2003 (8) TMI 544 - AT - Income Tax

Applicability of Section 73 - speculation loss - set off of losses incurred in the business of purchase and sale of shares against the other income - interest on advances - HELD THAT - From the facts of the assessee's case enumerated earlier, it may be noted that the dividend income earned by the assessee is attributable to the equity shares of Reliance Industries Ltd., held by the assessee as stock-in-trade in its business of purchase and sale of shares. In other words, the dividend received by the assessee is not attributable to investments by the assessee in shares. It is obvious from the above that when the shares are held as part of trading asset, dividends on such shares would form part of income from business of the assessee. In the case before us also, admittedly, the assessee is carrying on the business of purchase and sale of shares and that the shares are held as stock-in-trade. The decision of the Apex Court in Western States Trading Co. (P.) Ltd. v. CIT 1971 (1) TMI 11 - SUPREME COURT squarely applies to the facts of the assessee';s case. If the impugned dividend income is brought to tax by applying the decision of the Apex Court, the entire income of the assessee would be income from business and there would be no income at all under the heads, Interest on securities, Income from house property, Capital gains and Income from other sources . In this view of the matter, the gross total income of the assessee will consist of only business income and the assessee's case will fall within the Explanation to section 73 and not in the excluded category thereof. It would thus appear that the definition of Investment Company is similar to Companies which fall into excluded category under Explanation to section 73. In that case, gross total income of the assessee was ₹ 19,66,798 out of which, ₹ 10,67,474 happens to form the income from House property, Other sources and Capital gains. The Assessing Officer held the company to be an investment company within the meaning of section 109(ii) of the Act. On the basis of that, the income from the aforesaid source was more than 50% of its gross total income. On appeal, the CIT(A) and the Tribunal did not agree with the finding of the Assessing Officer. It is an undisputed fact that the assessee before us is engaged mainly, which word is akin to wholly in the business of purchase and sale of shares. If that be so, in our opinion, the decision (supra) of the Hon'ble Jurisdictional High Court would not render any assistance to the assessee and the assessee's case would not fall within the excluded category of Explanation to section 73. In other words, the case of the assessee, in our considered opinion, falls within the ambit of the Explanation to section 73. The conclusion which emerges from the discussion above is that the loss from trading in shares has to be treated as speculation loss. In this view of the matter, we reverse the findings of the CIT(A) on the point and allow ground No. 1 of the revenue. For statistical purposes, the appeal is treated as allowed.

Summary

Issues Involved:
1. Applicability of Section 73 and Explanation thereto.
2. Restriction of expenses on earning dividend income.

Summary:

Issue 1: Applicability of Section 73 and Explanation thereto

The revenue challenged the CIT(A)'s decision that the provision of section 73 read with Explanation thereto was not applicable to the assessee company, and the set-off of losses incurred in the business of purchase and sale of shares against other income was allowed. The CIT(A) had deleted several disallowances made by the Assessing Officer, including interest and management fees, and treated the business loss as not speculative since the gross total income consisted mainly of income from other sources.

The Tribunal examined the facts and found that the assessee was engaged in the business of purchase and sale of shares, and the shares were treated as stock-in-trade. The Tribunal referenced the decision in CIT v. Sun Distributors & Mining Co. Ltd., which held that section 73 applies if the business consists of purchase and sale of shares, regardless of whether both activities occur in the same year. The Tribunal concluded that the assessee's business fell within the mischief of Explanation to section 73, as the primary activity was the purchase and sale of shares, and the gross total income did not consist mainly of income from the excluded categories. Therefore, the loss from trading in shares was to be treated as speculation loss, reversing the CIT(A)'s findings.

Issue 2: Restriction of expenses on earning dividend income

The Assessing Officer had apportioned total expenses, including interest, to determine the expenses attributable to earning dividend income, which was significantly higher than the amount claimed by the assessee. The CIT(A) had directed to restrict the expenses to 1% of the dividend income.

The Tribunal found that the CIT(A) had not examined the issue correctly considering the nature of the assessee's business. The matter was set aside and remanded back to the CIT(A) for fresh consideration, taking into account relevant judicial decisions and allowing reasonable opportunity for hearing.

Conclusion:

The appeal was treated as allowed for statistical purposes, with the Tribunal reversing the CIT(A)'s decision on the applicability of section 73 and remanding the issue of expenses on earning dividend income back to the CIT(A) for reconsideration.