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TMI Blog2008 (4) TMI 415X X X X Extracts X X X X X X X X Extracts X X X X ..... Profit and gain from business other than speculation Rs. -5,69,001 business : Loss Profit and gain from speculation business Rs. 12,53,427 ------------- Rs. 6,84,426 Less: Brought forward business loss for asst. yr. 1998-99 Rs. 4,62,070 ------------- Rs. 2,22,356 ------------- The assessee while working out the loss from the business at Rs. 5,69,001 claimed trading loss with reference to the fall in the value of investments in the shares amounting to Rs. 1,92,913. The AO took the view that the sum of Rs. 1,92,913 is deemed speculation business in view of the provisions of Explanation to s. 73 and adjusted the same against the speculation business income amounting to Rs. 12,53,427 and thus computed the income from business at Rs. 6.84,426. The assessee has also claimed in the IT return loss amounting to Rs. 17,54,836 under the head "Capital gains" and also "income from other sources" amounting to Rs. 1,237. The AO accepted the loss under the head "Capital gains" and allowed carry forward. The income from other sources amounting to Rs. 1,237 as returned was also accepted 4. The assessee went in appeal before the CIT(A) and contended that the applicability of Explanat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the head "Capital gains" in the case of the assessee since was Rs. 17 lacs and odd and the income from business was only Rs. 6,84,426, therefore, the gross total income of the assessee mainly consists of the income from capital gains and therefore the assessee company falls under the first exception and accordingly Explanation to s. 73 is not applicable. On a query from the Bench when the assessee was allowed carry forward of the capital loss, can still be said that the gross total income consists mainly of income from capital gains, the learned Authorised Representative carried us to the definition of the gross income as stipulated under s. 80B(5), definition of total income under s. 2(24)(vi) and the definition of total income. Referring to s. 4 of the Act it was pointed out that the charge is on the total income. The total income includes loss also. Capital gain is computed under s. 45 which states any profit and gain arising from the transfer of a capital asset. Profit or gain not only includes positive income but the loss also. The provisions of s. 74 deal with the carry forward of the loss under the head "Capital gains". The gross total income will consist of capital loss a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us, he contended that the assessee is not covered by the exceptions in Explanation to s. 73. He relied on the order of the AO as well as that of the CIT(A). 7. We have carefully considered the rival submissions and perused the material on record along with the order of the authorities below as well as the case law as relied upon before us. This is an admitted fact that the loss under the head "Long-term capital gains" amounting to Rs. 17,14,957 has duly been accepted. The income from other sources amounting to Rs. 1,237 was also accepted. The assessee also derived the income from business amounting to Rs. 6,84,416. The only dispute before us is whether Explanation to s. 73 is applicable to the case of the assessee in respect of trading loss incurred by the assessee on shares amounting to Rs. 1,93,913. 8. Whether the case of the assessee falls within the exceptions given under the Explanation or not. Explanation to s. 73 of the Act stipulates as under: "Explanation.-Where any part of the business of a company (other than a company, whose gross total income consists mainly of income which is chargeable under the heads "Interest on securities", "Income from house property", "Capita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g and dividend. During the year the assessee has shown net loss of Rs. 28,50,358 in its P&L a/c which includes speculative loss in share transaction amounting to Rs. 7,95,447, loss in regular share dealing business amounting to Rs. 8,21,400. Against this the only income of the assessee was Rs. 3,87,603 by way of dividend. Without giving effect to Explanation to s. 73, the income from dividend assessable under the head "Income from other sources" was Rs. 3,87,603 and net business loss in share dealing business was Rs. 21,11,545. The speculative loss in share transaction amounting to Rs. 7,95,447 is to be carried forward in view of the provisions of s. 73 of the Act. The assessee contended that the gross total income of the assessee in his case mainly consists of income chargeable under the head "Income from other sources" and therefore in view of Explanation to s. 73, the Explanation is not applicable in the case of the assessee. When the matter travelled to the High Court, the Hon'ble High Court held as under: "It is by now well-settled that the words 'income' or 'profits and gains' should be understood as including losses also so that in one sense 'profits and gains' represent 'p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comprised of speculation loss from share dealing Rs. 4,50,779 and income from other sources was at Rs. 24,000. When the question travelled to the High Court with regard to the applicability of Explanation to s. 73, the Hon'ble High Court took the view that the case is fully covered by the decision in the case of Eastern Aviation & Industries Ltd. and held that in the instant case the assessee cannot be said to be a company whose gross total income consists mainly of income chargeable under the heads "Interest on securities", "Income from house property", "Capital gains" and "Income from other sources", since the business loss here exceeds income computed under the head "Income from other sources" and, as such the Explanation to s. 73 is clearly applicable. If we go to the facts of this case, here also the business loss was much more than the income from other sources and it is only the income under the head "Business income" nil would have been included in the gross total income while computing the gross total income as the loss was to be carried forward as per the provisions of the IT Act. Thus, while arriving at the finding whatever the business loss was computed under the head " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ttled proposition that the words "income", "profits" and "gains" have to be understood as including losses. In one sense, profit and gains represent positive income whereas loss represents negative income. It was so held in CIT vs. Harprasad &. Co. (P) Ltd. 1975 CTR (SC) 65 : (1975) 99 ITR 118 (SC) and CIT vs. J.H. Gotla (1985) 48 CTR (SC) 363 : (1985) 156 ITR 323 (SC), in construing the word "income" in s. 16(3) of the Indian IT Act, 1922. There is hardly any difference in the definition of "income" in the 1961 Act with that of the 1922 Act. In the case of Eastern Aviation & Industries Ltd., this Court had held that the Explanation to s. 73 could be applied before the principle of deduction is applied, namely, after computing the income as defined under s. 80B(5) of the said Act. Applying the said principle in the present case, we find that there was a loss in the share dealing account, i.e., Rs. 8,98,799. If the same is treated to be a negative profit, then definitely the income from other sources and dividend income (interest on securities) being Rs. 5,73,701 is lesser. Therefore, the main income consists of the business of share trading which is the main object of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess while computing the income under the head from business for applicability of Explanation to s. 73 of the Act. We, therefore, direct the AO that the sum of Rs. 1,92,913 cannot be deemed to have been derived from the speculation business as the provisions of Explanation to s. 73 are not applicable in the case of the assessee in view of the exceptions provided in the said Explanation. Therefore, the order of the CIT(A) is set aside and the appeal of the assessee for asst. yr. 2000-01 is allowed. Asst. yr. 2001-02: 16. In this year, there are two effective grounds of appeal taken by the assessee. The first ground is similar to the ground taken in asst. yr. 2000-01 while ground No. 2 reads as under: "(2)(a) The learned CIT(A) and AO have erred in law and on facts by not allowing long-term capital loss of Rs. 1,61,65,596 on actual sale of 3,20,000 shares of Atul Ltd., out of conversion of shares of Atul Ltd. into stock-in-trade as on 1st April, 2000. (b) Though CIT(A) has stated in his order that as per provisions of s. 45(2) of the Act, gain or loss is to be determined in the year in which actual transfer took place, he has overlooked to actual sale of 3,20,000 shares of Atul Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erved by the AO that the long-term capital loss as worked out by the assessee includes long-term capital loss amounting to Rs. 1,59,84,798 on the conversion of the shares of Atul Ltd. as held as investment and transferred to stock-in-trade, the assessee had not sold these shares during the year. As per the provisions of s. 45(2) profit or gains arising from the transfer by way of conversion of capital assets or its treatment by him as stock-in-trade of a business carried on by him shall be chargeable to tax as his income of the previous year in which such stock-in-trade is sold or otherwise transferred by him. The AO ignoring this loss worked out the income from capital gains at Rs. 2,29,957 as given in para 3.5 of the assessment order and therefore he took the view that the assessee cannot be said to be the one whose gross total income consists mainly of income assessable under the heads "Interest on securities", "Income from house property", "Capital gains" and "Income from other sources" and therefore Explanation to s. 73 was applicable in the case of the assessee. 17. The assessee went in appeal before the CIT(A) on both the grounds about the applicability of s. 45(2) as well ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rival submissions and perused the material on record along with the order of the tax authorities and the documents and material furnished before us. It is an admitted fact that in the computation statement, copy of which is available at p. 63, the assessee has clearly mentioned that the assessee has sold 3,20,000 shares of Atul Ltd. during the year. The assessee has also worked out the long-term capital loss of 5,37,431 shares on their conversion with the indexation at Rs. 1,60,06,124 out of which the assessee has reduced the loss of 2,17,431 shares of Atul Ltd. in his stock to be claimed at the time of their sale amounting to Rs. 21,326 and thus worked out the long-term capital loss on the sale of 3,20,000 shares of Atul Ltd. sold during the year at Rs. 1,59,84,798. The AO in the assessment order under para 3.5 has given the finding that the assessee has not sold the shares during the year but nothing borne out of the assessment order whether the AO has given an opportunity to the assessee to prove the sales of the shares as claimed by the assessee during the year. The assessee has also not brought out any evidence and details except the computation statement before us to prove th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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