2014 (9) TMI 173 - HC - Income Tax

Income from dividend, commission and interest from the business of trading in shares Business income or income from other sources Shares held as stock in trade - Held that - Assessee held shares as stock-in-trade - The dividend income earned by him on the shares does not cease to be income which arises in the course of business, though for the purpose of chargeability to tax, such income would be included under the head Income from other sources - where a shareholder receives dividends in respect of the shares held by him, the dividend is received because of the fact of his holding the shares - There may be no doubt of earning substantial dividends on the shares but one has to consider from the point of view that the assessee s business income consist of purchase and sale of shares - assessee does not purchase the shares with a view to get dividend, but the object of purchasing his shares is to earn profit by the sale of those shares - earning of dividends is merely the incidental result to the main activity of the purchase and sale of shares - receipt of dividends will not be chargeable to income tax under the head profits & gains from business or profession - relying upon Commissioner of Income-Tax, Bombay City-II Vs. D.G.Goenka 1980 (4) TMI 41 - BOMBAY High Court the dividend income arrived at by the appellant was chargeable under the head Income from other sources the order of the Tribunal is upheld Decided against Assessee.

Summary

Issues:
1. Classification of income from dividend, commission, and interest for assessment under the Income Tax Act.
2. Interpretation of Section 56(2) and Section 14 of the Act regarding chargeability of income under different heads.
3. Determining whether dividend income derived from shares held as stock-in-trade is assessable as business income or income from other sources.

Analysis:
The appellant, engaged in share trading and deriving income from various sources, filed a return showing nil income for the assessment year 1992-93, categorizing income from dividend, commission, and interest under "profits & gains from business or profession." However, the Assessing Officer assessed this income under "Income from other sources," leading to an appeal by the appellant.

The Commissioner of Income Tax (Appeal) found that income from shares, debentures, interest, and dividend should be assessed as business income under "profits & gains from business or profession," overturning the Assessing Officer's decision. Subsequently, the Tribunal reversed this decision, holding that the income from dividend, commission, etc., should be assessed under "Income from other sources" as per Section 56(2) of the Act.

The High Court analyzed Section 56 of the Act, emphasizing that income not excluded from total income is chargeable under "Income from other sources" if not covered under specified heads in Section 14. The Court highlighted that dividends are specifically chargeable under "Income from other sources," indicating the legislative intent. Even if shares are held as stock-in-trade, dividend income remains chargeable under "Income from other sources."

The Court reasoned that the appellant's main activity is share trading for profit, with dividends being incidental to this business. Relying on precedents, the Court affirmed that dividend income from shares held for trading is assessable under "Income from other sources," irrespective of the appellant's business classification. The Court disagreed with a decision from the Delhi High Court, supporting the Tribunal's ruling.

Ultimately, the Court upheld the Tribunal's decision, answering in favor of the Income Tax Department and dismissing the appeal. The judgment clarified the classification and chargeability of dividend income from shares held as stock-in-trade under the Income Tax Act, emphasizing legislative provisions and precedents in its analysis.