My company lends money and also deals in shares. How is it decided which is the 'principal business' for the exclusion in the Explanation to s.73?
There is no single test. The Calcutta High Court held that the memorandum of association, turnover, capital expenditure and the relation of profit to expenses are all relevant, that all of them must be judiciously analysed and assessed, and that what emerges is a tricky question of fact which the Tribunal must determine threadbare on the record. Because the Tribunal had not done that, the Court set its order aside and remitted the appeal with a direction to decide within six months.
Decided by the High Court (I. P. Mukerji J and Md. Nizamuddin J) on 2019-04-24, reported as ITA No. 840 of 2008 (High Court at Calcutta, Special Jurisdiction (Income Tax), Original Side). It bears on section 73, section 71, section 72, section 260A of the Income Tax Act 1961, in How Tax Law Is Read, Evidence & Burden of Proof and Appeals matters.
The Explanation to s.73 excludes a company whose principal business is banking or the granting of loans and advances, and from assessment year 2015-16 the Finance (No. 2) Act 2014 added a company whose principal business is the business of trading in shares to the same list. 'Principal business' bears the same meaning in both limbs, so this is the nearest High Court guidance on how the amended exclusion is to be worked as well. The practical lesson is that the fight is evidential, not legal: the assessee here put forward funds of Rs.13.03 crores deployed in lending against Rs.2.33 crores in share dealing, and even that did not decide the matter, because the Court would not accept deployment of funds as a self-sufficient test and sent the whole factual question back. Build the record at the Tribunal; a High Court will not do this exercise for you.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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The assessee filed a return on 29 October 2004 showing income of Rs.8,61,240. The Assessing Officer assessed income at Rs.1,56,18,200, disallowing a claimed loss of Rs.1,48,61,635 on the purchase and sale of shares as speculation loss under the Explanation to s.73 and holding that neither exception to the Explanation applied. The Commissioner (Appeals) reversed, holding that the assessee fell within the exceptions and that the loss was a business loss. The Tribunal reversed the Commissioner and restored the Assessing Officer's view. On appeal under s.260A the assessee contended that its funds deployed in the granting of loans, Rs.13.03 crores, exceeded the funds deployed in share dealing, Rs.2.33 crores, so that the granting of loans and advances was its principal business, and complained that the Tribunal had not considered the audit reports and balance sheets placed before it.
The Tribunal's order was set aside and the appeal remitted. Determining the principal business of a corporate assessee requires all the relevant factors - the businesses in the memorandum of association, turnover, capital expenditure made in a year for the promotion of a business as against the turnover of that year, and the profit of a business relative to its expenses - to be judiciously analysed and assessed, and possibly other factors as well; it is a tricky question of fact which the Tribunal must determine threadbare. The question whether the assessee's principal business was the granting of loans and advances rather than dealing in shares, and so whether it fell within the exception to the Explanation to s.73, was a mixed question of fact and law which the Tribunal had to re-examine on the existing records, audit reports and balance sheets without fresh filings, and if it found lending to be the principal business it had to allow the set-off under ss.71 and 72. The Tribunal was directed to dispose of the matter within six months.
The Court set out the Explanation to s.73 and its deeming effect, and the two exceptions - a company whose gross total income consists mainly of income under the heads interest on securities, income from house property, capital gains and income from other sources, and a company whose principal business is banking or the granting of loans and advances - and noted the legislative purpose recorded in the Statement of Objects, which was to curb manipulation by business houses controlling groups of companies who reduced taxable income by showing losses on the purchase and sale of shares. It then asked, in a series of questions, whether principal business is to be determined from the memorandum of association, whether turnover is an indication of it, what is to be made of a year in which substantial capital expenditure is incurred to promote a business whose turnover in that year is much lower than that of another business, and what is to be made of a business with lower turnover but higher profit because its expenses are lower. Its answer was that all of those factors must be judiciously analysed and assessed to determine the principal business of a corporate assessee, and that this is a question of fact for the Tribunal. Because the Tribunal had not carried out that exercise, and because the assessee had raised disputes about audit reports and balance sheets said not to have been considered, the matter had to go back.
Is the principal business of the assessee to be determined on the basis of the businesses mentioned in its memorandum of association? Whether turnover of the assessee is an indication of its principal business? Suppose an assessee makes substantial capital expenditure in a year for promotion of a particular business which it claims to be its principal business but its turnover in that year is much less than the turnover from other business, could the assessee claim the former business to be its principal business? Suppose the assessee carries on more than one business and the turnover of one business is less than the others but the profit of that business is more because the expenses are less. Would that business become the principal business? In my opinion, all the above factors have to be judiciously analysed and assessed to determine the principal business of a Corporate assessee.
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Handle my notice → Ask a CA on WhatsAppThere is no single test. The Calcutta High Court held that the memorandum of association, turnover, capital expenditure and the relation of profit to expenses are all relevant, that all of them must be judiciously analysed and assessed, and that what emerges is a tricky question of fact which the Tribunal must determine threadbare on the record. Because the Tribunal had not done that, the Court set its order aside and remitted the appeal with a direction to decide within six months. This was decided by the High Court (I. P. Mukerji J and Md. Nizamuddin J) and bears on section 73, section 71, section 72, section 260A of the Income Tax Act 1961. It is reported as ITA No. 840 of 2008 (High Court at Calcutta, Special Jurisdiction (Income Tax), Original Side). The Explanation to s.73 excludes a company whose principal business is banking or the granting of loans and advances, and from assessment year 2015-16 the Finance (No. 2) Act 2014 added a company whose principal business is the business of trading in shares to the same list. 'Principal business' bears the same meaning in both limbs, so this is the nearest High Court guidance on how the amended exclusion is to be worked as well. The practical lesson is that the fight is evidential, not legal: the assessee here put forward funds of Rs.13.03 crores deployed in lending against Rs.2.33 crores in share dealing, and even that did not decide the matter, because the Court would not accept deployment of funds as a self-sufficient test and sent the whole factual question back. Build the record at the Tribunal; a High Court will not do this exercise for you. If it applies to you, the first step is this: Put the whole factual matrix on the Tribunal record - the objects clause of the memorandum, year-wise turnover of each activity, funds deployed in each as at the balance sheet date, capital expenditure, and profit against expenses for each activity - because the Court treated all of these as relevant and none as decisive.
The assessee filed a return on 29 October 2004 showing income of Rs.8,61,240. The Assessing Officer assessed income at Rs.1,56,18,200, disallowing a claimed loss of Rs.1,48,61,635 on the purchase and sale of shares as speculation loss under the Explanation to s.73 and holding that neither exception to the Explanation applied. The Commissioner (Appeals) reversed, holding that the assessee fell within the exceptions and that the loss was a business loss. The Tribunal reversed the Commissioner and restored the Assessing Officer's view. On appeal under s.260A the assessee contended that its funds deployed in the granting of loans, Rs.13.03 crores, exceeded the funds deployed in share dealing, Rs.2.33 crores, so that the granting of loans and advances was its principal business, and complained that the Tribunal had not considered the audit reports and balance sheets placed before it. The matter was decided on 2019-04-24 by the High Court (I. P. Mukerji J and Md. Nizamuddin J). On those facts the High Court held as follows. The Tribunal's order was set aside and the appeal remitted. Determining the principal business of a corporate assessee requires all the relevant factors - the businesses in the memorandum of association, turnover, capital expenditure made in a year for the promotion of a business as against the turnover of that year, and the profit of a business relative to its expenses - to be judiciously analysed and assessed, and possibly other factors as well; it is a tricky question of fact which the Tribunal must determine threadbare. The question whether the assessee's principal business was the granting of loans and advances rather than dealing in shares, and so whether it fell within the exception to the Explanation to s.73, was a mixed question of fact and law which the Tribunal had to re-examine on the existing records, audit reports and balance sheets without fresh filings, and if it found lending to be the principal business it had to allow the set-off under ss.71 and 72. The Tribunal was directed to dispose of the matter within six months.
The Court set out the Explanation to s.73 and its deeming effect, and the two exceptions - a company whose gross total income consists mainly of income under the heads interest on securities, income from house property, capital gains and income from other sources, and a company whose principal business is banking or the granting of loans and advances - and noted the legislative purpose recorded in the Statement of Objects, which was to curb manipulation by business houses controlling groups of companies who reduced taxable income by showing losses on the purchase and sale of shares. It then asked, in a series of questions, whether principal business is to be determined from the memorandum of association, whether turnover is an indication of it, what is to be made of a year in which substantial capital expenditure is incurred to promote a business whose turnover in that year is much lower than that of another business, and what is to be made of a business with lower turnover but higher profit because its expenses are lower. Its answer was that all of those factors must be judiciously analysed and assessed to determine the principal business of a corporate assessee, and that this is a question of fact for the Tribunal. Because the Tribunal had not carried out that exercise, and because the assessee had raised disputes about audit reports and balance sheets said not to have been considered, the matter had to go back. In the words reproduced by the source cited on this page: "Is the principal business of the assessee to be determined on the basis of the businesses mentioned in its memorandum of association? Whether turnover of the assessee is an indication of its principal business? Suppose an assessee makes substantial capital expenditure in a year for promotion of a particular business which it claims to be its principal business but its turnover in that year is much less than the turnover from other business, could the assessee claim the former business to be its principal business? Suppose the assessee carries on more than one business and the turnover of one business is less than the others but the profit of that business is more because the expenses are less. Would that business become the principal business? In my opinion, all the above factors have to be judiciously analysed and assessed to determine the principal business of a Corporate assessee."
It was decided by the High Court on 2019-04-24 and is reported as ITA No. 840 of 2008 (High Court at Calcutta, Special Jurisdiction (Income Tax), Original Side). 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 71, section 72, 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. The Tribunal's order was set aside and the appeal remitted. Determining the principal business of a corporate assessee requires all the relevant factors - the businesses in the memorandum of association, turnover, capital expenditure made in a year for the promotion of a business as against the turnover of that year, and the profit of a business relative to its expenses - to be judiciously analysed and assessed, and possibly other factors as well; it is a tricky question of fact which the Tribunal must determine threadbare. The question whether the assessee's principal business was the granting of loans and advances rather than dealing in shares, and so whether it fell within the exception to the Explanation to s.73, was a mixed question of fact and law which the Tribunal had to re-examine on the existing records, audit reports and balance sheets without fresh filings, and if it found lending to be the principal business it had to allow the set-off under ss.71 and 72. The Tribunal was directed to dispose of the matter within six months. It arises in How Tax Law Is Read, Evidence & Burden of Proof and Appeals matters, on section 73, section 71, section 72, section 260A of the Income Tax Act 1961, and was decided by I. P. Mukerji J and Md. Nizamuddin 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. Do not rest on a funds-deployed comparison alone. It was the assessee's main plank here and the Court still remitted. Explain any year in which the claimed principal business has the smaller turnover; the Court posed exactly that case at paragraph level and left it open. If the Tribunal has decided principal business without dealing with the audit report and balance sheets, that is the ground for a s.260A appeal: the Court treated it as a mixed question of fact and law and remitted for reconsideration on the existing record without fresh filings. For assessment year 2015-16 and later, run the same evidence against the trading-in-shares limb added by the Finance (No. 2) Act 2014, which Snowtex holds to be prospective from that year.
Searched for later treatment; none was found. That is not the same as a source affirming it. The citator is empty and a second probe confirms it. A citedby search returns no results, and a phrase search on the case name with section 73 produced only the judgment itself, the earlier Calcutta High Court proceeding of 4 March 2010 in the same matter, and the Kolkata Tribunal's order in the same assessee's case (ITO, Ward-5(1) v Shankar Sales Promotion (P) Ltd, 6 September 2019), none of which cites the 24 April 2019 judgment. So the principal-business test it applies under the Explanation to section 73 - the composition of the company's own activity rather than the label it gives itself - has not been applied, doubted or overruled by any later decision on record. 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.
The passage setting out the relevant factors is written in the first person singular ('In my opinion'), so it comes from the judgment of I. P. Mukerji J; the transcription I obtained does not show separately whether Md. Nizamuddin J wrote a concurring opinion or agreed, though the material I read attributes a distinct set of observations on the audit reports and balance sheets to him. The assessment year is not stated in what I read; the return was filed on 29 October 2004, which points to assessment year 2004-05, and I have not asserted the year in the record fields. The exact framing of the substantial question of law was not reproduced to me verbatim and the version in the facts field is a description, not a quotation. The Explanation is reproduced in the judgment with 'principle business' for 'principal business'. 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.
The Tribunal's order was set aside and the appeal remitted. Determining the principal business of a corporate assessee requires all the relevant factors - the businesses in the memorandum of association, turnover, capital expenditure made in a year for the promotion of a business as against the turnover of that year, and the profit of a business relative to its expenses - to be judiciously analysed and assessed, and possibly other factors as well; it is a tricky question of fact which the Tribunal must determine threadbare. The question whether the assessee's principal business was the granting of loans and advances rather than dealing in shares, and so whether it fell within the exception to the Explanation to s.73, was a mixed question of fact and law which the Tribunal had to re-examine on the existing records, audit reports and balance sheets without fresh filings, and if it found lending to be the principal business it had to allow the set-off under ss.71 and 72. The Tribunal was directed to dispose of the matter within six months.
TaxSphere, “Shankar Sales Promotion Pvt Ltd v CIT”, https://taxnotice.vittsphere.com/caselaw/case/shankar-sales-promotion-principal-business-test-explanation-73/ (validity last checked 2026-09-07)
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