2016 (5) TMI 856 - AT - Income Tax

Applicability of explanation to Sec. 73 - Held that - The ambit of sub-section (1) of section 73 is only to prohibit the setting off of a loss which has resulted from a speculation business, save and except against the profits and gains of another speculation business. In order to determine whether the exception that is carved out by the Explanation applies, the Legislature has first mandated a computation of the gross total income of the company. The words consists mainly are indicative of the fact that the Legislature had in its contemplation that the gross total income consists predominantly of income from the four heads that are referred to therein. Obviously, in computing the gross total income the normal provisions of the Act must be applied and it is only thereafter, that it has to be determined as to whether the gross total income so computed consists mainly of income which is chargeable under the heads referred to in the Explanation. Consequently, in the present case, the gross total income of the assessee was required to be computed, inter alia, by computing the income under the head of profits and gains of business or profession as well. Both the income from service charges and the loss in share trading would have to be taken into account in computing the income under that head, both being sources under the same head. The assessee had a dividend income (income from other sources). The Tribunal was justified, in coming to the conclusion that the assessee fell within the purview of the exception carved out in the Explanation to section 73 and that consequently the assessee would not be deemed to be carrying on a speculation business for the purpose of section 73(1). See CIT Vs. Middleton Investment & Trading 2014 (1) TMI 1410 - CALCUTTA HIGH COURT

Summary

Issues:
- Applicability of Explanation to Sec. 73 of the Income Tax Act in the case
- Treatment of interest income from fixed deposits in relation to securities business

Analysis:
1. Applicability of Explanation to Sec. 73:
The appeal and cross objections arose from the order of CIT(A) regarding the applicability of the Explanation to Sec. 73 of the Income Tax Act. The revenue contended whether the said Explanation could be applied in the circumstances of the case. The assessee, a Private Limited Company, engaged in the business of purchase and sale of shares, securities, commodities, and derivatives, faced a loss from such business activities. The revenue authority assessed interest income from fixed deposits as part of the business income. However, the assessee argued that the interest income was integral to the securities business as it facilitated trade on the NSE platform. The CIT(A) ruled in favor of the assessee, considering the interest income as part of the speculative business profits. The Tribunal concurred with this view, emphasizing that the income from other sources exceeded the speculative business loss, thus rendering the Explanation to Sec. 73 inapplicable.

2. Treatment of Interest Income:
The Tribunal examined the provisions of the Explanation to Sec. 73, which deems a company to be carrying on a speculative business if a part of its business involves the purchase and sale of shares. The Tribunal referred to a jurisdictional High Court case where a similar situation was addressed, emphasizing the computation of gross total income and the predominance of income from specific heads. The Tribunal highlighted that the assessee's case fell outside the purview of the Explanation to Sec. 73 due to the income from other sources surpassing the speculative business loss. Citing a relevant judgment, the Tribunal dismissed the revenue's appeal and allowed the assessee's Cross Objection on this issue.

3. Disallowance u/s. 14A:
Regarding the disallowance under section 14A of the Act, the assessee withdrew the ground raised during the hearing due to the insignificance of the amount. The Tribunal noted the withdrawal of this ground and dismissed it accordingly. Consequently, the appeal of the revenue was dismissed, and the Cross Objection of the assessee was partly allowed.

In conclusion, the Tribunal's judgment clarified the non-applicability of the Explanation to Sec. 73 in the case, upheld the treatment of interest income as part of speculative business profits, and addressed the withdrawal of a ground related to disallowance under section 14A. The decision was pronounced on 18.05.2016, dismissing the revenue's appeal and partially allowing the assessee's Cross Objection.