(2011) 132 ITD 604(Mum.) Momaya Investments (P) Ltd. vs. ITO AY : 1996-97 Date of order : 22-06-2011

Facts:

The assessee company was mainly engaged in the business of providing loans and advances that formed about 68% of the income. The original assessment dated 30th September, 1998 was passed assessing the total income at Rs. 8,58,522/- This was eventually followed by a revision order passed which stated that the assessee dealt in shares and hence Explanation to section 73 was attracted since the main income did not consist of “Interest on securities, income from House Property, Capital Gains or Income from Other sources.” The assessee had appealed to the tribunal which remanded the matter back to CIT to re-examine certain aspects. The matter was then remanded back to the AO. In the fresh assessment, the assessee submitted that it was mainly engaged in the business of providing loans and advances and rediscounting bill. And therefore, Explanation to section 73 was not applicable. The AO however, objected to assessee’s contention that it was in business of granting loans and advances on the basis that main object of the memorandum of association was only to acquire, hold or deal in stocks and shares. Further, he also held that the activity of bill rediscounting cannot be called as granting of loans and advances.

Held:

What is important is not the object stated in the memorandum of association, but it is also important to look at the actual activity of the assessee. Therefore, merely because the business of granting loans was not mentioned in the memorandum, would not mean that actual nature of business cannot be looked at. It was even concluded that the activity of bill rediscounting has to be treated as only granting of loans. This was because the word “discount”, in regard to financial transactions, represents interest.