Bombay High Court

Swamini Leasing & Investment (P) ... vs Joint Cit on 28 January, 2004

Equivalent citations: (2004) 91 TTJ Mumbai 326

ORDER

A.K. Garodia, A.M.:

All these three appeals are assessee's appeals directed against the common order of learned Commissioner (Appeals)-X, Mumbai, dated 14-7-1999, for assessment years 1994-95, 1995-96 and 1996-97. As common issue is involved in all these three appeals, we dispose of the same by this common order, for the sake of convenience.

2. Although the assessee had raised only one ground in all these three appeals, additional grounds of appeal were also raised vide letter dated 1-1-2004. The original ground in all the three years relates to applicability of the Explanation to section 73 of the Income Tax Act, 1961 and taxing of dividend income without setting off of the business losses. In the additional grounds, the ground No. (A) relates to assessment year 1995-96 wherein the dividend and interest income exceeds the amount of business loss and the applicability of Explanation to section 73 has been challenged on this account also for assessment year 1995-96. The additional ground No. (B) relates to treating the dividend income separately under the head "income from other sources" instead of part and parcel of share trading activities. Additional ground Nos. (C) and (D) are factual and hence not admitted. Additional ground No. (E) relates to setting off of brought forward losses from the assessment year 1992-93 Rs. 68,000 and assessment year 1993-94 Rs. 1,356.

3. In summary, we have to decide the following three issues to dispose of the original grounds of appeals and ground Nos. A, B and E of additional grounds

(a) Whether the Explanation to section 73 is applicable to the assessee in all the 3 years and in particular assessment year 1995-96 when the dividend and interest income is more than business losses.

(b) Whether the dividend income shall be taxed under the head "income from business" or under the head "income from other sources" and

4. Regarding the first issue, i.e., applicability of Explanation to section 73, it was argued by the learned Authorised Representative of the assessee that dealing in shares is the only business of assessee whereas the Explanation starts with where any part of the business which implies that there must be at least two businesses of the assessee to apply this Explanation to section 73. It was contended by the learned Authorised Representative that the object of the said Explanation is to debar the set off of the non-share trading business incomes against the share trading losses. In this connection, our attention was drawn to the recommendation of Wanchoo Committee and CBDT Circular No. 204, dated 24-7-1976, appearing on page No. 8 of the paper book. It was also contended by the Authorised Representative that all the four judgments relied upon by the learned Commissioner (Appeals) are clearly distinguishable from the appellant-company's case. In the case of Eastern Aviation & Industries Ltd. v. CIT (1994) 208 ITR 1023 (Cal), the company was having two businesses, i.e., share trading business and speculation in shares. It was contended that this case is distinguishable from the present case as the assessee has only one business of trading in shares effected with actual delivery of the shares. The judgment in the case of CIT v. Amritlal & Co. (1995) 212 ITR 540 (Bom), is also distinguishable because in this case, it was held that a company engaged mainly in business or industrial activity cannot be held as an investment company mainly because in a particular year, its income from such business or industrial activity is lower than income from investment, interest on security, capital gains, etc. This case is clearly distinguishable from the present case as in the present case, the assessee does not have any other business or industrial activity. In other two judgments, i.e., Abdul Ghani Haji Habib & Ors. v. CIT (1969) 72 ITR 6 (Cal) and Sri Ranga Vilas Ginning & Oil Mills v. CIT ('1982) 133 ITR 85 (Mad), it was held that where forward contracts entered into by an assessee carrying on regular business are settled not by actual delivery of goods but by payment of price difference, such contracts will be speculative in nature. It was contended that the assessee had not settled any transaction by payment of price difference but have actually executed each transaction in terms of actual delivery of shares and hence these two judgments are also clearly distinguishable from the present case. The learned Authorised Representative also argued that apart from trading in shares, the assessee- company had advanced loans also in all the 3 years and earned interest in assessment years 1995-96 and 1996-97. The details of loans and interest earned is appearing on page No. 3 of the paper book and on this basis, it was contended that the assessee- company is a loans and advance company and therefore, out of purview of the Explanation to section 73. Regarding assessment year 1995-96, reliance was placed on the Tribunal's order in the case of M. Gulab Singh & Sons (P) Ltd. v. IAC (1992) 43 ITD 308 (Chd) appearing on pp. 28 and 29 of the paper book. In this case the company had positive income merely from house property and other sources and in that view of the matter, it was held that the assessee is an investment company and in view of exception contained in Explanation to section 73, the assessee-company was held to be entitled to adjust the loss on purchase and sales of shares against other income.

5. As against this, learned departmental Representative of revenue argued that in all the years, the assessee had shown the shares as stock-in-trade and not as investment. Our attention was drawn to page Nos. 4 and 5 of the assessment order for assessment year 1994-95 wherein the assessing officer has narrated all the facts from assessment year 1991-92 to assessment year 1994-95 and as per these, only Rs. 7,500 was shown as investment in assessment year 1994-95 by the assessee and all other holdings of shares had been shown as closing stock. Our attention was also drawn to page Nos. 3 and 4 of the order of learned Commissioner (Appeals) in which, the learned Commissioner (Appeals) had discussed in detail the recommendation of the Wanchoo Committee and CBDT Circular No. 204, dated 24-7-1976. It was contended by the learned departmental Representative that Explanation to section 73 is very much applicable even if the assessee had only one business, i.e., of dealing in shares. Reliance was placed in this regard on the following judgments

(a) Eastern Aviation & Industries Ltd. v. CIT (supra)

(b) CIT v. Amritlal & Co. (supra).

6. We have considered the rival submissions and perused the material from record and have gone through the various case laws cited before us. The Explanation to section 73 very clearly says that if the gross total income consists mainly of income which is chargeable under the heads 'interest on securities, income from house properties and capital gains and income from other sources', then the Explanation is not applicable to a company or if the principal business of the company is business of banking or the granting of loan and advances, then also this Explanation is not applicable. In all other cases, the Explanation is applicable. In the present case, there is no dispute that income from business whether positive or negative is higher than the income from dividend and interest earned by the assessee in all the years except in the assessment year 1995-96. If the income from dividend is considered as income from other sources, then Explanation to section 73 will not be applicable to the assessee in the assessment year 1995-96 but before coming to a conclusion in this regard, we have to decide whether the income from dividend in the present case shall be taxed under the head "income from business" or under the head "income from other sources" because as per additional ground raised by the assessee, the assessee has contended that the dividend earned is only a derivative of trading activities of shares and hence dividend income should be taxed along with trading activities in shares and for this contention, reliance is placed on the following judgments

(a) Goondram Bros. Ltd. v. CIT (1946) 14 ITR 764 (Bom)

(b) Western State Trading Ltd. v. CIT (1971) 80 ITR 21 (SC)

(d) Asstt. CIT v. Sinor Trading Ltd. (1999) 71 ITD 388 (Mum).

7. In all the cases, it was held that the dividend income arising from the shares held as stock-in-trade, would amount to business income. In this view of the matter, we are of the considered opinion that dividend income, in the facts and circumstances of this case, is taxable under the head income from business' only. We have to apply this ratio in assessment year 1995-96 also and then examine whether the claim of the assessee that income from other sources is higher than income from business in assessment year 1995-96 is correct or not. We find that after adjustment of dividend income of Rs. 12,07,767 against other business loss of Rs. 12,96,256, the position stands as under

Rs.

(a) Business Loss (Net)

88,489

(b) Income from other sources being interest

2,47,972

As per above, the income from other sources is higher than the business loss and hence, the Explanation to section 73 is not applicable to the assessee in assessment year '1995-96. But, in the other years, i.e., assessment years 1994-95 and 1996-97, the position is not so even after adjustment of dividend income against business loss and hence, the Explanation to section 73 is applicable to the assessee in these two years. This issue is disposed of accordingly.

8. Regarding the second issue, i.e., whether the dividend income in this case should be taxed under the head 'income from other sources', we have already decided in the above para that the same is taxable under the head 'income from business' and accordingly, we direct the assessing officer that income from dividend in all the three years shall be considered under the head 'income from business' and since the dividend has been earned out of the only business of the assessee, i.e., dealing in shares, the business loss shall be determined after considering the dividend income and only the net business loss in the two assessment years, i.e., assessment years 1994-95 and 1996-97 shall be treated as speculation loss. This issue stands disposed of accordingly.

9. Regarding the third issue, i.e., setting off of brought forward loss of assessment year 1992-93 and assessment year 1993-94, we set aside this matter to the file of the assessing officer with direction to examine the claim of the assessee in this regard and pass necessary orders as per law after providing reasonable opportunity of being heard to the assessee.

10. In the result, ITA No. 5166/Mum/1999 for assessment year 1995-96 is allowed and other two appeals of the assessee are assessment year 1995-96 is allowed and other two appeals of the assessee are partly allowed.