1988 (12) TMI 141 - AT - Income Tax

Assessment Year, Business Income, Business Loss, Carry Forward And Set Off, Income From Business, Income Tax, Investment Company, Speculation Business, Undistributed Profits

Summary

Issues:
1. Set off of business losses against dividend income for assessment year 1979-80.
2. Interpretation of the term "business income" in relation to dividend income.
3. Application of Explanation to section 73 of the Income-tax Act, 1961.
4. Determination of whether the assessee qualifies as an investment company.

Analysis:

Issue 1: Set off of business losses against dividend income for assessment year 1979-80
The appeal pertains to the set off of business losses carried forward from earlier years against dividend income for the assessment year 1979-80. The assessee filed a petition under section 154 claiming set off of losses, which the ITO allowed partially. The CIT(A) directed the ITO to examine the issue based on the Explanation to section 73 to determine if the losses could be set off against the dividend income.

Issue 2: Interpretation of the term "business income" in relation to dividend income
The CIT(A) considered whether dividend income, though assessed separately under "Other sources," could be treated as "business income" for the purpose of setting off against earlier years' business losses. Citing relevant case laws, the CIT(A) concluded that if the assessee is a dealer in shares and the shares producing dividend income are held as trading assets, the dividend income should be considered as business income eligible for set off against business losses.

Issue 3: Application of Explanation to section 73 of the Income-tax Act, 1961
The CIT(A) applied the Explanation to section 73 introduced in 1977 to determine the nature of the assessee's business income and losses. He found that the business losses arising from the purchase and sale of shares were to be considered as speculative business losses. The CIT(A) directed the ITO to assess whether the brought forward losses of non-speculative business could be set off against the dividend income.

Issue 4: Determination of whether the assessee qualifies as an investment company
The Departmental Representative argued that if dividend income is treated as business income, the assessee would not qualify as an investment company as defined in the Income-tax Act. However, the assessee's counsel contended that the dividend income, though under "Other sources," should be considered as business income based on relevant Supreme Court decisions.

In the final decision, the Tribunal held in favor of the assessee, allowing the set off of business losses against dividend income. The Tribunal disagreed with the CIT(A)'s application of the Explanation to section 73, determining that the assessee should be treated as an investment company based on the gross total income calculation. Consequently, the assessee was entitled to set off its business losses against the dividend income for the assessment year 1979-80.