1. PRESENTATION ON CERTAIN ASPECTS OF TAXATION OF COMPANIESBy
V.P. Gupta
Advocate

2. Residential Status- including implications on Foreign companies
Special provision of Deemed Divided Section 2(22)(e) Precautionary planning;
Expenditure incurred in respect of Exempt Income - Section 14A, Rule 8D and recent case Laws;
Section 115JB (MAT);
Deduction in respect of expenditure on specified business – Section 35AD;
Section 80JJAA Deduction in respect of employment of workmen;
Explanation to Section 73- speculative share transactions.

3. Including Implications on Foreign Companies
Residential Status
Including Implications on Foreign Companies

4. Section 6 -Existing
(3) A company is said to be resident in India in any previous year, if—
(i) It is an Indian company; or
(ii) During that year, the control and management of its affairs is situated wholly in India.

5. Importance or Relevance of Residential Status
Taxability of income under the Act is determined with reference to residential status as per section 5 of the Act.
In case of resident total world income is chargeable whereas in case of non-resident income received or deemed to be received or accrued or deemed to be accrued is taxable.

6. Meaning of Indian Company
Section 2(26) defines Indian Company to mean formed and registered under the companies Act or under any other law in force in India or established under a Central or State or Provincial Act or any association etc. declared to be a company.
Meaning of Control and Management
‘Control and Management’ signifies controlling and directing power, ‘the head and brain’ as is commonly called. De facto management and not merely the power or right to control and manage (CIT v. Nandlal Gandalal (1960) 40 ITR 1 (SC)).
Subsidiary company may not necessarily be resident by virtue of shareholding of the parent company (Vodafone International Holdings B.V. v. UOI (2012) 341 ITR 1 (SC))

7. Amendment in Finance Act, 2015 
Sub-section 3 is substituted w.e.f ,which reads as under:
(3) A company is said to be resident in India in any previous year, if,—
(i) it is an Indian company; or
(ii) its place of effective management, in that year, is in India. 
Explanation.—For the purposes of this clause “place of effective management” means a place where key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole are, in substance made.

8. Implications
 As per the earlier provision a foreign company is resident in India only if its control and management is wholly in India.
As per the amended provision it will be resident in India if effective management is in India.
The amended provision will seriously impact the foreign company or subsidiaries of Indian companies formed and registered outside India.
There is likely to be litigation in this regard.  
Guidelines are supposed to be issued by CBDT.

9. Special provision of Deemed Divided
Section 2(22)(e)

10. Section 2 
(22) "dividend" includes-
Clause (e)
any payment by a company, not being a company in which the public are substantially interested;
of any sum by way of advance or loan;
to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting power; or

11. to any concern in which such shareholder has a substantial interest ; or
any payment by any such company on behalf, or for the individual benefit, of any such shareholder;
to the extent to which the company in either case possesses accumulated profits ;
but "dividend" does not include-
(ii) any advance or loan made to a shareholder or the said concern by a company in the ordinary course of its business, where the lending of money is a substantial part of the business of the company ;
(iii) any dividend paid by a company against any sum previously paid by it and treated as a dividend;

12. Object of the Provision.
vide Finance Act, 1987 provisions of clause (e) were inserted to check possibility of closely-held companies not distributing there profits to their shareholders by way of dividend but to make payments by way of loans or advances.

13. Issues
1. Shareholder mean registered as well as beneficial shareholder–
CIT v. C.P. Sarathy Mudalier, (1972) 83 ITR 170 (SC);
Rameshwarlal Sanwarmal v. CIT (1980) 122 ITR 1 (SC)).
ACIT v. Bhaumik Colours (P) Ltd. (2009) 118 ITD 1 (SB) (Mum)).
In the case of CIT v. National Travel Services (2012) 347 ITR 305 (Del) firm holding the shares in the name of its partners has been held to be shareholder.
CIT v. Jignesh P. Shah (2015) 372 ITR 392 (Bom.)
CIT v. C.J.International Hotels P. Ltd. (2015) 372 ITR 684(Del.) Mrs. HK, shareholder holding more than 10% in Pure Drinks (New Delhi) Ltd. Which company was a holding company of assessee had taken loan from assessee co. AO taxed the loan. Held not taxable as HK was not a share holder of Assessee)

14. Issues
2. Payment made during the year only is to be considered, not the opening balance.
3 The person should be shareholder on the date of giving loan (CIT v. H.K. Mittal (1996) 219 ITR 420 (All.))
4 There should be accumulated profit as on the date of giving loan or advance. Same should be in commercial sense i.e. as per books of accounts and not as per income tax computation (P.K. Badiani v. CIT (1976) 105 ITR 642 (SC)). Deemed profit u/s 41(2) would not form part of accumulated profits (CIT v. Urmila Ramesh (1998) 96 Taxman 533 (SC); CIT v. Express Newspapers Ltd. (1998) 230 ITR 477(SC))

15. Issues
5. Accumulated profit has to be determined after excluding the dividend earlier considered u/s 2(22)(e) (CIT v. G Narasimham (1999) 236 ITR 327 (SC)).
6 In case of amalgamation effective from back date accumulated profit of both the company taken together have to be considered even though loan had been given by the amalgamating company on a date when it was not having sufficient accumulated profits (CIT v. Mukundray K Shah(2007) 290 ITR 433 (SC)).
7. Business transactions are not covered
CIT v. Ambassador Travel (P) Ltd., (2009)318 ITR 376 (Del);
CIT v. Creative Dying & Printing (P) Ltd., (2009) 318 ITR 476(Del);
CIT v. Raj Kumar, (2009) 318 ITR 462 (Del);

16. Issues
8. To be exempt from taxability money lending should be substantial part of the business. Various factors needs to be considered for this purpose. Capital employed in this business is also one of the consideration (CIT v. Parle Plastics Ltd. (2011) 196 Taxman 62 (Bom);Kishori Lal Agrawal v. CIT, 364 ITR 158 (All).
9. Loan or advance need not be in cash it can be in kind also (M.D. Jindal v. CIT 164 ITR 28 (Cal)). Supply of material (iron roads) to the shareholders was considered to be device to circumvent the provision and was accordingly taxed.
10. The theory of direct or indirect loan does not apply (Nandlal Kanoria v. CIT (1980) 122 ITR 405 (Cal)). In a case where MD directed an employee to take loan from

17. Issues
company and pass on the money to him was considered to be deemed dividend to MD (CIT v. L. Alagusundaram Chettiar (1977) 109 ITR 508 (Mad)). Advance though partnership firm was also considered as taxable u(CIT v. Mukundray K Shah (2007) 290 ITR 433 (SC)).Payment of expenses on behalf of shareholder will be considered as deemed dividend (CIT v. K Srinivasan (1963) 59 ITR 788 (Mad)). Advance given to a shareholder for purchase of property continued as such even after five year is deemed dividend (CIT v. Sunil Chopra (2011) 201 Taxman 316 (Del)).
11. Repayment of loan during the year will not affect the taxability
Tarulata Shyam v. CIT, (1977) 108 ITR 345 (SC)
Miss P. Sarada v. CIT, (2008) 229 ITR 444 (SC)

18. Issues
12 Payment made to concern is taxable only in the hands of shareholders
CIT v. Ankitech (P) Ltd., (2012) 340 ITR 14 (Del.);
CIT v. MCC Marketing (P) Ltd., (2012) 343 ITR 350;
CIT v. Universal Medicare (P) Ltd. (2010) 324 ITR 263 (Bom);
CCIT v. Sarva Equity (P) Ltd. (2014) 225 Taxman 172 (Kar).
CIT v. G.T.Z. Securities Ltd. (2013) 359 ITR 345 (J&K)
CIT v. Gopal Clothing Company P.Ltd (2013) 350 ITR 67 (Del)

19. Precaution
Most of the time in the case of transactions between the group company provisions of section 2(22)(e) are over looked. In order to avoid implication, it is very important that provisions should be considered while carrying out the transaction

20. Liability for TDS and Taxability
Company is liable to deduct TDS as per provision of Section 194 of the Act. This section specifically provides for deduction of Tax from payments referred to u/s 2(22)(e) of the Act.
Provision of section 115O are not applicable to such payments as provided in section 115 Q of the Act. Accordingly, such deemed dividend will not be exempt u/s 10(34) of the Act and same will be chargeable to full rate of tax in the hands of shareholders.

21. Expenditure Incurred in Respect of Exempt Income
Section 14A, Rule 8D and Recent Case Laws

22. Section 14A
Section 14A inserted vide Finance Act 2001 w.e.f and sub-sections (2) and (3) inserted w.e.f. from
14A.(1) For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act.
(2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in

23. Section 14A
accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act.
(3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act:

24. Rule 8D Clause(i):Expenditure directly relating to exempt income.
Notified on and provides -
Clause(i):Expenditure directly relating to exempt income.
Clause(ii):Interest, not directly attributable to any particular income or receipt, in ratio of average investment to average total assets.
Clause(iii):Amount equal to 0.5%

25. Rule 8D is prospective
Godrej Boyce Manufacturing Co. Ltd. V. DCIT 328 ITR 81(Bom.)
Maxopp Investment Ltd. vs. CIT, 347 ITR 272 (Del.)
Birla Corp. Ltd. v. CIT (2014) 267 CTR 540 (Cal.)

26. Expenditure incurred in relation to exempt income is disallowable
CIT v. Hero Cycles Ltd. (2010) 323 ITR 0518 (P&H);
CIT v. Ms. Sushma Kapoor 319 ITR 299 (Del);
ACIT Vs. Eicher Ltd. 101 TTJ (Del.) 369;
Maruti Udyog Ltd. v. Dy. CIT (2005) 92 ITD 119 (Del.);
Escorts Ltd. Vs. DCIT 102 TTJ 522 (Del.);
Wimco Seedling v. DCIT 107 ITD 267 (Del.) (TM);
Space Financial Services Ltd. v. ACIT 115 TTJ 165 (Del.)

27. AO to record satisfaction
Maxopp Investment Ltd. vs. CIT, 347 ITR 272 (Del.);
CIT v. Hero Management Service Ltd. (2014) 360 ITR 68 (Del.);
Amway India Enterprises Pvt. Ltd v. ITO, ITA No.585/2014 decided on Delhi High Court.;
CIT v. REI Agro Ltd (4) TMI 713(HC Cal.) decided on ;
Kodak India Pvt. Ltd. v. Addl.CIT, (2013) 155 TTJ (Mum) 697;
Tata Projects Limited v. Dy.CIT, I.T.A. No. 544/Mum/2012 decided on – ITAT;
Udhav Holdings Pvt. v. ACIT, ITA No. 5117/Mum./2012 decided on – ITAT;
ITO v. Reliance Share & stock Brokers (P) Ltd., ITA 74/Mum/2013 decided on

28. Satisfaction – CIT(A) gave opportunity to assessee and recorded satisfaction – disallowance upheld. (GEBR Pfeiffer (I) (P) Ltd. v. Addl. CIT (2014) 64 SOT 172 (URO))

29. No disallowance for interest if own funds are more than the amount of investment
Munjal Sales Corporation Vs. CIT & Anr. (2008) 298 ITR 298 (SC);
CIT Vs. Reliance Utilities & Power Ltd. (2009) 313 ITR 340 (Bom.);
CIT Vs. Bharti Televenture Ltd. (2011) 331 ITR 502 (Del.);
Addl.CIT vs. Dhampur Sugar Mill Pvt. Ltd, (2015) 370 ITR 194 (All);
Hitachi Home & Life Solutions (I) Ltd., (2014) 221 Taxman 109 (Mag.) (Guj.);

30. No disallowance for interest if own funds are more than the amount of investment
DCIT v. Allied Investments Housing P. Ltd. (ITAT Chennai) December 13th, 2013;
Yatish Trading Co. (P.) Ltd. v. CIT 2010 –TMI ID ITAT, MUMBAI;
M/s. Paranjape Autocast Pvt. Ltd., Vs. DCIT 2012 (8) TMI 549 – ITAT, Pune;
JCIT v. ANS Securities Ltd., 2014 (3) TMI 463 – ITAT Kol Decided on
CIT v. Gujarat Narmada Valley Fertilizers Co. Ltd, (2014) 221 Taxman 479 (Guj.);

31. Interest on loans taken for business to be excluded for disallowance
ACIT v. Champion Commercial Co Ltd (Kol.)(Trib.)
 Dy. CIT v. REI Agro Ltd. ITA No. 1811/Kol./2012 Decided on – (upheld by High Court in ITA No. 161/2013 decided on )
 ACIT vs. Best & Crompton Engineering Ltd (ITAT Chennai).

32. No disallowance in respect of investment made in subsidiary / group companies
CIT vs. Oriental Structural Engineers Pvt. Ltd. 216 Taxman 92.
Garware Wall Ropes Ltd vs. ACIT (2014) 65 SOT 86 (Mum)
Interglobe Enterprises Ltd. v. DCIT, 2014 (4) TMI 269 – ITAT Del. decided on
JM Financial Limited vs. ACIT (ITAT Mumbai) ITA No /Mum/2012, date of decision
EIH Associated Hotels Ltd vs. DCIT (ITAT Chennai) ITA No /MDS/2012

33. No disallowance if there is no exempt income.
CIT v. Holcim India P. Ltd., (2014) 272 CTR (Del) 282
CIT vs. Shivam Motors (P) Ltd . (2010) 272 CTR 277 (All.)
CIT v. Corrtech Energy Pvt. Ltd. (2014) 223 TAXMAN 130 (GUJ) – HC
CIT v. Lakhani Marketing Inc. (2014) 272 CTR 265 ( P & H)
CIT v. Winsome Textile Ind. Ltd., 319 ITR 204 ( P & H)
CIT v. Delite Enterprises – ITA NO. 110/2009 (Bom.) (HC)

34. Disallowance is to be restricted to exempt income
Joint Investments Pvt. Ltd. v. CIT, (2015) 372 ITR6 94 (Delhi)
Indus Valley Investment & Finance Pvt. Ltd. v. DCIT, ITA No.3763/Del/2013 decided on

35. No disallowance if income from investments is taxable.
Investment in Foreign Companies
CIT v. Suzlon Energy Ltd. (2013) 354 ITR 630 (Guj.)
Birla Group Holding Ltd. v. Dy. CIT (2007) 13 SOT 642 (Mum.)
ITO v. Strides Acrolab Ltd. (2012) 138 ITD 323 (Mum.)
Preference Shares
ACIT v. Tellicherry Co-op Hospital Society Ltd. – ITA No. 404/Coch./2013 dt (A.Y )
Short-term investments, gains from which are taxable
CIT v. Holcim India P. Ltd., (2014) 272 CTR (Del) 282
Sundaram Asset Management Co. Ltd. v. Dy. CIT (2013) 145 ITD 17 (Chennai)

36. Disallowance only with respect to investment on which exempt income was received
Dy. CIT v. REI Agro Ltd. ITA No. 1811/Kol./2012 decided on

37. Disallowance on reasonable basis keeping in view the expenditure actually incurred
J.K. Investors (Bombay) Ltd. v. ACIT, ITA No. 7858/Mum./2011 decided on
Godrej Consumer Products Ltd. v. Addl. CIT (2014) 159 TTJ 21 (Mum.) (Trib.)

38. No disallowance where shares are held as stock in trade.
CCI Ltd. v. JCIT (2012) 206 Taxman 563 (Ker.)
CIT v. Smt. Leena Ramachandran (2011) 339 ITR 293 (Ker.)
Esquire Pvt Ltd  v. DCIT ( Mum.) (Trib.)
CIT v. Gulshan Investment Co. Ltd., 2013(3) TMI 393 – (Kolkata) dated
Ethio Plastic Pvt. Ltd. Vs. DCIT, 2013(1) TMI 235 (Ahmd.).
Dy. CIT v. Baljit Securities Pvt. Ltd. - ITA No. 1183/Kol./2012 dt

39. No disallowance where shares are held as stock in trade.
AGAINST
 ITO v. Daga Capital Management (P) Ltd. (2009) 117 ITD 169 (Mum.)(S.B.) (Appeal pending before Bombay High Court – ITA NO. 989/2009).
DCIT Vs Hathway Investment Pvt Ltd 2015-TIOL-79-ITAT-MUM
  in the case of shares held as stock-in-trade, same activity, i.e., the purchase and sale of shares, results in two streams of income, being the share trading income (which is taxable) and dividend income (which is not taxable), so there is no feasibility of recording expenditure separately, and the estimation of expenditure becomes inevitable.
D.H. Securities Pvt. Ltd. v. Dy. CIT (2014) 146 ITD 1 (Mum.)TM

40. DISALLOWANCE CANNOT BE MORE THAN THE EXPENDITURE INCURRED AND CLAIMED
Gillette Group India Pvt. Ltd. v. ACIT (2012) 16 ITR 57 (Trib.)
Modern Info Technology Pvt. Ltd. Vs ITO 2012-TIOL-644 –ITAT-DEL
Udhav Holdings Pvt. Ltd. v. ACIT 2014 (1) TMI 1134 (Mum.) ITA No. 5117/Mum./2012 decided on
Tata Projects Limited v. Dy.CIT, I.T.A. No. 544/Mum/2012  
Adani Port Infrastructure Pvt. Ltd. v. DCIT 2014 (1) TMI 1122 ITAT Ahm. ITA No. 1383/Ahm/2013 decided on

41. DISALLOWANCE CANNOT BE MORE THAN THE EXPENDITURE INCURRED AND CLAIMED
M/s Cresent Trading Pvt. Ltd. v. ACIT (6) TMI 218 ITAI Mum.
Anahaita Nalin Shah Versus Asst. CIT, Range 4(1), Mumbai No. - I.T.A. No.301/Mum/2012 dated - July 24, 2013
Derive Trading Pvt. Ltd v. DCIT, ITA No. 3101/MUM/2012 decided on
ACIT v. Iqbal M. Chagla (2014) 34 ITR 636 (Trib.) Mum – ITA No. 877/Mum./2013 dt

42. EXPENSES INCURRED ON STATUTORY COMPLIANCES IN CASE OF COMPANY IS ALLOWABLE
CIT v. New Savan Sugar & Gur Refining Co. Ltd., 185 ITR 564 (Cal.)
CIT v. Ganga Properties Ltd., 199 ITR 94 (Cal.)
CIT v. Rampur Timber and Turnery Co. Ltd., 129 ITR 58 (All.)
Daljeet Export ((Ind.) (P.) Ltd., 36 ITD 305 (Del.)
Udhav Holding Pvt. Ltd. Vs. Asstt.CIT, (2014) 1 TMI 1134 – ITAT Mumbai
DSP Adiko Holdings Pvt. Ltd. v. Dy.CIT, I.T.A. No.7598/Mum/2011 decided on

43. Conclusion Assessee should make disallowance on a reasonable basis.
Assessee should be able to substantiate the basis.
Basis can be volume and the frequency of the transactions, receipts of exempt income.
CBDT, in the interest of avoiding litigations, should clarify the position and also suitably modify Rule 8D.

44. Provisions of Section 115JB
Minimum Alternate Tax

45. Taxpayable on Book Profit
Section 115JB provides for levy of tax on book 18.5%. Profit will be as per Profit & Loss Account prepared in accordance with Schedule- VI to the Companies Act, Adjustments can be made as have been specified in the section (Apollo Tyres v. CIT (2002) 255 ITR 273 (SC); Malyalam Manorma v. CIT (2008) 300 ITR 251 (SC)). MAT Credit is also available for set off against tax payable on income computed as per provision of Income Tax Act.

46. Issues / Controversies
There have been many controversies in regard to provisions of section 115J / 115JA / 115JB. Most of the same have been resolved by way of amendments in the section from time to time. Still there are following controversies:-
Levy of MAT on foreign companies. Held leviable in the cases Castleton Investment Ltd., In re (2012) 211 Taxman 282 (AAR); (2013) 212 Taxman 246 (AAR). Held not leviable in the case of Timken Co., In re (2010) 326 ITR 193 (AAR). Vide Finance Act, 2015 capital gain and also interest, royalty or fee for technical services chargeable to tax at rate less than 18.5% is to be excluded from book profit.
Adjustment on account of provision for gratuity and leave encashment;

47. Issues / Controversies
Adjustment on account of expenditure to exempt income;
Adjustment on account of prior period expenses;
Claim for bad debts written off against provision added in book profit in earlier years;
Adjustment on account of income or expense not credit or debited, specified in notes to accounts or adjusted in reserves in the balance sheet;
Determination of amount of loss or depreciation for earlier years, whether on year to year basis or cumulative basis

48. Deduction in respect of expenditure of Capital Nature Incurred for Specified Business
Section 35AD

49. Clause
Specified Business
Commenced on or After
Deduction Allowable
(i)
Cold Chain Facility
150% if commenced on or after
(ii)
Warehousing Facility for Agricultural Produce
(iii)
Cross Country Natural Gas or Crud or Petroleum Pipe Line, including storage facility
100%
(iv)
Hotel of Two-Star or Above Category
(v)
Hospital with at least 100 Beds
(vi)
Housing Project for Slum Redevelopment or rehabilitation

50. Clause
Specified Business
Commenced on or After
Deduction Allowable
(vii)
Housing Project for Affordable Housing
150% if commenced on or after
(viii)
Production of Fertilizer
(ix)
Inland Container Depot or a container Freight Station
100%
(x)
Bee-Keeping and Production of Honey and Beeswax
(xi)
Warehousing Facility for Sugar
(xii)
Slurry Pipeline for Transportation of Iron Ore
(xiii)
Semi-Conductor Wafer Fabrication Manufacturing Unit

51. Conditions
Expenditure of capital nature incurred, wholly and exclusively for the purpose of business carried on during the year, other than the expenditure incurred on the acquisition of any land or goodwill or financial instrument.
The expenditure incurred prior to commencement of operation and capitalized in the books of accounts will be allowable in the year of commencement.
Business is not set up by splitting-up or reconstruction.
Plant and machinery not used earlier, except to the extent of 20% of total value of plant and machinery used in the business or machinery imported from out side India.

52. Conditions
In case of business of natural gas or crude or petroleum oil pipeline the business is run by a company formed under the Companies Act or by a consortium of such companies or by an authority constituted under any Central or State Act and the business has been approved by Petroleum and Natural Gas Regulatory Board and it has also made pipeline capacity for use as common carrier by any person other than the assesse, to the extent specified by the Board and also fulfils such other conditions as may be prescribed.
The assets in respect of which deduction claimed and allowed shall be used for a period of 8 years only for that business.

53. Conditions
Where deduction has been claimed and allowed in respect of business for any assessment year under this section no deduction shall be allowed to the assesse u/s 10AA or Chapter VI-A (Sections 80IA, 80IB, 80IC etc.).
No deduction in respect of expenditure will be allowable under any other section in that year or in any other year.

54. Deduction in respect of employment of workmen
Section 80JJAA

55. Deduction is allowable in respect of additional wages paid to new regular employees employed during the year in a factory engaged in the business of manufacture of goods, for a period not less than 300 days and are also not casual employees or though contract labour.
Deduction is allowable equal to 30% of additional wages for three assessment years, including the assessment year in which new employees were employed.

56. Vide Finance Act, 2015 following amendments have been made w. e. f. 01
Earlier deduction was available to an Indian Company. Now deduction will be available to all the assesses;
Earlier there was condition of 100 new workers or 10% of strength as on the last day of the preceding year, whichever is higher. Now number has been reduced to 50 or 10% of existing strength.

57. Issues
If the worker is employed for less than 300 days in the first year, whether the deduction will be available in the subsequent years. If yes, whether for two years or three years;
If the worker, who is qualified in the first year, leaves the job in second year working for less than 300 days, whether deduction will be available for his wages;

58. Speculative Share Transactions
Explanation to Section 73

59. Section 73
Explanation.—Where any part of the business of 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", or a company the principal business of which is the business of trading in shares or banking or the granting of loans and advances, 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.

60. Object and purpose
Explanation was inserted vide Taxation Laws (Amendment) Act, 1975 w.e.f to curve the device sometime resorted to by business houses controlling group of companies to manipulate and reduce the taxable income of the companies under their control (Circular No. 204 dated ).

61. Scope of Explanation
This is a deeming provision. In general section 43(5) defines ‘speculative transaction’ to mean a contract settled otherwise than the actual delivery.
Section applies only to a company.
Investment or a company having principal business of trading in shares or banking or granting of loans and advances is outside the purview. In other words a company engaged in any other business and is also carrying on business of purchase and sale of shares is covered.

62. Issues
Explanation applies to loss in shares transactions and not to the profit.
Explanation applies to a single or more transactions in shares constituting business and not to the shares held as investment.
In order to decide whether it is mainly an investment company, normal test can be more than 50% of its income from such income but it is not a sole criteria and other factors also needs to be looked into.
In order to decide whether main business is investment or granting of loans or advances, loss may also be considered as profit for the purpose of comparison.

63. Issues
Even the activity or income in one year may not be deciding factor. What needs to be considered is major source of income. (Nawn Estates (P) Ltd. v. CIT (1977) 106 ITR 45 (SC); CIT v. Coochbehar Trading Co. Pvt. Ltd. (1979) 120 ITR 535 (Cal).
The fact that there was physical delivery of shares would not save the assesse from deeming the loss as speculative. In other words even if a transaction in non-speculative according to Section 43(5), still it would be speculative for the purpose of this Explanation (Merfin (I) Ltd. v. DCIT (2002) 80 ITD 399 (Hyd.); CIT v. Lokmat News Papers P Ltd. (2010) 322 ITR 43 (Bom))

64. Issues
Loss arising on account of valuation of shares at the end of the year will also attract Explanation. (Centurion Investment and International Trading Co. Pvt. Ltd. v. ITO (2009) 318 ITR (AT) 24 (Del

65. THANK YOU
V.P. Gupta
Advocate