Stock-in-trade characterization of shares allowed set-off of carried-forward business losses against dividend income.

Shares held as stock-in-trade, rather than as investment, produced dividend income of a business character, allowing carried-forward business losses to be set off against that income. The determining factor was the character of the shares in the relevant year: the original control objective had ceased, the assessee treated the shares as business assets, later dealings in the same shares were taxed as business income, and borrowings used to acquire them had been allowed as a business deduction. On those facts, the shares were treated as trading stock and the set-off was permitted.

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Issues: Whether the assessee was entitled to carry forward and set off losses of earlier years against dividend income received from shares, which turned on whether the shares were held as stock-in-trade or as investment.

Analysis: The decisive question was the character of the shares in the relevant accounting year. If the shares were stock-in-trade of the assessee's share business, dividend income derived from them would retain the character of business income and the carried-forward business losses could be set off under the loss carry-forward provision. The surrounding circumstances supported a conversion of the holding from investment to trading stock: the original purpose of acquiring control had ceased, the assessee subsequently dealt with the shares as business assets, profits from dealings in the same shares in later years were treated as business income, and interest on borrowings for purchase of the shares had been allowed as a business deduction.

Conclusion: The shares were held as stock-in-trade and not as investment, so the assessee was entitled to set off the earlier years' losses against the dividend income. The question was answered in the affirmative, in favour of the assessee and against the revenue.

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