Dividend on stock-in-trade shares treated as business income, allowing set-off of carried-forward business losses.

Dividend received on shares held as stock-in-trade in the course of a share-dealing business is treated as business income under the charging scheme, because the receipt arises incidentally from the business source and cannot be relegated to the residuary head merely due to the separate computational machinery for dividend income. On that basis, the carried-forward business loss from share dealings may be set off against the dividend income. The commentary states that this view follows the scheme of the Act, under which the residuary head applies only where income does not properly fall under an earlier head.

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Issues: Whether dividends received on shares held as stock-in-trade by a dealer in shares constitute business income assessable under section 10 of the Income-tax Act, 1922, or income from other sources under section 12, and whether the carried-forward business loss from share dealings could be set off against the dividend income.

Analysis: The governing scheme of the Act places section 12 as a residuary head, operative only where income cannot properly be brought under any preceding head. Where shares are held as stock-in-trade and dividends are received in respect of those shares, the dividend arises incidentally in the course of the business of dealing in shares. The fact that dividends are computed through the statutory machinery for dividend income, including grossing up, does not prevent their inclusion in business accounts where the receipt is part of the business source. The decisions relied upon did not require a contrary conclusion, because they turned on different statutory heads such as securities income, which is separately charged, and not on dividend income received on stock-in-trade.

Conclusion: Dividend income received on shares held as stock-in-trade was held to be business income under section 10 and not income from other sources under section 12; the assessee was entitled to set off the carried-forward business loss against that income. The reference was answered in the affirmative, in favour of the assessee.

Ratio Decidendi: Where dividend is earned on shares held as stock-in-trade in the course of a share-dealing business, it forms part of business income under the charging scheme and cannot be relegated to the residuary head merely because it is computed under a separate statutory machinery.

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