Business income treatment of dividend on trading shares and deductibility of machinery sale loss under tax law

Loss on sale of machinery and plant used in the colliery business was deductible where the asset had been used during the relevant accounting year, the sale occurred in that year, and the loss was written off in the books, satisfying section 10(2)(vii) of the Income-tax Act, 1922. Dividend received on shares held as trading assets was treated as business income for section 24(2), because stock-in-trade shares retain their business character and the dividend could be adjusted against brought forward business losses. The Supreme Court therefore accepted both assessees' contentions and set aside the contrary answers of the High Court.

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Issues: (i) Whether the loss on sale of machinery and plant used in the colliery business was deductible under section 10(2)(vii) of the Income-tax Act, 1922. (ii) Whether dividend income from shares held as trading assets could be treated as business income and set off against brought forward business losses under section 24(2) of the Income-tax Act, 1922.

Issue (i): Whether the loss on sale of machinery and plant used in the colliery business was deductible under section 10(2)(vii) of the Income-tax Act, 1922.

Analysis: The assessee had carried on the colliery business during part of the relevant accounting year, the machinery and plant had been used for the business, the sale took place during that year, and the loss was written off in the books. The statutory conditions for allowance under section 10(2)(vii) were thus satisfied.

Conclusion: The loss was allowable and the answer was in favour of the assessee.

Issue (ii): Whether dividend income from shares held as trading assets could be treated as business income and set off against brought forward business losses under section 24(2) of the Income-tax Act, 1922.

Analysis: Where shares form part of the assessee's trading assets, dividend received from them is part of the business income for the purpose of section 24(2). Since the shares were stock-in-trade, the dividend income was capable of being adjusted against earlier business losses.

Conclusion: The set-off was admissible and the answer was in favour of the assessee.

Final Conclusion: The appeals succeeded on the two questions decided by the Court, and the High Court's contrary answers on those questions were set aside.

Ratio Decidendi: If the statutory conditions are satisfied and the asset sold was used in the business during the relevant year, the loss on sale is allowable under section 10(2)(vii); dividend from shares held as trading assets is business income capable of set-off against carried forward business losses under section 24(2).

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