVANCES IS NOT THE PRI NCIPAL BUSINESS OF THE ASSESSEE. IN THE PAST YEARS THE ASSESSEE HAS NO SHARE DEALINGS WHATSOEVER AND CLEARLY THE PRINCIPAL BUSINESS OF TH E ASSESSEE IN THE PRECEDING YEARS WAS THAT OF ADVANCEMENT OF LOANS AN D ADVANCES. 10. WE HOLD THAT TO DECIDE WHETHER THE CASE OF AN ASSE SSEE FALLS IN EXCEPTIONS PROVIDED IN EXPLANATION TO SECTION 73 OF THE ACT OR NOT AND TO DECIDE WHETHER THE PRINCIPAL BUSINESS OF THE ASSESSEE IS THAT OF GRANTING OF LOANS AND ADVANCES, THE DECISIVE FACTOR IS THE NATURE OF THE ACTIVITIES OF THE ASSESSEE AND NOT THE ACTUAL I NCOME FROM SUCH ACTIVITIES DURING A PARTICULAR YEAR. MERELY BECAUSE THE NUMERICAL VALUE OF THE PROFIT/LOSS IN PURCHASE AND SALE OF SH ARES IS MORE THAN THE INTEREST INCOME DURING THE RELEVANT PERIOD, DOE S NOT MEAN THAT THE PRINCIPAL BUSINESS OF THE ASSESSEE CEASES TO BE THAT OF GRANTING OF LOANS AND ADVANCES. WHAT CONSTITUTES THE PRINCIPAL BUSINESS HAS NOT BEEN DEFINED ANYWHERE IN THE ACT. WHAT CONSTITU TES THE PRINCIPAL BUSINESS WILL DEPEND ON THE FACTS AND CIRCUMSTANCES OF EACH CASE. THE MEMORANDUM AND THE ARTICLES OF ASSOCIATION OF T HE COMPANY, PAST HISTORY OF THE ASSESSEE, CURRENT AND PAST YEAR S DEPLOYMENT OF THE CAPITAL OF THE ASSESSEE, BREAK-UP OF THE INCOME EARNED DURING THE RELEVANT AND PAST YEARS AND THE NATURE OF ACTIVITIE S OF THE ASSESSEE WILL ALL HELP IN DETERMINING THE PRINCIPAL BUSINESS OF THE ASSESSEE. IF IN ANY PARTICULAR YEAR, THE ASSESSEE HAS NOMINAL BU SINESS INCOME AND HAS SUBSTANTIAL INTEREST INCOME, IT DOES NOT IMPLY THAT THE ASSESSEES PRINCIPAL BUSINESS IS OF FINANCE OR GRANTING OF LOA NS AND ADVANCES. SIMILARLY THE ASSESSEE, THE PRINCIPAL BUSINESS OF W HICH IS THE GRANTING OF LOANS AND ADVANCES, MAY EARN A COMPARATIVELY HIG H INCOME FROM OTHER ACTIVITIES IN ANY PARTICULAR YEAR AND STILL T HE PRINCIPAL BUSINESS OF THE ASSESSEE MAY REMAIN GRANTING OF LOANS AND AD VANCES. THE EXPLANATION TO SECTION 73 IS IN THE NATURE OF A DEEMING PROVIS ION AND AS SUCH HAS TO BE STRICTLY CONSTRUED. THE DECISIVE FACTOR IS THE TRUE NATURE OF ACTIVITIES OF THE COMPANY DURING THE RELE VANT PERIOD AS WELL ITA-538/DEL/2009 7 AS IN THE PAST OR SUCCEEDING PERIODS. CONSIDERING T HE OBJECTS OF THE ASSESSEE-COMPANY AS STATED IN THE MEMORANDUM OF ASS OCIATION AND THE FACT THAT THE INCOME FROM INTEREST AND LEASE RE NTALS WERE THE ONLY INCOME IN THE PAST YEARS AND THE LOSS FROM SHARE DE ALINGS WAS INCURRED ONLY DURING THE YEAR UNDER CONSIDERATION A ND CONSIDERING THE POSITION OF DEPLOYMENT OF FUNDS IN LOANS AND AD VANCES AND LEASING BUSINESS WHICH IS MORE THAN 3 TIMES OF THE FUND DEPLOYED IN SHARE BUSINESS AS ON 31-3-1997 AND TAKING INTO CONS IDERATION THE VARIOUS DECISIONS OF THE HONBLE COURTS ( SUPRA ) AND THE TOTALITY OF THE FACTS AND CIRCUMSTANCES OF THE CASE, WE HOLD TH AT THE PRINCIPAL BUSINESS OF THE ASSESSEE IS THAT OF GRANTING LOANS AND ADVANCES AND AS SUCH THE CASE OF THE ASSESSEE FALLS IN EXCEPTION TO EXPLANATION TO SECTION 73 OF THE ACT AND THE PROVISION OF EXPLANATION TO SECTION 73 ARE NOT APPLICABLE TO THE INSTANT CASE. IN THIS VIE W OF THE MATTER, WE HOLD THAT THERE IS NO MISTAKE IN THE ORDER OF THE C IT (APPEALS) IN HOLDING THAT THE CASE OF THE ASSESSEE-COMPANY IS NO T HIT BY EXPLANATION TO SECTION 73 AND THE LOSS SO SUFFERED SHALL BE TR EATED AS BUSINESS LOSS AND NOT SPECULATION LOSS AND QUESTION REFERRED TO IS ANSWERED IN FAVOUR OF THE ASSESSEE AND THE GROUNDS OF APPEAL OF THE REVENUE ARE DISMISSED. 11. IN THE RESULT, THE APPEAL OF THE REVENUE IS DISMIS SED. 11. IN VIEW OF THE ABOVE DECISION, THE COMPANY WHOS E PRINCIPAL BUSINESS IS THAT OF GRANTING OF LOANS AND ADVANCES, MAY EARN A COMPA RATIVELY HIGH INCOME FROM SOME OTHER ACTIVITY IN A PARTICULAR YEAR, MERELY BE CAUSE THE INCOME/LOSS FROM SHARE TRADING IN THE YEAR UNDER CONSIDERATION IS HIGHER T HAN THE INTEREST INCOME, THAT ITSELF WOULD NOT BE SUFFICIENT TO CONCLUDE THAT THE PRINCIPAL BUSINESS OF THE COMPANY IS NOT THAT OF GRANTING OF LOANS AND ADVANC ES. EVEN THEN, THE PRINCIPAL BUSINESS OF THE COMPANY CAN REMAIN GRANTING OF LOAN S AND ADVANCES. THERE MAY BE A CASE WHERE IN ANY PARTICULAR ASSESSMENT YEAR T HE INCOME FROM INTEREST IS LOWER THAN INCOME/LOSS FROM SHARE TRADING OR THERE MAY BE TEMPORARY LULL OF THE TRADING ACTIVITY OF A COMPANY IN A PARTICULAR YEAR. WHILE APPLYING THIS PROPOSITION TO THE FACTS OF INSTANT CASE, WE HAVE VERIFIED THE CHART OF DEPLOYMENT OF FUNDS IN THE ASSESSEES ACTIVITY OF GRANTING LOANS AND ADVAN CES VIS--VIS DEALING IN SHARES AND FOUND THAT NET WORKING CAPITAL EMPLOYED BY THE ASSESSEE IN THE BUSINESS OF ITA-538/DEL/2009 8 GRANTING LOANS AND ADVANCES WAS RS.6.85 CRORES, AS AGAINST NET WORKING CAPITAL BLOCKED IN BUSINESS OF DEALING IN SHARES WHICH AMOU NTED TO RS.62.38 LAKHS ONLY. THE NET WORKING CAPITAL OF THE ASSESSEE IN ITS ACTI VITY OF PAPER TRADING AND REAL ESTATE WAS RS.6.04 CRORES. EVEN IF WE CLUB THE NET CAPITAL EMPLOYED IN THE BUSINESS OF SHARE, PAPER TRADING AND REAL ESTATE WH ICH WORKS OUT TO BE RS.6.66 CRORES AS AGAINST NET CAPITAL EMPLOYED IN THE ACTIV ITY OF LOANS AND AND ADVANCES WHICH IS RS.6.85 CRORES, WE FOUND THAT HIGHEST DEPL OYMENT OF CAPITAL WAS IN THE ACTIVITY OF LOANS AND ADVANCES. THUS, WE FOUND THAT HIGHEST CAPITAL EMPLOYMENT WAS IN THE BUSINESS OF LOANS AND FINANCING WHICH WA S RS.6.85 CRORES AS COMPARED TO ALL THE OTHER BUSINESS ACTIVITY OF THE ASSESSEE WHICH CLEARLY DEMONSTRATE THAT THE MAIN ACTIVITY OF ASSESSEE WAS GIVING LOANS AND ADVA NCES. AS PER THE AUDITED BALANCE SHEET PLACED ON RECORD, THE ASSESSEE HAD GI VEN LOANS AND ADVANCES OF RS.5.53 CRORES WHEREAS STOCK OF SHARES WAS JUST RS. 62.28 LAKHS. 12. THE AUDITED BALANCE SHEET PLACED ON THE RECORD INDICATES DETAILS OF FUNDS INVESTED IN INVESTMENT ACTIVITY AND OTHER BUSINESS ACTIVITY WHICH SHOWS THAT INVESTMENT OF MORE CAPITAL IS IN THE INVESTMENT ACT IVITY. TOTAL FUNDS AVAILABLE AS ON BALANCE SHEET DATE I.E. 31.3.2005 COMPRISES OF A S UNDER:- SHARE HOLDERS FUND (CAPITAL + RESERVE) 77,97 ,119 LOANS FUNDS 12,74,43,767 13,52,40,886 BREAK UP OF FUNDS APPLIED AS ON BALANCE SHEET DATE I.E. 31.03.2005 PARTICULARS LOAN AND FINANCING DEALING IN SHARES OTHER BUSINESS PAPER & REAL ESTATE TOTAL FIXED ASSETS 16,10,020 14,58,642 30,68,662 INVESTMENTS 45,10,000 45,10,000 STOCK IN TRADE: ITA-538/DEL/2009 9 PAPER 1,70,72,150 1,70,72,150 LAND & BUILDING 94,57,446 94,57,446 SHARES 62,28,642 62,28,642 DEBTORS 4,49,13,642 4,49,13,642 CASH AND BANK 83,33,979 83,33,979 LOANS AND ADVANCES 5,53,09,768 5,53,09,768 6,97,63,767 62,28,642 7,29,01,880 14,88,94,289 LESS : DEFERRED TAX -1,33,543 -1,33,543 CURRENT LIABILITIES -12,08,147 -1,23,11,713 -1,35,19,860 NET WORKING CAPITAL 6,85,55,620 62,38,642 6,04,56,624 13,52,40,886 13. WE HAVE ALSO VERIFIED DIVERSION OF FUNDS FROM O THER BUSINESS ACTIVITY TO THE INVESTMENT ACTIVITY AS COMPARED TO THE FUNDS INVEST ED IN THE IMMEDIATELY PRECEDING YEAR, WHICH IS AS UNDER:- 31.03.2005 31.03.2004 DIVERSION REMARKS RS. RS. SHARE HOLDERS FUND SHARE CAPITAL 4,556,000 4,556,000 RESERVES AND SURPLUS 3,241,119 3,376,136 7,797,119 7,932,136 UNSECURED LOANS 127,443,767 141,541,128 (14,097, 361) REPAYMENT OF LOAN DEFERRED TAX LIABILITY 133,543 133,543 ---------------- ---------------- 135,374,429 149,606,807 ---------------- ---------------- FIXED ASSETS GROSS BLOCK 5,526,947 5,183,437 LESS : DEPRECIATION 2,458,285 2,021,723 NET BLOCK 3,068,662 3,161,714 INVESTMENTS 4,510,000 4,510,000 CURRENT ASSETS LOANS & ITA-538/DEL/2009 10 ADVANCES INVENTORIES 32,758,238 48,613,623 15,855,385 RE DUCTION IN STOCK LEVEL. SUNDRY DEBTORS 44,913,642 83,167,131 38,253,489 REDUCTION IN DEBTORS LEVEL. CASH & BANK BALANCES 8,333,979 5,924,273 LOANS & ADVANCES 55,309,768 34,410,998 (20,898,77 0) MORE FUNDS TO ------------- -------------- INVEST MENT ACTIVITY 141,315,627 172,116,025 LESS : CURRENT LIABILITIES & PROVISIONS NET CURRENT ASSETS 127,795,767 141,935,093 135,374,429 149,606,807 INCOME SALES PAPER 239,769,862 334,443,586 (94,673,724) R EDUCTION IN SALES BY 28.31%. SHARES 3,746,000 19,886,520 (16,140,520) R EDUCTION IN SALES BY 81.16% MUTUAL FUNDS 10,968,041 -- INCREASE IN MUTUAL FUND ACTIVITY OTHER INCOME 6,323,015 8,545,399 (2,222,384 ) REDUCTION IN EARNING 14. THE ABOVE FIGURE SHOWS A CLEAR DIVERSION OF FUN DS FROM OTHER BUSINESS ACTIVITY TO INVESTMENT ACTIVITY. THERE IS ALSO NO DISPUTE TO THE FACTUAL FINDINGS AS RECORDED BY THE AO HIMSELF IN PARA 2 OF HIS ORDER W HICH READS AS UNDER:- THE ASSESSEE COMPANY CONTINUE TO BE ENGAGED IN THE BUSINESS OF TRADING IN PAPER, SHARES, FINANCING AND REAL ESTATE S. 15. FURTHER, AS PER CLAUSE 14 OF ITS MEMORANDUM AND ARTICLES OF ASSOCIATION OF THE COMPANY, WHICH IS TO INVEST, BUY, SELL, TRANSFE R, HYPOTHECATE, DEAL IN AND DISPOSE OF ANY SHARES, STOCKS, DEBENTURE WHETHER PE RPETUAL OR REDEEMABLE DEBENTURES, STOCKS, SECURITIES, PROPERTIES, BONDS, SECURITIES OF ANY GOVT. OR LOCAL AUTHORITY. THUS, IN CASE OF ASSESSEE COMPANY THE O BJECT CLAUSE OF MEMORANDUM OF ASSOCIATION TALKS OF FINANCE BUSINESS. ITA-538/DEL/2009 11 16. THE PAST HISTORY OF THE 4 YEARS SHOWS THAT THE INCOME FROM OTHER SOURCES HAS BEEN MORE THAN THE BUSINESS INCOME. SAME IS AL SO EVIDENT FROM THE ITAT ORDER FOR THE ASSESSMENT YEAR 2004-05, DATED 24.10. 2008. 17. AS REGARDS TO THE CURRENT DEPLOYMENT OF THE CAP ITAL OF THE COMPANY IT IS EVIDENT FROM THE ABOVE THAT HIGHEST FUNDS ARE EMPLO YED IN THE INVESTMENT ACTIVITIES THAN THE OTHER BUSINESS ACTIVITIES. HOW EVER, THE SLIGHT SHORT FALL IN THE INCOME FROM OTHER SOURCES THEN COMPARED TO BUSINESS ACTIVITY DOES NOT DEFLECT THAT THE PRINCIPAL BUSINESS OF THE ASSESSEE COMPANY IS N OT THAT OF GRANTING LOAN AND ADVANCES WHICH HAS RATHER INCREASED FROM RS.3.44 CR ORES TO RS.5.53 CRORES DURING THE YEAR UNDER CONSIDERATION. 18. IN VIEW OF THE ABOVE, THE ASSESSEE COMPANY IS N OT COVERED BY THE DEEMING PROVISIONS OF EXPLANATION TO SECTION 73 ON THE BASI S OF ITS PRINCIPAL BUSINESS OF GRANTING LOANS AND ADVANCES. THE AO WAS THEREFORE NOT JUSTIFIED IN TREATING THE ASSESSEE COMPANY AS HIT BY THE EXPLANATION TO SECTI ON 73 AND THEREBY NOT ALLOWING THE SETTING OFF SUCH LOSS OUT OF OTHER HEAD OF INCO ME. 19. IN THE RESULT, THE APPEAL OF THE REVENUE IS DIS MISSED. DECISION PRONOUNCED IN THE OPEN COURT ON 13 TH NOVEMBER, 2009. SD/- SD/- (I.P.BANSAL) (R.C.SHARMA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 13.11.2009. VK. COPY FORWARDED TO: - 1. APPELLANT 2. RESPONDENT 3. CIT ITA-538/DEL/2009 12 4. CIT(A) 5. DR, ITAT DEPUTY REGISTRAR