2005 (5) TMI 29 - HC - Income Tax

Carry forward - set Off - set-off the unabsorbed brought forward losses against dividend income - Once it is held that the shares held by the assessee as a stock-in-trade and the income whether directly or incidentally from holding of such shares as stock-in-trade, would be business income, then it cannot be said that the dividend income would fall as an income from other sources as contemplated under section 56 of the Act and that set-off of under section 72 of the Act in a subsequent year would not be permissible - hold that no question much less a substantial question of law arises for consideration in this case. The appeal is, therefore, dismissed

Summary

Issues:
- Whether unabsorbed brought forward losses can be set-off against dividend income classified as income from other sources?
- Whether dividend income from shares can be set-off against business losses from earlier years?

Analysis:
1. The primary issue in this case was whether unabsorbed brought forward losses could be set-off against dividend income classified as income from other sources. The Income-tax Officer raised this issue against the order of the Commissioner of Income-tax (Appeals) for the assessing year 1996-97. The assessee had set-off unabsorbed brought forward losses against dividend income, claiming it as business income. The Commissioner of Income-tax partly allowed the appeal, directing the Assessing Officer to set-off the losses against the dividend income considered as business income. The Income-tax Appellate Tribunal upheld this decision, dismissing the Revenue's appeal.

2. The second issue revolved around whether dividend income from shares could be set-off against business losses from earlier years. The Revenue contended that such set-off was not permissible as the income was from other sources and the business was not carried out in the relevant year. However, the first appellate authority and the Income-tax Appellate Tribunal rejected this argument. They relied on previous judgments, including those from the High Court and the Supreme Court, establishing that dividend income could be related to the business activity of the assessee and not just income from other sources.

3. The courts referred to various precedents to support their decision. They cited the case of Snam Progetti S.P.A. v. Addl. CIT, where it was held that income from investments made in the course of business activities should be treated as business income eligible for set-off against losses. Additionally, the case of Western States Trading Co. P. Ltd. v. CIT was mentioned, where the Supreme Court allowed set-off of dividend income against losses brought forward for earlier years. These precedents established the principle that dividend income related to business activities could be considered as business income for the purpose of set-off.

4. The Income-tax Appellate Tribunal affirmed the finding that the dividend income earned from shares held as stock-in-trade was rightly treated as income from business, not other sources. The courts emphasized that once shares were held as stock-in-trade, income from such shares, directly or incidentally, would be considered business income. This interpretation aligned with the consistent view taken in previous judgments, indicating that dividend income related to business activities could be set-off against losses from earlier years.

5. Ultimately, the court dismissed the appeal by the Revenue, concluding that no substantial question of law arose for consideration. The decision was based on established principles and precedents, confirming that dividend income related to business activities could be treated as business income and set-off against losses. The judgment upheld the position that income from shares held as stock-in-trade could not be classified as income from other sources under section 56 of the Income-tax Act, allowing for set-off under section 72 in subsequent years.