Income Tax Appellate Tribunal - Ahmedabad
Torrent Finance (P) Ltd. vs Joint Commissioner Of Income Tax on 25 August, 2006
Equivalent citations: [2008]110ITD315(AHD), [2008]303ITR380(AHD), (2007)108TTJ(AHD)615
ORDER
R.P Garg, Vice President
1. This appeal by the assessee is directed against the order of the CIT(A)-XIII, Ahmedabad, for asst. yr. 1997-98.
2. The dispute in this appeal is mainly concerning Explanation to Section 73, set-off of speculation loss against the dividend income and claim of expenses.
3. The assessee filed its return of income declaring loss of Rs. 11,76,10,593 that being business loss of Rs. 8,93,43,748 plus share capital loss of Rs. 3,50,54,547 minus dividend income of Rs. 67,87,702. The AO applied the provisions of Explanation to Section 73 and held that the business loss was on sale of shares and therefore, speculative nature. He recomputed the business loss at Rs. 8,23,70,792 and loss under the head capital gain Rs. 3,23,86,938. An alternate claim of the assessee was made on the decision of the Supreme Court in the case of Brooke Bond & Co. Ltd. v. CIT and the Calcutta High Court in the case of CIT v. Niimal Kumar & Co. to set-off the dividend income arising from shares held as stock-in-trade as this was also a part and parcel of business activity and that it was business income. It was also rejected by the AO by relying upon the decision of Calcutta High Court in. the case of CIT v. National & Grindlays Bank Ltd. , dividend income being assessable under Section 56 and because of provisions of Section 73, the business loss could be set of only against speculative profit. He also referred to the Gujarat High Court decision in the case of Addl. CIT v. Laxmi Agents (P) Ltd. (1980) 125 ITR 227 (Guj), wherein it was held that the dividend income was chargeable under Section 56 irrespective of it being from trading of shares. The assessee's claim for proportionate expenses on dividend was also disallowed by the AO as the entire expenses was to be treated as relating to speculation business and also that the dividend income was incidental as the intention was not to earn dividend but to earn profit out of sale of shares.
4. The CIT(A) upheld the order of AO as the loss has occurred on sale and purchase of shares and therefore speculative. The claim of being out of Explanation to Section 73 was also rejected by following the decision of the Calcutta High Court in the case of Eastern Aviation & Industries Ltd. v. CIT . He observed that in the instant case, the business loss has been computed at Rs. 8,23,70,792 and the capital loss at Rs. 3,23,86,938 and against it, the dividend income was computed at Rs. 67,87,702. Therefore, the business loss exceeded the aggregate of income computed under the head 'Income from other sources' and the capital loss and therefore in view of the above referred decision of Hon'ble Calcutta High Court, the Explanation to Section 73(4) is clearly applicable. The alternate claim of the assessee based on Calcutta High Court in the case of CIT v. Nirmal Kumar & Co. (supra) that dividend income being business income the loss should be set-off against the said speculative loss, was also rejected as in that case the transactions of the loss and earning of brokerage were interlinked and the two activities were treated as inseparable, and therefore, it was held that loss suffered by the assessee in speculation transaction in PDO was to be set-off against brokerage income earned from those transactions. On the contrary, in the instant case, the two types of income/loss under consideration have not arisen on the same transaction. He observed that loss was suffered on account of purchase and sale of shares and the dividend has been earned on account of holding of certain shares. He referred to another decision of Calcutta High Court in the case of CIT v. K.L. Jhunjhunwalla wherein the High Court held that the commission received by the assessee could not be set-off against the speculation losses because there was no element of speculation whatsoever in the commission income received by the assessee. He then referred to the decision of the Supreme Court in the case of Brooke Bond & Co. Ltd. v. CIT (supra) relied upon by the assessee before him and held that the issue in that case was whether the dividend income declared under the head 'Income from other sources' in IT return could be treated as business income. The Court was not concerned with the question whether the dividend income could be set-off against loss in share trading business if being treated as speculation loss in view of the Explanation to Section 73(4) of the Act. He, also referred to the decision of the Supreme Court in the case of Western States Trading Co. (P) Ltd. v. CIT , wherein it was held that dividend formed part of the income from the business of the assessee if the shares were a part of the assessee's trading assets and the assessee would be entitled to a set-off claimed against the loss from its business incurred during the earlier years. He observed that in this case also, question involved was not whether the dividend income assessable as income from other sources can be set-off against the speculation loss, and therefore, he held this case also was of no help. He, accordingly, upheld the order of the CIT(A).
5. The learned Counsel of the assessee reiterated its claim and submitted that the entire gross total income consists of dividend income and therefore, the assessee's case would be covered by the exclusion provided in the Explanation i.e. its gross total income consists of mainly from income from other sources, i.e. the dividend income. He further submitted that dividend income is a business income though assessable under the IT Act under the head income from other sources, and therefore, set-off should be allowed to the assessee. He, therefore, relied upon the following decisions:
(i) CIT v. Tamil Nadu Mercantile Bank Ltd. ;
(ii) Dy. CFT v. Aakrosh Investment & Leasing (P) Ltd. (2004) 90 TTJ (Mumbai) 36 : (2004) 90 ITD 287 (Mumbai);
(iii) CIT v. Mugneeram Bangui & Co. (Land Department) ;
(iv) Western State Trading Co. (P) Ltd. v. CIT (supra);
(v) Brooke Bond & Co. Ltd. v. CIT (supra);
(vi) O.RM.M.SP.SV. Firm v. CIT .
5.1 He further submitted that the expenditure relating to earning of dividend should be allowed as it is not gross amount of dividend which is taxable but after reducing the expenditure in earning the same on the lines of Lalsons Enterprises v. Dy. CIT (2004) 82 TTJ (Del)(SB) 1048 : (2004) 89 LTD 25 (Del)(SB).
5.2 The learned Departmental Representative, on the other hand, submitted that the order of the Revenue authorities do not call for any interference as the assessee admittedly carrying on the business of dealing in shares and therefore, any loss incurred by the assessee has to be a speculation loss in view of the clear provisions of the Explanation below Section 73(4) of the Act. The nature of dividend income may be business income, it was not earned out of sale and purchases of the shares but for holding of the shares, and therefore, it not being income of speculation in nature, either as such or by virtue of any deeming provision, therefore, it cannot be set-off. The claim of proportionate expenses, the assessee is also not eligible in view of the decision of the Gujarat High Court in the case of Laxmi Agents referred to by AO as also the case of CIT v. Cotton Fabrics Ltd. .
6. We have heard the parties and considered the rival submissions. Section 73 deals with losses in speculation business and profits; Sub-section (1) provides that any loss computed in speculation business carried on by the assessee, shall not be set-off except against profits and gains, if any, of another speculation business. An Explanation below Section 73(4) is provided which reads as under:
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", "Capital gains" and "Income from other sources", or a company the principal business of which is the business of banking or the granting of loans and advances) consists in the purchase and sale of shares of other companies, such company shall, for the purposes of this section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares.
7. On a perusal of this Explanation it is evident that it deems an assessee company to be carrying on a speculation business if the business of the company consists of purchase and sale of shares of other companies. It, however, excludes a company whose gross total income consists mainly of income which is chargeable under various heads other than "Income from business or profession".
8. As regards the first contention of the assessee that its gross total income consists mainly of dividend income of Rs. 67,87,702 which is chargeable under the head "Income from other sources", cannot be accepted as it ignores the business loss of Rs. 8,23,70,792 and that is more than the income in view of the decision of the Calcutta High Court in the case of Eastern Aviation & Industries Ltd. (supra) referred to by the CIT(A). In that case, the Court observed as under:
For the asst. yr. 1983-84, the ITO held that the business loss shown by the assessee had to be taken as speculative loss in view of the Explanation to Section 73. The assessee went in appeal before the CIT(A) and contended that it was an "investment company" within the meaning of Section l09(ii) of the Act, as its dividend income was greater than the business income, and, consequently, the business loss in shares could not be taken as speculative loss in view of the Explanation to Section 73. The argument of the assessee was accepted by the CIT(A), who directed the ITO to treat the loss from share dealings as an ordinary business loss and not as a speculative loss. On further appeal by the Revenue, the Tribunal held that the loss from share dealing was more than the income from other sources, and that, therefore, the assessee was not an investment company. On a reference:
Held, that from the assessment order passed in the case of the assessee company, it was clear that the assessee had shown a net loss of Rs. 28,50,358 in its profit and loss account for the previous year under reference. This included speculative loss in share transactions amounting to Rs. 7,95,447, loss in regular share dealing business amounting to Rs. 12,90,145 and loss of interest attributable to the share dealing business amounting to Rs. 12,90,145 and loss of interest attributable to the share dealing business amounting to Rs. 8,21,400. As against the above, the only income of the assessee company for the year under reference was by way of dividend amounting to Rs. 3,87,603. In other words, the business loss of Rs. 21,11,545 was clearly more than the income by way of dividend. Hence for the year under reference, it could not be said to be a company whose gross total income consisted mainly of income which was chargeable under the heads "Interest on securities, "Income from house property", "Capital gains" and "Income from other sources", since the business loss exceeded income computed under the head "Income from other sources". As such, the Explanation to Section 73 was clearly applicable and the loss suffered by the assessee company in its share trading transactions inclusive of interest paid on borrowed monies attributable to that business was rightly treated, by the Tribunal as a loss in speculative business.
9. This decision has been followed by the High Court in the subsequent judgment in the case of Aiyasthan Corporation Ltd. v. CIT . In the present case, the business loss is of Rs. 8,23,70,792 and the loss under the head 'Capital gain is of Rs. 3,23,86,938 and income from dividend being the income under the head 'Other sources' is of Rs. 67,87,702. Therefore, the business loss exceeded the income computed under the two other heads and consequently, the assessee could not be to a company whose gross total income consisted mainly the income chargeable under the head "Interest on securities", "Income from house property", "Capital gain" and "Income from other sources" so as to exclude it from having treated as carrying speculative business. The first contention of the assessee, is accordingly, rejected.
10. As regards the second contention that dividend income is business income though assessable under the head other sources and therefore, the loss on sale of shares should be set-off against the dividend income, cannot also be accepted. The dividend is the income earned for holding the shares, whereas the loss is incurred on purchase and sale and by transferring the shares. The two transactions are altogether different and the case of the assessee would be directly covered by the decision of the Calcutta High Court in the case of K.L. Junjhunwalla (supra). In this case the set-off of commission received by the assessee against the speculative loss was rejected on the ground that there was no element of speculation whatsoever in the commission income received by the assessee though it has arisen from the transaction in the business of jute and hessian goods, which were settled otherwise than by actual delivery and were speculative in nature. The brokerage was also earned by the assessee on purchase and sale of jute and hussian goods, which were settled otherwise than actual delivery. The Court rejected the claim of the assessee by following the decision of the Supreme Court in the case of CIT v. Pangal Vittal Nayak & Co. (P) Ltd. , by observing as under:
We are inclined to agree with the view of the Tribunal. But the Supreme Court in the case of CIT v. Pangal Vittal Nayak & Co. (P) Ltd , where the assessee, who was a member of an association for speculation in coconut oil, had also speculated on its own, and the assessee also received orders from its constituents, who were not members of the association, to speculate on their behalf, the procedure for those transactions being, as mentioned in the said judgment, the Supreme Court noticed, that, in each of the transactions, the assessee had received commission from the parties on whose behalf the transactions were done. The assessee had claimed to set-off such commission against the speculation losses. It was held by the Supreme Court that the commission received by the assessee could not be set-off against the speculation losses, because there was no element of speculation whatever in the commission income received by the assessee; the commission was independent of any fluctuation in the market and no risk was involved in earning it. The commission had to be treated not as a profit from the speculation business but as profit from the business as brokerage and the assessee was not entitled to have that commission receipt assessed under the head "Speculation business". In view of the said decision of the Supreme Court, the question must be answered in the negative and in the favour of the Revenue.
11. In the case before us, the dividend income was received by the assessee in respect of the shares which might have also been sold and the loss wherefrom is deemed as speculative loss cannot be set-off against the dividend income, as the dividend income was earned by the assessee for holding those shares in view of the two direct decisions of Calcutta High Court and Supreme Court referred to above.
12. Reliance by the assessee is placed on the decision of Nirmal Kumar & Co. (supra). In that case, the assessee dealt with in pucca delivery orders (PDO) and suffered loss of Rs. 8,96,300 in speculative transactions and claimed the set-off of the same against the brokerage income earned from those transactions. The AO held that the brokerage income should be assessed as business income and the loss should be regarded as speculation loss. The AAC, however, accepted the claim of the assessee by observing that the assessee used to show separately purchase and sale of PDOs resulting in profit or loss and the brokerage in regard to these transactions to give a correct picture of the result of the transactions and it had never been the practice of the assessee to describe the profit and loss of PDO transactions as separate business in speculation, that the transactions were inter-linked; and that in the earlier years, the ITO had treated the income from transactions in PDOs as business transactions. The Tribunal also upheld the contention of the assessee. The High Court on reference answered in the affirmative and in favour of the assessee, by observing as under:
The decision of the Tribunal appears to us to be correct. The assessee was dealing in PDOs. The brokerage that it earned from dealing in PDOs was shown as profit. The PDO loss that was incurred was found by the Tribunal to be inseparable. In fact, the ITO himself had treated all these transactions as inseparable in the earlier assessment years. The ITO could have dealt with these transactions as speculative or the ITO could have treated them as business transactions. In either event, the loss had to be set-off against the profit. The ITO in the earlier assessment years had treated all these transactions as business transactions. No reason has been given to depart from the view taken by the ITO in the earlier years.
It is to be noted that it is not the case of the ITO that the brokerage income was earned out of the transactions which were actually settled by delivery of jute goods and loss arose out of transactions in which goods were not ultimately delivered. Had that been the case, different consequences might have followed.
13. In this decision, the earlier decision of the Calcutta High Court in the case of K.L. Junjhunwalla (supra) and the Supreme Court decision in Pangal Vittal Naik & Co. (supra), were not cited nor referred to. In these circumstances, assessee's contention that dividend income and loss on sale of shares are arising from the same transaction cannot be accepted.
14. The next contention of the assessee is that both dividend income and loss on sale of shares arise out of same business carried on by the assessee and therefore speculation loss should be allowed set-off against dividend income. Certain cases relied in this connection are discussed hereunder.
14.1 Brooke Bond & Co. Ltd. (supra) : In this case, the assessee was carrying on the business in tea with its head office in the UK, had invested in shares of other tea companies in different parts of the world and had a 100 per cent shareholding in an Indian subsidiary. The assessee claimed set-off of loss against the income from dividend on the ground that the share held by it in tea companies constituted its trading assets and the dividend income therefrom was income from business. The Revenue rejected the claim of the assessee and it lost upto the High Court. On appeal, the Supreme Court held that the mere circumstances' that the assessee had shown the dividend income under the head income from other sources in its returns could not in law decide the nature of the dividend income. It had to be determined from the evidence whether, having regard to the true nature and character of the income, it could be described as income from business, even though it fell for computation under another head. The Supreme Court in that connection referred to its earlier decisions in the case of United Commercial Bank Ltd. v. CIT , CIT v. Chugandas & Co. , CIT v. Cocanada Radhaswami Bank Ltd. and O.RM.M.SP.SV. Firm v. CIT (supra). The Supreme Court, in this connection, observed at p. 379 as under:
Ordinarily, when income pertains to a certain head, the source of such income is peculiar to that head, but it is not unusual that commercial considerations may properly describe the source differently. For instance, a banking concern may hold securities in the course of its business. The securities constitute its trading assets and income from them would, in the commercial sense, be regarded as business income. However, for the purposes of computation under the IT law, the income form such securities would be computed not under the head "Income from business" but under the head "Interest on securities". In United Commercial Bank Ltd. v. CIT , this Court pointed out that business income was broken up under different heads only for the purpose of computation of the total income, and that by such break-up, the income did not cease to be the income of the business. This principle was followed by this Court in CIT v. Chugandas & Co. and it was reiterated that business income was broken up under different heads under the IT Act only for the purpose of computation of the total income, and that by breaking up, the income did not cease to be the income of the business.
14.2 However, on the facts of the case as appearing in Brook Bond & Co. (supra), the Supreme Court held that there was nothing to show that the investment of the assessee in the other tea companies were intended to bring about, or, in fact, brought about, some advantage or benefit to the assessee's business and the mere fact that the shareholding related to tea companies was not sufficient by itself to support the claim that the shares were acquired to safeguard the assessee's interest in the tea business carried on by it, and therefore, it could not be said that the dividend income had to be regarded as income from business.
14.3 In Western States Trading Co. (P) Ltd. (supra), it was held that if shares held by an assessee as part of his trading assets, dividend on those shares would form part of income from business of the assessee. The assessee will therefore be entitled to claim set-off of loss from its business carried forward from earlier year against dividend of the current year from the shares held as stock-in-trade of his business under Section 24(2) of the Indian IT Act, 1922.
14.4 In the case of Cocanada Radhaswami Bank Ltd. (supra), the assessee company which carried on banking business, held securities as part of the trading assets of its business. It had incurred a loss under the head "Business" and earned interest on the securities and the net loss amounted to Rs. 55,912. For the succeeding assessment years, the AO allowed this loss to be set-off against income under the head "Business" but refused to set it off against the income computed under the head "Interest on securities". The Supreme Court held that the assessee was entitled to set-off the loss against the entire income including the interest on securities in the succeeding years as under Section 24(2) of the Indian IT Act, 1922, income from securities which formed part of the assessee's trading assets was part of its income from business, and therefore, the loss incurred in the business in the earlier year could be set-off against the income from securities also in the succeeding year.
14.5 In the case of Aakrosh Investment & Leasing (P) Ltd. (supra), before the Tribunal, the assessee company was engaged in the business of purchase and sale of shares and during the relevant previous year and it had incurred loss. It had also income from dividend from the shares held as stock-in-trade. The AO applying the provisions of Explanation to Section 73, held that the loss on purchase and sale of shares would be speculative loss and assessee would not be entitled set-off against income. The CIT(A) allowed the claim of the assessee by holding that provisions of Explanation to Section 73 would not be applicable and therefore loss incurred should be treated as business loss which was to be set-off against other income during the relevant year. The Tribunal held that trading assets when the shares are held as part of dividends on such shares would form part of income from business of the assessee.
14.6 In the case of CIT v. Excellent Commercial Enterprises & Investments Ltd. before the Delhi High Court, the assessee had earned income from interest and dividend. It brought forward the losses and claimed set-off against the dividend income of the current year which was disallowed by the AO. The CIT(A) allowed the set-off against the dividend income considering the same as business income. The order of the CIT(A) was upheld by the Tribunal, and on appeal, by the High Court by following the decision of the Supreme Court in the case of Western States Trading Co. (P) Ltd. (supra) and by observing as under:
Applying the above settled principles, the Tribunal had affirmed the finding of the CIT(A) that the company in the interest of its business and to earn additional profits arising from such stock-in-trade had invested its money which was earning dividends on shares held in stock-in-trade. This was thus and rightly so treated as income from business and not income from other sources. No distinctive features have been placed before us. which could persuade the Court to take a view different than the one which has been taken in the above orders. Even otherwise, it would be a finding of fact based and referable to the records which were produced before the Tribunal.
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 under Section 72 of the Act in a subsequent year would not be permissible. In our view, the question has been squarely answered in the aforereferred judgment which has taken a consistent view for such a long period. Consequently, we must hold that no question much less a substantial question of law arises for consideration in this case. The appeal is, therefore, dismissed.
15. On perusal of these cases, it is evident that what has been held by the Supreme Court and High Courts and the Tribunals is that income from dividend would be business income if the shares are held as stock-in-trade and the loss incurred by the assessee in business transactions would be set-off against the same. However, in those cases, the provisions of Section 73 were either not in existence or not considered. Explanation to Section 73 as stated above deems an assessee to be carrying on speculation business to the extent to which the business consists of purchase and sale of such shares. It is only this part of the activity i.e. purchase and sale of shares, which is held to be speculative in nature. The earnings of the assessee from those shares or other shares held by an assessee as stock-in-trade have not been so deemed to be income from speculation. Therefore, though it may be true that dividend income is the business income and is earning on account of the shares held by the assessee before the dividend was earned, and it would be a business income but it is not treated to be an income from speculation business because of the clear Explanation of Section 73 of the Act, which deems the loss arising out of carrying on a speculation business only to the extent to which the business consists of purchase and sale of such shares. The dividend is not earned by transfer of shares. It is earned by holding the shares on a particular day when the dividend was declared, and therefore, in our opinion, the CIT(A) was right in not allowing the set-off of the dividend income against the speculation loss. This contention of the assessee is, therefore, rejected.
16. The last contention of the assessee viz., that gross dividend should not be assessed, but it should be deducted by the expenditure in earning the same. This issue does not arise out of the order of the CIT(A) though a contention in this regard was raised before the AO. In any case, the expenditure has been incurred by the assessee in carrying on the business, and therefore, allowable under the head "Business" and no part thereof cannot {sic) be allowed against dividend income assessable under Section 56 of the Act.
17. The Gujarat High Court in the case of CIT v. Cotton Fabtics Ltd. (supra) held where the assessee was a dealer in shares, interest paid by the assessee on borrowing for the purpose of shares and other expenses incurred by the company and allocated to the dividend income were allowable under the head "Business" and not under the head "Other sources". It is held:
(i) that though the total income of the assessee was in the course of its business, it derived part of its income from dividends and computation of that income from dividends was to be done in accordance with the provisions of Sections 56 and 57. But the computation having been so done, ultimately it still formed part of the income of the business of the assessee and it was assessable as such as profits and gains of business carried on by the assessee. Under Section 36, interest paid by an assessee for the purpose of carrying on its business was deductible in its entirety while computing profits and gains of the business and, therefore, it was not possible to allocate a portion of that interest as against income from dividends.
(ii) That the entire amount of dividends earned by the assessee company from inter-corporate dividends was the amount with reference to which relief under Section 80M had to be worked out. Section 80AA made no difference because no expenditure was incurred for the purpose of earning the amount of dividends. The expenditure incurred by way of payment of interest was incurred for the deducted in its entirety under Section 36(l)(iii) while computing the income of the assessee for the purpose of profits and gains from business.
18. It followed the earlier decision of Division Bench in the case of Addl. CIT v. Laxmi Agents (P) Ltd. (1980) 125 ITR 227 (Guj), referred to by the AO, wherein the High Court at p. 236 held that "If once it is established that capital was borrowed for the purpose of business, it is immaterial how that borrowed capital was applied because all that Clause (iii) of Section 36(1) requires is that borrowings, on which interest is paid, should be for the purpose of business. It was held that under Section 36 of the Act, interest paid by an assessee for the purpose of carrying on its business should be deducted while computing profits and gains of business, and therefore, no portion of that interest can be apportioned as against income from dividend. It is only when the dividend income is not arising to an assessee from business but from investment and assessable as such from other sources, the interest would be allowable to assessee against that and can be deducted from the dividend income in view of another decision of the Bombay High Court in the case of CIT v. Maganlal Chaganlal (P) Ltd. and also in view of Lalsons Enterprises (supra). We, therefore, reject this contention of the assessee, as well.
19. In the result, the appeal is dismissed.