TaxTMI 
TaxTMI 
2005 (1) TMI 314
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....Industries Ltd. v. CIT reported at 208 ITR 1023." 2. When the Court was assembled, Shri K.C. Naredi, the learned Commissioner of Income-tax (Departmental Representative) sought the attention of the Bench to the adjournment application moved by the Revenue. The Revenue has sought adjournment of the hearing for the reason that the Special Counsel engaged by the Department to conduct its case, Shri Beni M. Chattergi has informed his inability to appear in the Court for this case and the appointment of another Counsel is in the process. The learned CIT (D.R.) has produced a copy of the communication that he has received from Shri M.G. Zade, Income-tax Officer, 3(1)(3), Mumbai, to support the adjournment motion. 3. The Bench after considering the submissions, expressed its constraints in adjourning Special Bench Cases posted for hearing after a long process of administrative proceedings and giving advance: notices to the parties concerned and the interveners, if any. The Bench expressed its inability to adjourn the hearing of the case. 4. When the adjournment sought for by the Revenue was declined by the Bench, the learned CIT (D.R.) dutifully shouldered the responsibility of c....
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.... assessee-company. He held that the provisions of section 43(5) do not have application in this case as the present case is governed by Explanation to section 73 which is an independent and deeming provision. (8) The assessee-company defended its case under Explanation to section 73 also. The assessee-company contended that its gross total income consisted mainly of income which is chargeable under the head "income from other sources" and therefore the exclusion provided in the Explanation applied to it. (9) The claim of the assessee-company regarding non-applicability of Explanation to section 73 also was rejected by the Assessing Officer on the following grounds:- (i) Explanation to section 73 stated that where the assessee-company has more than one business activities, one of which is buying and selling of shares, shall be treated as speculative business; the view supported by the decision of CIT v. Arvind Investments Ltd. [1991] 192 ITR 365 (Cal.). (ii) The Explanation was brought in the statute book to curb the device sometimes resorted to by business houses controlling group of companies to manipulate and reduce taxable income of companies ....
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....gross total income without applying the provisions of Explanation to section 73 and on that basis if the gross total income consisted wholly of dividend: income which is chargeable under the head "income from other sources" then, the loss incurred by the assessee-company on purchase and sale of shares would not be speculative in nature within the meaning of Explanation to section 73. (vi) Reliance was placed by the assessee-company on the following decisions:- (a) Rajan Enterprises (P.) Ltd. v. ITO [1992] 41 ITD 469 (Bom.) (b) M. Gulab Singh & Sons (P.) Ltd. v. IAC [1992] 43 ITD 308 (Chd.). (12) The CIT(A) accepted the second limb of the contention advanced by the assessee-company and held as follows:- "I agree with the submissions made on behalf of the appellant that the Assessing Officer could not invoke the provisions of section 73 and Explanation thereto without adjusting the losses and gains from various sources under the head 'business' as permitted by the provisions of sections 70 and 71 of the Income-tax Act, 1961, and only then, if the appellant's case fell within the non-excluded categories of companies as per the E....
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.... the other hand, in the following decisions, the Tribunal has taken the view that while examining the applicability of Explanation to section 73, the entire business activities of the assessee-company need to be considered and not the composition of the gross total income alone. (i) ITO v. Srichakra Textiles (P.) Ltd. [IT Appeal No. 6640 (Bom.) of 1992, dated 31-5-2001] (ii) Usha Distributors (P.) Ltd. [IT Appeal Nos, 940 & 491 (Bom.) of 2001 (SMC)] (iii) Prudential Construction Co. Ltd. v. Asstt. CIT [2000] 75 ITD 338 (Hyd.) (iv) Merfin (India) Ltd. v. Dy. CIT [2002] 80 ITD 399 (Hyd.) (v) Off-shore India Ltd. v. ITO [1986] 15 ITD 549 (Cal.) 8. Therefore, at the instance of Revenue, the matter was placed before the Hon'ble President of the Income-tax Appellate Tribunal, who has constituted the Special Bench to deliver upon the issue raised in appeal by the Revenue. 9. Shri K.C. Naredi, the learned CIT (DR) who appeared for the Revenue, argued his case at length. The contentions and Arguments advanced by Shri Naredi are in the following lines:- (1) That the present issue is to be considered in the light of Explanation t....
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.... other sources and therefore, the assessee-company could not claim immunity from Explanation to section 73 of the Act. (6) The above composition of assessee's income is the correct state of affairs. The positive income earned from the principal business carried on by the assessee-company was reduced to a loss only because of the share trading loss was set off against it. The real composition of assessee's income need to be looked into before such set off. (7) That the Courts have held in the following cases that the test to be applied to ascertain the nature of activities carried on by a company is to examine the principal/primary/fundamental business carried on by it and not to examine the composition of gross total income on a year to year basis. Relied on the following decisions: (i) CIT v. Amritlal & Co. Ltd. [1995] 212 ITR 540 (Bom.) "Section 109 of the Income-tax Act, 1961, defines the expression "investment company" for purposes of sections 104, 105 and 107A. From the definition it is evident that in order to term a company an "investment company", its gross total income should consist "mainly" of income from securities, h....
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....ould form part of the income from the business of the assessee. In that case, the dividends of Rs. 10,18,914 declared by the assessee under the head "other sources" need to be considered as its business income in which case the business income of the assessee-company would be more than the income under any of the heads mentioned in the exclusion to Explanation to section 73; rather there would be no income under any other heads, than business income. (9) Reliance placed on the following decisions:- (i) Western States Trading Co. (P.) Ltd. v. CIT [1971] 80 ITR 21 (SC). "If shares are held by an assessee as part of his trading assets, dividends on those shares would for part of the income from business of the assessee. The assessee will therefore be entitled to claim set off of loss from its business carried forward from earlier years against dividends of the current year from the shares held as stock-in-trade of his business under section 24(2) of the Income-tax Act, 1922." (ii) Apollo Tyres Ltd. v. CIT [2002] 255 ITR 273 (SC) pp. 277, 278. "The dispute in the present case is in regard to the question whether the assessee's investment....
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....r sources by way of dividends and the assessee-company cannot claim that it is excluded from Explanation to section 73 on the ground that its gross total income mainly consisted of income from other sources. (11) Reliance placed on the following decisions:- (i) Eastern Aviation & Industries Ltd. v. CIT [1994] 208 ITR 1023 (Cal.) "The expression "investment company" means a company whose gross total income consists mainly of income which is chargeable under the heads "Interest on securities", "Income from house property", "Capital gains" and "Income from other sources". Further, the Explanation to section 73 of the Income-tax Act, 1961, reads as under. "Explanation": Where any part of the business of a company (other than a company whose gross total income consists mainly of income which is chargeable under the heads "Interest on securities", "Income from house property", "Capital gains" and "Income from other sources" or a company the principal business of which is the business of banking or the granting of loans and advances) consists in the purchase arid sale of shares of other companies, such company shall, for the purposes of this section, be deemed t....
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....The above decision was followed by the Tribunal as the circumstances in which the company was to be treated as an investment company and circumstances in which a company is excluded from Explanation to section 73 are identically stated in section 109 (since repealed) and in section 73 of the Income-tax Act, 1961. (14) That the Tribunal has also relied on the judgment in Western States Trading Co. (P.) Ltd. v. CIT [1971] 80 ITR 21 (SC) to hold that dividends received on shares held as stock-in-trade has to be treated as business income. The Tribunal has held as under:- "Applying the ratio laid down by Hon'ble Apex Court in the case of Western States Holding Co. (P.) Ltd., dividend income is to be assessed under the head income from business. Alter doing so, because income of the assessee will be Rs. 17,50,851 (4,26,051 + 13,24,800). It's income chargeable under the head "Interest on securities", "Income from house property", "Capital gains" and "Income from other sources" will be nil Thus, its gross total income will consist of only business income. Therefore, the assessee will fall within the Explanation of section 73." (15) That, therefore, the d....
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....s and also in shares in addition to rendering of commercial services. The income/loss of the different business have to be considered together under the head "profits and gains of business or profession". (2) That the normal presumption is that loss of any one business has to be set off against the income of other business, all coming under the same head of business income. The above presumption is the substance of law stated in section 70. The Revenue has not pointed out any provision of law in the Income-tax Act which does not support the above presumption regarding intra-head set off of income/loss arising out of different business carried on by an assessee. The assessee-company has set off its share trading loss against income from other business activity of trading in Steel, Yarn, Fabrics and rendering of commercial services. Therefore, this is perfectly in accordance with law relating to computation of income. (3) That, there is no law to bifurcate the business income once computed under the head "profits and gains of business or profession" in the context of computing the gross total income of an assessee. If any specific item is to be considered differentl....
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..... (8) That in the light of the legal position explained above, the contention of the Revenue that dividends earned by the assessee-company from the shares held by it as stock-in-trade should be considered as "business income" rather than "income from other sources" is not sustainable in law. The reliance placed by the Revenue on the Supreme Court decisions in Western States Trading Co. (P.) Ltd. v. CIT [1971] 80 ITR 21 and Appollo Tyres Ltd. v. CIT [2002] 255 ITR 273 is out of context. (9) That the contention of the Revenue regarding business loss being in the nature of negative income should have been compared to the positive income from other sources is not applicable to the facts of the present case. In the cases cited by the Revenue in Eastern Aviation & Industries Ltd. v. CIT [1994] 208 ITR 1023 (Cal.), the assessee had a share trading loss of Rs. 12,90,145 and a speculation loss of Rs. 7,95,447 while the: positive income from other sources was Rs. 3,87,603. In that case, the Calcutta High Court held that loss is a negative profit and therefore the amount of negative profit will surpass the income from other sources and it could not be held as an investment c....
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....carried on by the assessee, as its main source of income. The inquiry regarding "source of income" is relevant in identifying the principal business of an assessee. In computing gross total income, what is relevant is "heads of income". That there should not be any confusion between "source of income and heads of income". In the context of Explanation to section 73 which is based on the concept of gross total income, the relevant factor to be looked into is "heads of income". (13) That the argument of the Revenue that the test to be applied to ascertain the nature of activity carried on by a company is to examine the principal business carried on by it and not the examination of the composition of gross total income on an year to year basis, is not correct. That the reliance placed by Revenue on the decision of the Bombay High Court in CIT v. Amritlal & Co. Ltd. [1995] 212 ITR 540 and that of Andhra Pradesh High Court in Nav Bharat Enterprises (P.) Ltd. v. CIT [1983] 143 ITR 804 is not proper. (14) That the fundamental distinction between the above two cases relied on by the Revenue and the present case of the assessee-company is that, in the former two cases the ....
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.... Asstt. CIT [IT Appeal No. 768 (Bom.) of 1992, dated 26-2-1999] (12) Santoor Commercials Ltd. v. Asstt. CIT [IT Appeal No. 435 (Bom.) of 1972, dated 28-12-1998] (13) Asstt. CIT v. Crator Trading Enterprises Ltd. [IT Appeal No. 8927 (Bom.) of 1992, dated 22-9-1998] (14) Asstt. CIT v. Madona Commercial (P.) Ltd. [IT Appeal No. 9558 (Bom.) of 1991, dated 17-9-1998] (15) Mansi Trading (P.) Ltd v. Asstt. CIT [IT Appeal No. 2331 (Bom.) of 1991, dated 3-8-1998] (16) Dy. CIT v. Bloom Trading Co. (P.) Ltd. [IT Appeal No. 6629 (Bom.) of 1991, dated 27-4-1996] (17) Vision Trading Co. (P.) Ltd. v. Asstt. CIT [IT Appeal No. 2914 (Bom.) of 1990, dated 11-12-1997] (18) Asstt. CIT (Inv.) v. Hero Textiles & Trading Ltd. [IT Appeal No. 7272 (Bom.) of 1992, dated 28-11-2000] (19) ITO v. Akhil Fabrics Ltd. [IT Appeal No. 8902 (Bom.) of 1992, dated 14-5-2001] (20) Utkarsh Textiles Trading Ltd. v. Asstt. CIT [IT Appeal No. 8492 (Bom.) of 1992, dated 13-7-1998] (21) Dy. CIT v. Pams Investment & Trading Co. Ltd. [IT Appeal No. 7789 (Bom.) of 1992, dated 5-7-2002] (22) Dy. CIT v. Radiant Texfabs Ltd. [IT Appe....
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....terprises (P.) Ltd. v. CIT [1983] 143 ITR 804 was considered by the Tribunal in the decisions of Sitcon Commercials (P.) Ltd. v. Asstt. CIT [IT Appeal No. 8036 (Bom.) of 1992, dated 30-3-1993], Contony Trading Enterprises Ltd. v. Asstt. CIT [IT Appeal Nos. 1430 & 1431 (Bom.) of 1992, dated 31-3-1993], Adamson Commercials Ltd v. Dy. CIT [IT Appeal No. 8582 (Bom.) of 1992, dated 8-6-1993], Sanket Commercials Ltd. v. Dy. CIT [IT Appeal No. 8592 (Bom.) of 1992, dated 23-9-1993], Rajniketan Traders Ltd. v. Asstt. CIT [IT Appeal No. 4618 (Bom.) of 1993, dated 18-8-1994]. (21) The decision of the Calcutta High Court in Eastern Aviation & Industries Ltd. v. CIT [1994] 208 ITR 1023 was considered by the Tribunal in its decisions rendered in Santoor Commercials Ltd. v. Asstt. CIT [IT Appeal No. 435 (Bom.) of 1972, dated 28-12-1998] and Utkarsh Textiles Trading Ltd. v. Asstt. CIT [IT Appeal No. 8492 (Bom.) of 1992, dated 13-7-1998]. (22) Again, the decision of Calcutta High Court in the case of CIT v. Arvind Investments Ltd. [1991] 192 ITR 365 was considered by the Tribunal in its decisions in ITO v. Akhil Fabrics Ltd. [IT Appeal No. 8902 (Bom.) of 1992, dated 14-5-2001] and....
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....balal v. CIT [1976] 105 ITR 735 (Bom.) (iv) CIT v. New India Investment Corpn. Ltd. [1994] 205 ITR 618 (Cal.) (v) Merfin (India) Ltd. v. Dy. CIT [2002] 80 ITD 399 (Hyd.). 17. A speculative transaction and the loss arising out of a speculative transaction have been highlighted in the scheme of Income-tax Act, 1961, more particularly in the context of computation of income under the head "Profits and gains of business or profession", for the purpose of restricting the scope of setting off and carry forward of such loss. The law, for that matter, treats speculative transaction carried on by an assessee as a distinct and separate business if the nature of such transactions arc such that, it constitutes a business. This is provided under Explanation 2 to section 28 of the Act. Likewise the definition of the term speculative transaction is provided in section 43(5) in a substantive manner. Generally speaking, the ambit and scope of speculative transaction and speculation loss need to be confined within the limit provided by law contained in the above-mentioned provisions. But, further to take care of any device that may be attempted by business houses controlling gro....
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.... whose gross total income consists mainly of income which is chargeable under the head "interest on securities", "income from house property", "capital gains" and "income from other sources"] provide thrust on the composition of the gross total income of that company. If the gross total income of the company mainly consists of income falling under the above-mentioned heads, Explanation to section 73 does not apply. If the gross total income of the company is mainly made up of income under the head "profits and gains of business or profession", it is caught by the mischief of Explanation to section 73. Therefore, we have to sec that the first category of exception is made on the basis of the "character of its gross total income". 23. As far as the second category of exception is concerned, the thrust is made on the nature of business carried on by the company. If the company is carrying as its principal business, the business of banking or the granting of loans and advances, Explanation to section 73 does not apply. The company is excluded from the ambit of Explanation on the basis of the nature of the principal business carried on by it. 24. The two kinds of exceptions provid....
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....e rate was 25 per cent. The examination made by the Court in that case, therefore, was whether the assessee-company could be treated as an investment company for the purpose of levying tax at 50 per cent. In that case, the income of the assessee-company right from assessment years 1951-52 to 1977-78 showed that assessee's income from business always far exceeded its non-business income. It was only in the case of four assessment years 1968-69, 1969-70, 1971-72 and 1972-73 that other income exceeded the business income of the assessee. In a period of 27 years, only in the case of four assessment years that the business income of that assessee-company fell short of 50 per cent of its gross total income. For all other assessment years the business income far exceeded the income from other heads. In the facts and circumstances of that case, the Court held that only for the reason that the income from other heads exceeded the business income for some assessment years, the basic nature of the assessee-company could not be changed. The assessee-company was dealing in dyes and chemicals manufactured by others. The primary business carried on by the assessee was that of trading. Therefo....
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....he judgment as found in pages 812 and 813 is extracted below:- "We are of the opinion that the construction placed by the Central Board of Direct Taxes upon the definition represents the correct view. Adopting the view contended for by the Department would result in anomalous and inequitable results. Take the case of a company which is engaged in generation of electricity. Its investment in that behalf is ten crores of rupees. It also engages itself in trading activities, which is not one of the specified activities. The investment in trading activities is, say, 50 lakhs of rupees. Suppose in a given assessment year, its income from generation of electricity is 'nil' while its income from trading activities is one lakh of rupees. According to the Department's contention, it would not be an industrial company. In other words, according to the Department, it would not be a company mainly engaged in the generation of electricity, which is, ex facie and from any point of view, untrue and untenable. We, are, therefore, of the opinion that the company which is mainly engaged in the specified activity shall be deemed to be an industrial company notwithstanding the fac....
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.... income from business is a loss of Rs. 97,358. The assessee-company has further earned dividend income of Rs. 10,18,914 from shares held as its stock-in-trade. The loss of Rs. 97,358 has been computed under the head "profits and gains of business or profession". The dividend income of Rs. 10,18,914 has been computed under the head "income from other sources". After the set off of the dividend income and the business loss, the gross total income has been worked out to Rs. 9,21,556 which is entirely made up of dividend income computed under the head "income from other sources". 32. In the present case, the gross total income is made up of dividend income chargeable to tax under the head "income from other sources". The character of gross total income for the purpose of Explanation to section 73 is to be examined in the light of the "chargeability" to tax, of various components of the gross total income under the specified heads of income. The "chargeability" is to be looked into with reference to the heads of income. The emphasis given to "chargeability" on the basis of the heads of income is apparent from the relevant text of law given in Explanation to section 73, which is extra....
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....income from "interest on securities" would fall under section 8 of the 1922 Act even though securities were held by a banker as part of its trading assets in the course of business, and such income cannot be brought to tax as business income. 34. Following the above principles, the Supreme Court has held in CIT v. Chugandas & Co. [1965] 55 ITR 17 that even if an item of income is earned in the course of carrying on a business, it will not necessarily fall within the heading "profits and gains of business". If securities constitute stock-in-trade of the business of an assessee, interest received from those securities will for the purpose of determining the taxable income, be shown under the head "interest on securities". Similarly, dividends from shares will be shown under "other sources". 35. In the case of CIT v. Cocanada Radhaswami Bank Ltd. [1965] 57 ITR 306, the Supreme Court was examining again the statutory nature of computation of total income under different heads. The Court held that the scheme of the Act is that income-tax is one tax and section 6 of the 1922 Act only classified the taxable income under different heads for the purpose of computation of net income of....
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.... 32 ITR 688 (SC) and CIT v. Cocanada Radhaswami Bank Ltd. [1965] 57 ITR 306 (SC), relied on by the assessee's Counsel. 37. The examination leads us to the provisions contained in section 56 of the Income-tax Act, 1961. Section 56(2)(i) mandates that "dividends" shall be chargeable to income-tax under the head "income from other sources". The nature and composition of gross total income for the purpose of Explanation to section 73 need to be examined on the basis whether the main chunk of the gross total income is made up of income "chargeable" under the head "income from other sources". The provisions of section 56(2)(i) provides that dividend shall be "chargeable" under the head "income from other sources". The gross total income in the present case is made up of dividend from shares held as stock-in-trade. Therefore, it is to be seen that the gross total income in the present case is chargeable under the head "income from other sources". 38. In this context, we have to refer to the two decisions relied on by the Revenue in support of the argument that the dividend income in the hands of the assessee-company should be considered as its "income from business" for the reas....
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....imed against the loss from its business incurred during the previous year...." 40. In the above case, the Supreme Court has only reiterated the principles laid down by the Court in CIT v. Cocanada Radhaswami Bank Ltd. [1965] 57 ITR 306. In CIT v. Cocanada Radhaswami Bank Ltd. [1965] 57 ITR 306, the Supreme Court has held that the scheme of the Act is that income tax is one tax. Section 6 of the 1922 Act (corresponding to section 14 of the 1961 Act) only classifies the taxable income under different heads for the purpose of computation of net income of the assessee. Though for the purpose of computation of income, interest on securities is separately classified, income by way of interest from securities does not cease to be part of the business income, if the securities are part of the trading asset. Whether a particular income is part of the income from a business falls to be decided not on the basis of the provisions of section 6 but on commercial principles. In the decision of CIT v. Cocanada Radhaswami Bank Ltd. [1965] 57 ITR 306, the Supreme Court was following its own earlier-decision in United Commercial Bank Ltd. v. CIT [1957] 32 ITR 688 where it was held that income from....
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.... In that case also; the Court has not held that dividend income is chargeable under the head "profits and gains of business or profession". 44. The Supreme Court in the cases of Western States Trading Co. (P.) Ltd. and Apollo Tyres Ltd. has not reconsidered the principles laid down in the earlier decisions of United Commercial Bank Ltd.'s case and Cocanada Radhaswami Bank Ltd.'s case regarding the classification and computation of income under different heads and its chargeability to tax. In fact the earlier decisions are exactly followed in the later decisions. The Court infact examined the genesis of the income earned by the companies by way of dividends from shares and units. The genesis was gone into for determining whether the dividends were earned out of regular business activities of the companies, so that dividends could be construed as business income for purposes of set off of business loss and for computing eligible business profit under section 32AB. The Court has not held in those cases that dividends in such circumstances would be chargeable to tax under the head "profits and gains of business or profession". 45. In the light of the discussions in the pa....
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....s higher than the business loss. Income from other sources by way of dividend was Rs. 10,18,914 whereas income from business was a loss of Rs. 97,358. Even when business loss is treated as negative profit, the negative profit was less than the positive income from dividends. Therefore, on the facts of the present case, the above two decisions of the Calcutta High Court are not applicable to issue. 49. The Revenue has also raised certain supporting arguments that the case need to be considered in the light of the intention of the Legislature in enacting Explanation to section 73, which has been clarified in CBDT Circular No. 204, dated 24-7-1976, and that the meaning of the expression "gross total income" defined in section 80B(5) cannot be imported into the context of section 73 of the Act. 50. There are no materials on record to show that the assessee-company did make loss in the share trading activities in order to reduce the tax incidence. In respect of the contention regarding "gross total income", section 73 does not provide for any special treatment. The Supreme Court has held in CIT v. Venkateswara Hatcheries (P.) Ltd. [1999] 237 ITR 174 that the same word occurring mo....