[CIT v. Narayan Properties Ltd., 21 Taxman.com 547 (All.)]
The assessee-company was in the business of purchase and sale of shares and was also earning interest income by granting loans and advances. During the previous years relevant to the A.Ys. 1996-97 and 1998-99, the assessee incurred loss in the purchase and sale of shares and earned interest income from loans and advances. It claimed set-off of the above loss against the interest income. The Assessing Officer assessed the interest income as business income. He further treated the business of purchase and sale of shares as speculation business as per Explanation to section 73 of the Income-tax Act, 1961. He, therefore, considered the aforesaid loss as speculation loss and held that it would only be set off against the speculation profit in the subsequent years. The Tribunal allowed the assessee’s claim.
On appeal by the Revenue the Allahabad High Court upheld the decision of the Tribunal and held as under: “
(i) Section 73(1) provides that 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. Section 73(1) uses the words ‘business carried on’. The Explanation to section 73 also uses the phrase ‘where any part of the business of the company . . . . . consists in the purchase and sale of shares of other companies’. Section 28(1) provides for charging of income-tax on profits and gains of any business or profession which was carried on by the assessee at any time during the previous year. Section 28(1) r/w section 73(1) which also uses the words ‘business carried on’ clearly indicate that what is chargeable to the income-tax is the business actually carried on and profits and gains of the said business.
The Explanation to section 73 contains an exclusionary clause, according to which the following companies are excluded from the operation of the deeming clause
(i) a company whose gross total income consists mainly of income which is chargeable under the heads ‘Interest on securities’, ‘Income from house property’, ‘Capital gains’ and ‘Income from other sources’, or (ii) a company the principal business of which is the business of banking or granting of loans and advances’.
(ii) The question to be considered is as to whether a company, which fulfils the conditions as mentioned in the exclusionary categories, can be denied the benefit, if the income consists mainly of income as used in first category and the principal business of which as used in the second category from the activities and business which are not the part of the memorandum of association of the company. Section 28(1), section 73(1) and the Explanation to section 73 indicate that the income which is chargeable is the income in the relevant year arising from business or profession carried on by the company. The words ‘carried on’ mean actual carrying of the activity. The words ‘carried on has to be read in context of what actually was done by the company in the relevant year, rather than what was main object in the memorandum of association of the company. Thus, the submission of the Revenue that since in the memorandum of association the activity or business, which is shown to have been carried on by the assessee, is not included, it is not entitled to be considered in exclusionary clause, has to be rejected.
(iii) For qualifying the exclusionary categories as mentioned in the Explanation to section 73, the condition to be fulfilled is that gross total income consists mainly of income which is chargeable under the heads
(a) ‘Interest on securities’,
(b) ‘Income from house property’,
(c) ‘Capital gains’ and
(d) ‘Income from other sources’.
The said provision uses the words ‘mainly of income’. The words ‘mainly of income’ and similarly in the second category the words ‘principal business of which’ mean substantially or primarily.
(iv) In the instant case, the total gross income of the assessee, which has been shown in the assessment order, is interest income. The assessment order does not refer to any other income. Hence, the condition that income consists ‘mainly of income’ is completely fulfilled. One of the heads of the income for exclusionary category is income from other sources.
(v) The second category consists of the phrase ‘a company the principal business of which is granting of loans and advances’. The income, which has been treated to be gross income, is income from interest of the assessee from granting loans and advances. Thus, the assessee was covered by exclusionary clause of Explanation to section 73.
(vi) Therefore, the assessee was clearly covered by the exclusionary clause of Explanation to section 73 and the Tribunal rightly set off of the aforesaid loss against the income of the assessee from loans and advances.”
