2007 (4) TMI 290 - AT - Income Tax

Summary

Issues Involved:
1. Applicability of Explanation to Section 73 of the IT Act, 1961.
2. Whether the assessee is covered by the exception provided in the Explanation to Section 73.
3. Inclusion of loss on dealing in shares for calculating gross total income under the Explanation to Section 73.
4. Set off of dividend income against loss on dealing in shares.

Issue-wise Detailed Analysis:

1. Applicability of Explanation to Section 73 of the IT Act, 1961:
The primary issue was whether the CIT(A) was justified in upholding the AO's action of declining the set off of speculation loss from share dealings against dividend income. The assessee argued that Explanation to Section 73 should not apply as its only business was dealing in shares and securities. The AO, however, maintained that the law is clear and unambiguous, treating the loss incurred in trading shares as speculation loss. The CIT(A) upheld the AO's decision, emphasizing that the Explanation to Section 73 was applicable to the appellant company.

2. Whether the Assessee is Covered by the Exception Provided in the Explanation to Section 73:
The assessee contended that its gross total income mainly consisted of 'income from other sources,' thus it should be covered by the exception in the Explanation to Section 73. The AO and CIT(A) disagreed, stating that the loss on dealing in shares must be included in the gross total income calculation, and the dividend income could not be treated as income from speculative business. The CIT(A) confirmed that the appellant company is not covered by the exception provided in the Explanation.

3. Inclusion of Loss on Dealing in Shares for Calculating Gross Total Income:
The assessee argued that the loss from dealing in shares should not be included in the gross total income for the purpose of the Explanation to Section 73. The AO and CIT(A) both rejected this argument, with the AO emphasizing that the law treats losses from share trading as speculation losses, which cannot be set off against dividend income assessed under 'income from other sources.'

4. Set Off of Dividend Income Against Loss on Dealing in Shares:
The assessee claimed that since the shares were held as stock-in-trade, the dividend income should be considered part of the business income and set off against the speculation loss. The AO and CIT(A) disagreed, stating that dividends are to be taxed as 'income from other sources' and cannot be treated as profits of speculation business. The Tribunal, however, found that the dividend earned from shares held as stock-in-trade should be viewed as part of the speculation business income, even if it is chargeable under a different head of income.

Conclusion:
The Tribunal concluded that the CIT(A) was not justified in upholding the AO's action. The Tribunal held that the dividend income earned from shares held as stock-in-trade should be considered part of the speculation business income, and thus, the set off against speculation loss should be allowed. The appeal was allowed in favor of the assessee, providing relief by allowing the set off of the speculation loss from share dealings against the dividend income.