Commissioner Of Income Tax vs Front Line Securities Limited
2010 Latest Caselaw 3949 Del

*          IN THE HIGH COURT OF DELHI AT NEW DELHI



+                         ITA No.1007 of 2008



%                                   Date of Decision: 26th August, 2010.


     COMMISSIONER OF INCOME TAX                             . . . Appellant


                        through :         Ms. Prem Lata Bansal, Advocate


                              VERSUS


     FRONT LINE SECURITIES LIMITED                        . . .Respondent


                        through:          Mr. Vibhu Bhakru with Mr. Vikas
                                          Chandel, Advocates.


CORAM :-
    HON'BLE MR. JUSTICE A.K. SIKRI
    HON'BLE MS. JUSTICE REVA KHETRAPAL

     1.    Whether Reporters of Local newspapers may be allowed
           to see the Judgment?
     2.    To be referred to the Reporter or not?
     3.    Whether the Judgment should be reported in the Digest?



A.K. SIKRI, J. (ORAL)

1. In the return filed by the assessee for the Assessment Year 1997-

98, the assessee claimed loss of `98,03,600/- on sale/purchase of

shares. The question fell for consideration before the Assessing

Officer as to whether this loss was a business loss or speculative

loss. According to the AO, the case of the assessee falls within

the provisions of Explanation to Section 73 of the Income Tax Act

(hereinafter referred to as 'the Act') and treating the said loss to

be speculative in nature, the AO refused to give the adjustment

against other business income. The assessee had earned the

income in different business activities, which included the

consultancy income, lease interest income and other income, as

against that, insofar as dealing in shares is concerned, the

assessee suffered losses, as mentioned above. Explanation to

Section 73 of the Act stipulates that where any part of the

business of a company 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. Further, it is also provided in the said Explanation

that it would not apply in two cases: firstly, in case a company

other than 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" and secondly, in case of a company,

the principal business of which is the business of banking of the

granting of loans and advances.

2. The assessee had pleaded before the AO that the principal

business of the assessee was of granting of loans and advances

and earning the income therefrom and therefore, the Explanation

to Section 73 of the Act would not apply in the case of the

assessee. It is in this backdrop that the AO went into the question

as to whether the principal business of the assessee was that of

lending money and earning the income therefrom. He concluded

in the negative, i.e., he held that the principal business of the

assessee was not of money lending. The detailed order passed by

the AO, in this behalf, would reveal that the AO gave as many as

five reasons in support of his aforesaid conclusion. Three reasons

are predicated on the object clause contained in the Memorandum

of Association of the assessee as per which, money lending was

not one of the objects for which the assessee-company was

incorporated. Fourth reason which is stated by the Assessing

Officer is that even if the company had passed resolution for

carrying out business of money lending for loans and advances

and got the license Reserve Bank of India, because no subsequent

changes were made in the objects of the company, it could not be

treated as principal business. Thus, these four reasons are based

on the main object of the company as stated in the assessment

order. It seems that the AO had perused Memorandum and Article

of Association prepared at the time of incorporation of the

company and produced before him by the assessee. Fact remains

that within four months of its incorporation, the assessee

company had amended the Memorandum of Association. This

amendment was carried out by passing specific resolution in the

Extraordinary General Body Meeting. On the basis of that

resolution, Certificate of Registration under Section 18 (1)(A) of

the Companies Act was also issued by the Registrar of

Companies.

3. By this amendment, main objects which are added to the object

clause categorically stipulate the objects of carrying on business

of consultancy, rendering all kinds of consultancy and advisory

services, consultants in the field of business, industrial

productivity, management, administration, etc. to act as financial

consultants, advisers to public issue, preparation of project

reports. Thus, consultancy and money lending had become the

main business of the company after the aforesaid amendment in

the object clauses, which was carried out, as mentioned above

within four months of its incorporation. In view thereof, the first

four reasons given by the AO would lose their validity.

4. The Fifth reason, which was given by the AO was that the interest

income of the assessee was only 27% of its total income and

therefore, it should not be treated as its main business.

5. The CIT (Appeals) revisited this issue in much greater details. The

contention of the assessee in the appeal filed before the CIT (A)

was that the AO had not taken into consideration the important

aspect, viz., the consultancy income was from the business of

lending loans and advances and therefore, it was from the

business of granting of loans and advances. It was also pointed

out that the other income was accrued/earned from bill

discounting charges in the nature of granting loans and advances.

The case which was set up by the assessee before the CIT (A) was

that all the three incomes, i.e., the interest income, consultancy

income as well as income from bill discounting were to come

under one head, viz., "income from business of granting of loans

and advances" and thus, where these three incomes were taken

together it constituted 52% of the total income. It was also

submitted that even the lease rentals were in the nature of

lending money and the income from this source amounts to

20.99% of the total income of the assessee from which 28.99%

income was accrued to the assessee‟s income. On this basis, the

arguments of the leaned counsel for the assessee was that the

principal business of the assessee was that of money lending and

therefore, Explanation to Section 73 of the Act would not apply.

6. The CIT(A) after discussing the above aspect in detail and relying

upon the judgment of the Supreme Court in the case of K.P.

Varghese v. Income Tax Officer, Ernakulam and Anr. [(1981)

131 ITR 597 (SC)] concluded that the principal business of the

assessee was that of money lending and allowed the adjustment

of losses suffered on account of sale/purchase of shares from

other business income.

7. The Income Tax Appellate Tribunal (in short „the ITAT‟) has

accepted the aforesaid reasoning of the CIT (A) in its impugned

order. The relevant discussion contained in the ITAT‟s order reads

as under:

"6. On the other hand, the learned counsel for the assessee explained the provisions of Section 73 including exception clauses of Explanation to Section 73. Then he took the Bench to the various head of the income of last three years and stated that the main income of the assessee was from interest and leasing and this constituted the principal business of the assessee. Then the learned counsel took the Tribunal to the copy of the Memorandum of Association and it was stated that he company was incorporated in the month of May 1994 and at that time the main objects of the assessee were dealing in shares and banking management. Thereafter, after 4 months the assessee company amended its clauses by passing various Board‟s resolutions and started the business of money lending

and leasing of assets. Approval was also sought form RBI. The attention of the Bench was also drawn on copy of approval from RBI placed on record. Various clauses of amended objects were also shown by the learned counsel and it was stated that copies of all these are placed on record at page 26 to 78. Reliance was placed on the decision of the Delhi bench f the ITAT in the case of NBI Industrial Finance Co. Ltd. Vs. DCIT (2004) 1 SOT 132 (Del); and on the decision of Special Bench of the ITAT in the case of DCIT Vs. Venkateshwar Investment & finance Pvt. Ltd. 93 ITD 177 (Cal) (SB). It was explained that he lease rent and the interest has to be taken together for establishing the principal business of the assessee. Relevant paras of both the orders of the Tribunal (supra) were also read by the learned counsel by which it was held that for the purpose of considering that explanation to Section 73 is applicable or not, the interest income well as lease rental income has to be taken into consideration. Further reliance was placed on the decision of Hon‟ble Allahabad High Court in the case of Motor & General Sales Pvt. Ltd. Vs. CIT 226 ITR 137 wherein financing of vehicles was held as business of money lending. Reliance was also placed on the decision of Hon‟ble Supreme Court reported in 196 ITR 149/156.

7. We have heard rival submissions and considered them carefully. After considering the relevant material and case laws and the details on which our attentions were drawn by the learned counsel, we find that assessee‟s case fails under exception clauses of Explanation to 73. We have seen amended clauses of the company and found that the company had amended its objects by which the company started the business of investors, financers traders etc. and to carry on the business of consultancy and also to act as consultant in the field of industrial, business, financial consultants, and to act as consultant and to carry on the business of all and every kind of hire purchase finance, lease and lease finance etc. The clauses of the amended Memorandum of Association are from 56 to 68. Copy of the same is placed on record from pages 35 to 43. We have also seen the Board‟s resolutions, copies of the same are placed at pages 68 to 78. Copy of approval from RBI is placed at pages 6 & 7. Certificate of registration from RBI is placed at page 8. Statement of asset allocation and statement of income under various heads are placed at pages 9 & 10. We note tht out of total capital of Rs.420 lacs the assessee had purchases assets of Rs.98.50 lacs and advanced loans of Rs.86.11 lacs. Thereafter the assessee has shown purchases of shares at Rs.224 lacs. We have seen the allocation of funds in assets and found that during A.Y. 1996-97 the allocation on account of assets on lease and loans advances was 46.53%. During A.Y. 1997-98 the allocation was 52.77% and during A>Y. 1998-99 this allocation was 57%. Similarly, the income on account of interest, lease rent and consultancy was 55.16% for A.Y. 1996- 97; 71.63% for A.Y. 1997-98 & 60.74% for A.Y. 1998-99. The remaining part of income is on account of dividend and consultancy charges which is 35.56% for A.Y. 1996-97; 19.25% for A.Y. 1997-98 & 23.43% for A.Y. 1998-99. Chart of the same is placed at page 10, as stated above."

8. We are of the opinion that the finding of the two Authorities

below, viz., CIT (A) and ITAT to the effect that the principal

business of the assessee is money lending is based on cogent

evidence and material on record, it being a finding of fact and

therefore, it cannot be treated as perverse. Therefore, no

substantial question of law arises.

9. This appeal is dismissed accordingly.

(A.K. SIKRI) JUDGE

(REVA KHETRAPAL) JUDGE AUGUST 26, 2010.

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