My company deals in shares as part of its business, but its income comes mainly from lending. The Commissioner (Appeals) has treated the share loss as a speculation loss under the Explanation to section 73. Is the company excepted?
Yes, if its total income mainly consists of income derived from the granting of loans and advances. The Delhi High Court held that the Tribunal was textually right to find the company within the exception carved out in the parenthesis of the Explanation to s.73, so the Commissioner (Appeals) fell into error in treating the reported loss as pertaining to a speculative transaction, and no question of law arose.
Decided by the High Court (S. Ravindra Bhat J and Prateek Jalan J) on 2019-03-26, reported as ITA 1142/2018 and ITA 1144/2018 (Delhi High Court); Assessment Years 2005-06 and 2006-07. It bears on section 73, section 68, section 14A, section 36(1)(vii), section 36(2), section 260A of the Income Tax Act 1961, in Deductions & Disallowances, Assessment & Scrutiny and How Tax Law Is Read matters.
The Explanation to s.73 has two distinct exception limbs and the library's existing authorities run mostly on the first — the 'gross total income consists mainly of' limb tested in Darshan Securities and Shankar Sales Promotion. This decision runs on the second limb: a company the principal business of which is the granting of loans and advances is outside the deeming altogether, whatever proportion of its business consists in the purchase and sale of shares. That matters most for non-banking financial companies and for investment arms left holding legacy scrips after a demerger, which is exactly what this assessee was — Jindal Strips Ltd. having been restructured in 2004-05, the assessee continued as a non-banking financial institution advancing loans and investing. Two cautions on how far the decision travels. It is a decision at the s.260A gate: the Court held that no substantial question of law arose, so the reasoning is short and the Tribunal's finding on the composition of income was treated as a finding of fact. And the assessment years are 2005-06 and 2006-07, before the Finance Act 2014 added a company whose principal business is trading in shares to the same parenthesis with effect from Assessment Year 2015-16 — a change the Supreme Court considered in Snowtex Investment Ltd. and held to operate prospectively. The 'granting of loans and advances' limb, by contrast, has been in the Explanation throughout, so this part of the decision is not affected.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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The assessee had been part of Jindal Strips Ltd., which carried on multifarious activities; following a demerger and corporate restructuring in 2004-05 the assessee continued with the principal objective of functioning as a non-banking financial institution, advancing loans and engaging in investment activities. For Assessment Year 2005-06 it reported a loss of Rs 73,54,155. The Assessing Officer, after inquiry, refused to allow the loss and added it back under s.68, holding the transactions to be suspect. The Commissioner (Appeals) granted relief on the genuineness of the transactions but held that the assessee had indulged in speculative transactions and, on the operation of the Explanation to s.73, was disentitled to the loss and could only set the speculative loss against speculative profit. The Tribunal set aside that finding, holding that the assessee was excepted from the operation of the Explanation. The Revenue appealed under s.260A, raising in ITA 1142/2018 three questions — the s.14A disallowance, the write-off of the principal amount of bad debts, and the speculative loss finding — and in ITA 1144/2018 only the s.14A question. The Revenue had not, before the Tribunal, challenged the Commissioner (Appeals)' findings on the genuineness of the share transactions.
Both appeals were dismissed; no substantial question of law arose (paras 17 and 18). On s.73, the Court was satisfied that textually the Tribunal's findings were warranted: the assessee falls within the exception carved out in the parenthesis of the Explanation because its total income mainly consists of income derived from the granting of loans and advances, so the Commissioner (Appeals) clearly fell into error in holding that the loss pertained to a speculative transaction, and the Tribunal acted correctly in law in setting that finding aside (para 10). On s.68, the Revenue's argument was unmerited because the genuineness findings of the Commissioner (Appeals) had not been challenged before the Tribunal (paras 7 and 8). On the write-off, the Tribunal's decision rested on the Supreme Court in T.R.F. Limited v. CIT and on the Delhi High Court in CIT v. IFCI Venture Capital, and no question of law arose (para 13). On s.14A, the years predated Rule 8D and the Assessing Officer had merely applied a rough proportion instead of inquiring into the individual heads of expenditure, the funds and scrips being legacy assets, so the assessee's arguments were reasonable and no question arose (paras 14, 16 and 17).
The Court read the Explanation as deeming a company to be carrying on a speculation business where any part of its business consists in the purchase and sale of shares of other companies, and then read the parenthesis as carving out two classes: a company whose gross total income consists mainly of income chargeable under the heads 'Interest on securities', 'Income from house property', 'Capital gains' and 'Income from other sources', and a company the principal business of which is the business of trading in shares or banking or the granting of loans and advances (paras 9 and 10). It found the assessee within the second class on the composition of its income, which mainly consisted of income derived from the granting of loans and advances, a conclusion that followed from the corporate history recorded at paragraph 4 — that after the 2004-05 demerger and restructuring the assessee continued as a non-banking financial institution advancing loans and investing (para 10).
Such being the case, the CIT(A) clearly falls into error in holding that the loss reported pertains to a speculative transaction; the ITAT acted correctly in law in setting aside that finding.
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Handle my notice → Ask a CA on WhatsAppYes, if its total income mainly consists of income derived from the granting of loans and advances. The Delhi High Court held that the Tribunal was textually right to find the company within the exception carved out in the parenthesis of the Explanation to s.73, so the Commissioner (Appeals) fell into error in treating the reported loss as pertaining to a speculative transaction, and no question of law arose. This was decided by the High Court (S. Ravindra Bhat J and Prateek Jalan J) and bears on section 73, section 68, section 14A, section 36(1)(vii), section 36(2), section 260A of the Income Tax Act 1961. It is reported as ITA 1142/2018 and ITA 1144/2018 (Delhi High Court); Assessment Years 2005-06 and 2006-07. The Explanation to s.73 has two distinct exception limbs and the library's existing authorities run mostly on the first — the 'gross total income consists mainly of' limb tested in Darshan Securities and Shankar Sales Promotion. This decision runs on the second limb: a company the principal business of which is the granting of loans and advances is outside the deeming altogether, whatever proportion of its business consists in the purchase and sale of shares. That matters most for non-banking financial companies and for investment arms left holding legacy scrips after a demerger, which is exactly what this assessee was — Jindal Strips Ltd. having been restructured in 2004-05, the assessee continued as a non-banking financial institution advancing loans and investing. Two cautions on how far the decision travels. It is a decision at the s.260A gate: the Court held that no substantial question of law arose, so the reasoning is short and the Tribunal's finding on the composition of income was treated as a finding of fact. And the assessment years are 2005-06 and 2006-07, before the Finance Act 2014 added a company whose principal business is trading in shares to the same parenthesis with effect from Assessment Year 2015-16 — a change the Supreme Court considered in Snowtex Investment Ltd. and held to operate prospectively. The 'granting of loans and advances' limb, by contrast, has been in the Explanation throughout, so this part of the decision is not affected. If it applies to you, the first step is this: Identify which exception limb you are in before drafting. The 'gross total income consists mainly of' limb is tested on the heads under which the gross total income falls; the 'principal business' limb is tested on what the company actually does.
The assessee had been part of Jindal Strips Ltd., which carried on multifarious activities; following a demerger and corporate restructuring in 2004-05 the assessee continued with the principal objective of functioning as a non-banking financial institution, advancing loans and engaging in investment activities. For Assessment Year 2005-06 it reported a loss of Rs 73,54,155. The Assessing Officer, after inquiry, refused to allow the loss and added it back under s.68, holding the transactions to be suspect. The Commissioner (Appeals) granted relief on the genuineness of the transactions but held that the assessee had indulged in speculative transactions and, on the operation of the Explanation to s.73, was disentitled to the loss and could only set the speculative loss against speculative profit. The Tribunal set aside that finding, holding that the assessee was excepted from the operation of the Explanation. The Revenue appealed under s.260A, raising in ITA 1142/2018 three questions — the s.14A disallowance, the write-off of the principal amount of bad debts, and the speculative loss finding — and in ITA 1144/2018 only the s.14A question. The Revenue had not, before the Tribunal, challenged the Commissioner (Appeals)' findings on the genuineness of the share transactions. The matter was decided on 2019-03-26 by the High Court (S. Ravindra Bhat J and Prateek Jalan J). On those facts the High Court held as follows. Both appeals were dismissed; no substantial question of law arose (paras 17 and 18). On s.73, the Court was satisfied that textually the Tribunal's findings were warranted: the assessee falls within the exception carved out in the parenthesis of the Explanation because its total income mainly consists of income derived from the granting of loans and advances, so the Commissioner (Appeals) clearly fell into error in holding that the loss pertained to a speculative transaction, and the Tribunal acted correctly in law in setting that finding aside (para 10). On s.68, the Revenue's argument was unmerited because the genuineness findings of the Commissioner (Appeals) had not been challenged before the Tribunal (paras 7 and 8). On the write-off, the Tribunal's decision rested on the Supreme Court in T.R.F. Limited v. CIT and on the Delhi High Court in CIT v. IFCI Venture Capital, and no question of law arose (para 13). On s.14A, the years predated Rule 8D and the Assessing Officer had merely applied a rough proportion instead of inquiring into the individual heads of expenditure, the funds and scrips being legacy assets, so the assessee's arguments were reasonable and no question arose (paras 14, 16 and 17).
The Court read the Explanation as deeming a company to be carrying on a speculation business where any part of its business consists in the purchase and sale of shares of other companies, and then read the parenthesis as carving out two classes: a company whose gross total income consists mainly of income chargeable under the heads 'Interest on securities', 'Income from house property', 'Capital gains' and 'Income from other sources', and a company the principal business of which is the business of trading in shares or banking or the granting of loans and advances (paras 9 and 10). It found the assessee within the second class on the composition of its income, which mainly consisted of income derived from the granting of loans and advances, a conclusion that followed from the corporate history recorded at paragraph 4 — that after the 2004-05 demerger and restructuring the assessee continued as a non-banking financial institution advancing loans and investing (para 10). In the words reproduced by the source cited on this page: "Such being the case, the CIT(A) clearly falls into error in holding that the loss reported pertains to a speculative transaction; the ITAT acted correctly in law in setting aside that finding." The decision followed or applied T.R.F. Limited v. CIT, Ranchi (2010) 323 ITR 397 (SC) — relied on by the Tribunal and approved on the bad debt issue; CIT v. IFCI Venture Capital (2009) 2 Taxmann.com 93 (Delhi) — relied on; Kedarnath Jute Mfg. Co. Ltd. v. CIT (Central), Calcutta (1971) 82 ITR 363 (SC) — applied; CIT v. Abhishek Industries Ltd. [2016] 380 ITR 652 (P&H) — reproduced from the Tribunal's order on the s.14A issue.
It was decided by the High Court on 2019-03-26 and is reported as ITA 1142/2018 and ITA 1144/2018 (Delhi High Court); Assessment Years 2005-06 and 2006-07. Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 73, section 68, section 14A, section 36(1)(vii), section 36(2), section 260A, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. Both appeals were dismissed; no substantial question of law arose (paras 17 and 18). On s.73, the Court was satisfied that textually the Tribunal's findings were warranted: the assessee falls within the exception carved out in the parenthesis of the Explanation because its total income mainly consists of income derived from the granting of loans and advances, so the Commissioner (Appeals) clearly fell into error in holding that the loss pertained to a speculative transaction, and the Tribunal acted correctly in law in setting that finding aside (para 10). On s.68, the Revenue's argument was unmerited because the genuineness findings of the Commissioner (Appeals) had not been challenged before the Tribunal (paras 7 and 8). On the write-off, the Tribunal's decision rested on the Supreme Court in T.R.F. Limited v. CIT and on the Delhi High Court in CIT v. IFCI Venture Capital, and no question of law arose (para 13). On s.14A, the years predated Rule 8D and the Assessing Officer had merely applied a rough proportion instead of inquiring into the individual heads of expenditure, the funds and scrips being legacy assets, so the assessee's arguments were reasonable and no question arose (paras 14, 16 and 17). It arises in Deductions & Disallowances, Assessment & Scrutiny and How Tax Law Is Read matters, on section 73, section 68, section 14A, section 36(1)(vii), section 36(2), section 260A of the Income Tax Act 1961, and was decided by S. Ravindra Bhat J and Prateek Jalan J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Prove the composition of income on the accounts: interest received on loans and advances, the size of the loan book, and the proportion of total income it produces. The Court's operative finding is that the assessee's total income mainly consists of income derived from the granting of loans and advances. Where a demerger or restructuring left the company holding legacy scrips, put the corporate history in evidence; the Court relied on the fact that after the 2004-05 restructuring the assessee continued with the principal objective of functioning as a non-banking financial institution. Check the assessment year against the Finance Act 2014 amendment: for AY 2015-16 onwards a company whose principal business is trading in shares is also excepted, and for earlier years it is not — see Snowtex Investment Ltd. on prospectivity. Do not confuse the s.73 point with the s.68 point; here the Revenue's s.68 argument failed separately because the genuineness findings of the Commissioner (Appeals) had never been challenged by the Revenue before the Tribunal.
Validity check could not be completed. Validity check could not be completed. No later treatment of this judgment was searched for or found. Note the limits on its reach: it is a decision at the s.260A admission gate holding that no substantial question of law arises, and the finding on the composition of income was the Tribunal's finding of fact. Note also that the assessment years are 2005-06 and 2006-07, before the Finance Act 2014 added a company whose principal business is trading in shares to the same exception with effect from Assessment Year 2015-16 — the Supreme Court held that amendment prospective in Snowtex Investment Ltd. v. PCIT, which is separately in this library and was not re-read on this pass. The 'granting of loans and advances' limb relied on here has been in the Explanation throughout and is unaffected by that amendment. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Two textual points. First, there is a date conflict: the judgment as printed carries 'Date of Order: 26.03.2019' while the Indian Kanoon listing records 23 March 2019. The date printed on the document has been taken. Second, the Explanation to s.73 as reproduced at paragraph 9 of the judgment is the text then in force, which already contains the words 'trading in shares' inserted by the Finance Act 2014 with effect from 1 April 2015, although the assessment years before the Court were 2005-06 and 2006-07; and the reproduction contains an evident typographical error, 'the principal business of which is the business of trading in shares of banking', for 'trading in shares or banking'. The department's own section page for s.73, stamped Year 2025 and carrying the heading 'Losses in speculation business', prints the Explanation with the same 'or banking' wording and a stray closing bracket. Paragraph 9 is the Court reproducing the statute; the key quote used here is from paragraph 10, which is the Court speaking, and was confirmed word for word on a separate docfragment pass. The judgment runs to eighteen numbered paragraphs, the last being the disposal, and paragraphs 7, 12, 15 reproduce extracts from the Tribunal, this Court in IFCI Venture Capital and the Punjab and Haryana High Court in Abhishek Industries respectively — those are not the Delhi High Court's own words. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
Both appeals were dismissed; no substantial question of law arose (paras 17 and 18). On s.73, the Court was satisfied that textually the Tribunal's findings were warranted: the assessee falls within the exception carved out in the parenthesis of the Explanation because its total income mainly consists of income derived from the granting of loans and advances, so the Commissioner (Appeals) clearly fell into error in holding that the loss pertained to a speculative transaction, and the Tribunal acted correctly in law in setting that finding aside (para 10). On s.68, the Revenue's argument was unmerited because the genuineness findings of the Commissioner (Appeals) had not been challenged before the Tribunal (paras 7 and 8). On the write-off, the Tribunal's decision rested on the Supreme Court in T.R.F. Limited v. CIT and on the Delhi High Court in CIT v. IFCI Venture Capital, and no question of law arose (para 13). On s.14A, the years predated Rule 8D and the Assessing Officer had merely applied a rough proportion instead of inquiring into the individual heads of expenditure, the funds and scrips being legacy assets, so the assessee's arguments were reasonable and no question arose (paras 14, 16 and 17).
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