Court classifies shares as trading assets, allows set-off of carried-forward loss against dividend income

The court determined that the shares of Bhavnagar Electricity Company Limited were trading assets of the assessee's money-lending business. Consequently, the income from dividends on these shares was considered business income, allowing the carried-forward loss of earlier years to be set off against it under section 24(2) of the Indian Income-tax Act, 1922. The court directed the Commissioner to pay the costs of the reference to the assessee.

---

---

Issues Involved:
1. Whether the assessee is entitled to set off the carried forward loss of Rs. 99,704 against the income of Rs. 6,148, representing the dividend earned on shares of Bhavnagar Electricity Company Limited.
2. Determination of whether the shares of Bhavnagar Electricity Company Limited were trading assets of the assessee's money-lending business.

Detailed Analysis:

Issue 1: Set off of Carried Forward Loss
The primary question addressed was whether the assessee could set off a carried forward loss of Rs. 99,704 against the income of Rs. 6,148, which was dividend income from shares of Bhavnagar Electricity Company Limited. Section 24(2) of the Indian Income-tax Act, 1922, was central to this issue. The court noted that the carried forward loss of earlier years could be set off against the profits of any business carried on by the assessee in the relevant year, provided the business in which the loss was originally sustained continued to be carried on.

The judgment emphasized that the profits of the business against which such set off can be claimed include income derived from a business activity, even if computed under another head. Citing Commissioner of Income-tax v. Cocanada Radhaswami Bank Ltd., the court clarified that the income from dividends, though assessable under section 12, could still be considered business income if it was derived from trading assets of the business.

Issue 2: Nature of Shares as Trading Assets
The court examined whether the shares of Bhavnagar Electricity Company Limited were trading assets of the assessee's money-lending business. The shares were acquired as part satisfaction of a debt due to the assessee in the course of its money-lending business. The court found that the shares were received by the assessee as stock-in-trade of the money-lending business, and there was no evidence to suggest that the assessee had withdrawn these shares from its money-lending business and treated them as investments.

The balance-sheet of the assessee showed that the paid-up capital and reserve fund were insufficient to cover the investment in the shares, indicating that borrowed moneys were utilized for this purpose. The interest on these borrowed moneys was consistently treated as business expenditure and accepted as such by the revenue authorities. This reinforced the view that the shares were regarded as part of the stock-in-trade of the money-lending business.

The court dismissed the revenue's argument that the long retention of shares indicated they were investments, noting the lack of evidence showing the shares were easily realisable. The court also highlighted the inconsistency in the revenue's stance of treating the interest on borrowed moneys as business expenditure while simultaneously claiming the shares were investments.

Conclusion:
The court concluded that the shares of Bhavnagar Electricity Company Limited were indeed trading assets of the assessee's money-lending business. Consequently, the income from dividends on these shares was considered business income, allowing the carried-forward loss of earlier years to be set off against it under section 24(2). The court reframed the question to: "Whether, on the facts and in the circumstances of the case, the dividend income of Rs. 6,148 though chargeable under section 12 of the Indian Income-tax Act, 1922, is part of the income of the business of the assessee for the purpose of set off of the loss of Rs. 99,704 brought forward under section 24(2) of the Indian Income-tax Act, 1922Rs." The answer was in the affirmative, and the Commissioner was directed to pay the costs of the reference to the assessee.

---