Dividend from trading shares may be set off against brought forward business losses where the investment-company test fails under section 73.

Dividend from shares held as stock-in-trade may retain business-income character for the limited purpose of setting off brought forward business losses. The note also states that a company's status as an investment company under the Explanation to section 73 must be tested by reference to gross total income before Chapter VI-A deductions. Applying that test, dividend income exceeded business income, so the company was treated as an investment company and the Explanation to section 73 did not apply. The assessee was therefore entitled to set off earlier business losses against dividend income, and the disallowance made by the lower authorities was unsustainable.

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Issues: Whether dividend income from shares held as stock-in-trade could be treated as part of business income for the purpose of setting off brought forward business losses, and whether the assessee was an investment company so that the Explanation to section 73 of the Income-tax Act, 1961 would not apply.

Analysis: The assessee was found to be dealing in shares and the shares yielding dividend were held as trading assets. Dividend income from such shares does not cease to bear the character of business income for the limited purpose of set-off against earlier business losses. The crucial test for deciding whether the company was an investment company under section 109(ii) had to be applied with reference to gross total income under section 109(iv), that is, before Chapter VI-A deductions. On that basis, dividend income exceeded business income, so the assessee answered the description of an investment company and the Explanation to section 73 was not attracted.

Conclusion: The assessee was entitled to set off the brought forward business losses against the dividend income to the extent of Rs. 31,110, and the disallowance made by the lower authorities was unsustainable.

Ratio Decidendi: For determining the applicability of the Explanation to section 73, the company's status as an investment company must be judged on gross total income before Chapter VI-A deductions, and dividend from shares held as stock-in-trade may be available for set-off of earlier business losses when that explanation does not apply.

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