2012 (8) TMI 427 - HC - Income Tax

Dividend income earned by investment company from the shares held as stock in trade - Business income or Income from other sources - set off of business loss against dividend Income - Held that - In Investment Ltd vs CIT (1970 (4) TMI 15 - SUPREME COURT), it has been held that method of accounting regularly employed by the assessee can be discarded only if the taxing authority is of the opinion that the income earned cannot be properly deduced therefrom. The method employed by the company in valuing stock at cost and describing such stock in the balance-sheet as investments , were held to be not decisive of the fact that the stock valued was not stock-in-trade. The finding of the first appellate authority as well as the Tribunal that the shares held by the assessee, which earned dividend income, constituted stock-in-trade; does not necessarily give rise to a question of law. The appellate authorities having concurred on facts that the dividend income earned by the assessee was eligible to be brought forward as loss of the previous years, in our opinion, cannot be interfered with in this appeal - Decided in favor of assessee.

Summary

Issues:
- Disallowance of claim by assessing officer regarding setting off carried forward business loss against dividend income returned under "other sources"
- Whether dividend income from shares retained by investment company constitutes business income eligible for setting off business loss

Analysis:
1. The appeal before the High Court involved the Revenue challenging the orders of appellate authorities that reversed the disallowance of a claim by the assessing officer. The issue revolved around the treatment of dividend income by an investment company for the assessment year 1992-93. The company had dividend income from shares retained during the year, returned under "other sources," but claimed for setting off carried forward business loss against it.

2. The assessing officer disallowed the claim stating that the income was derived from investments, not stock-in-trade. However, the first appellate authority, supported by Supreme Court and Delhi High Court decisions, held that dividends on shares should be considered part of business income. The Tribunal upheld this view, emphasizing that the dividend income was earned in the course of the business of stock trading.

3. The counsel for the assessee relied on legal precedents to argue that the dividend income was directly attributable to the business activities and thus eligible for setting off business losses. The High Court noted that the company regularly dealt in shares and debentures, indicating business activities beyond mere investment. The Tribunal's findings were deemed factual and not perverse, hence not open to interference.

4. The Revenue contended that the company initially classified the income as "other sources," precluding a later claim of business income. Citing the Bengal & Assam Investors Ltd. case, the Revenue argued that dividend income from shares not held as stock-in-trade cannot be considered business income. However, the High Court differentiated the facts of the present case from the Bengal & Assam case, emphasizing the regular business dealings of the assessee company.

5. Ultimately, the High Court rejected the Revenue's appeal, affirming the Tribunal's decision. It concluded that the dividend income earned by the company, derived from shares held as stock-in-trade, was rightly considered business income eligible for setting off against carried forward business losses. The judgment highlighted the factual nature of the findings and the absence of any legal questions arising from the impugned order.