1993 (7) TMI 41 - HC - Income Tax

Assessee not an investment company under s.109(ii); Explanation to s.73 applies, speculative share trading losses carried forward under s.73

Eastern Aviation And Industries Limited Versus Commissioner Of Income-Tax

HC upheld the Tribunal's finding that the assessee was not an investment company under s.109(ii) and that the Explanation to s.73 applied. The assessee's ... Investment company - Income derives from share dealings and dividend - speculation loss in shares in view of the Explanation to section 73 - Whether, the Tribunal was justified in law in holding that the appellant was not an investment company in terms of section 109(ii) of the Income-tax Act, 1961 ? - HELD THAT:- From the assessment order passed in the case of the assessee-company it is clear that the assessee had shown a net loss of Rs. 28,50,358 in its profit and loss account for the previous year under reference. This included speculative loss in share transactions amounting to Rs. 7,95,447, loss in regular share dealing business amounting to Rs. 12,90,145 and loss of interest attributable to the share dealing business amounting to Rs. 8,21,400. As against the above, the only income of the assessee-company for the year under reference was by way of dividend amounting to Rs. 3,87,603. If the total income of this assessee-company is computed in accordance with the provisions of the Income-tax Act, 1961, without first giving effect to the Explanation to section 73, it would be found that as against the income by way of dividend amounting to Rs. 3,87,603 assessable under the head 'Income from other sources', it had a net business loss in its share dealing transactions aggregating Rs. 21,11,545. In addition thereto, it had a speculative loss in share transaction amounting to Rs. 7,95,447 which, in any event, is to be carried forward in view of the provisions of section 73 of the said Act. In other words, the business loss of Rs. 21,11,545 is clearly more than the income by way of dividend amounting to Rs. 3,87,603. It is by now well-settled that the words 'income' or 'profits and gains' should be understood as including losses also so that in one sense 'profits and gains' represent 'positive income' whereas 'losses' represent 'negative income'. Explanation to section 73 is clearly applicable and loss suffered by the assessee-company in its share trading transactions inclusive of interest paid on borrowed monies attributable to that business was rightly treated by the Tribunal as a loss in speculative business. Issues Involved: Interpretation of whether the appellant qualifies as an investment company under section 109(ii) of the Income-tax Act, 1961 for the assessment year 1983-84.Summary: The assessee, a limited company, claimed to be an investment company due to its dividend income exceeding business income. The Income-tax Officer initially treated the business loss as speculative loss. The Commissioner of Income-tax (Appeals) accepted the assessee's argument, directing the loss to be treated as ordinary business loss. However, the Tribunal ruled that the assessee did not qualify as an investment company as the loss from share dealings exceeded income from other sources. The Tribunal also applied the Explanation to section 73, deeming the share trading losses as speculative business losses.During the reference hearing, the assessee's representative argued that the dividend income was higher than the business loss, thus meeting the criteria of an investment company as per section 109(ii) of the Act. The definition of an 'investment company' was crucial, as per section 109(ii), focusing on income from various sources.The Court analyzed the gross total income of the assessee, considering losses as negative income. Citing relevant case law, it concluded that the assessee did not qualify as an investment company since business losses exceeded income from other sources. Therefore, the Tribunal's treatment of the share trading losses as speculative business losses was deemed appropriate.In conclusion, the Court ruled in favor of the Revenue, affirming that the assessee did not meet the criteria to be classified as an investment company. No costs were awarded in this matter.Separate Judgment: Judge SHYAMAL KUMAR SEN concurred with the decision.