Income Tax Appellate Tribunal - Mumbai
Pursarth Trading (P) Ltd, Mumbai vs Assessee on 5 December, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL,
MUMBAI BENCH 'J' BENCH
BEFORE SHRI B.R.MITTAL(JUDICIAL MEMBER) AND
SHRI RAJENDRA (ACCOUNTANT MEMBER)
ITA No.688/Mum/2008: Assessment Year: 2004-05
ITO 5(2)(4), Pursarth Trading Co. Pvt Ltd., G-3, Iccha
Aayakar Bhavan, M.K. Road, Kutir, Devidar Lane, Borivali(W),
Mumbai. Mumbai-92
Vs. PA No.AACCP 2006 L
(Appellant) (Respondent)
ITA No.546/Mum/2008: Assessment Year: 2004-05
Pursarth Trading Co. Pvt Ltd., G-3, ITO 5(2)(4),
Iccha Kutir, Devidar Lane, Aayakar Bhavan, M.K. Road,
Borivali(W), Mumbai.
Mumbai-92 Vs.
PA No.AACCP 2006 L
(Appellant) (Respondent)
Assessee by : Shri Vipul B. Joshi
Revenue by: Shri B.D.Pati
Date of hearing: 5 .12.2012
Date of pronouncement: 28 .12.2012
ORDER
Per B.R.Mittal, JM:
These cross appeals are filed by the department and the assessee for assessment year 2004-05 against order dated 21.11.2007 of ld CIT(A)-V, Mumbai.
2. The department in its appeal has taken following grounds:
"1. On the facts and in the circumstances of the case and in law, the ld CIT(A),Mumbai erred in directing the AO not to treat the loss in share transactions determined at Rs.32,43,945/- as speculation loss ignoring the fact that the short term capital gain has arisen u/s.50 of the Act and is not the normal capital gain arising out of sale of investment and thus hit by Explanation to section 73 of the Act.
2 Pursarth Trading Co. Pvt Ltd.
2. On the facts and in the circumstances of the case and in law, the ld CIT(A) erred in directing the AO not to apportion expenses of Rs.12,09,897 towards speculation loss pursuant to his direction not to treat loss in share transaction as speculation in nature."
3. The assessee has taken following grounds in its appeal:
"1.1 On facts and inn law, ld CIT(A) erred in confirming action of the AO of not allowing unabsorbed business loss of earlier years to be set off against income for the year.
1.2 On facts & in law, ld CIT(A) failed to appreciate that the taxable of income was on sale of business asset and thereby erred in not allowing unabsorbed business loss to be set off against income for the year.
2. The AO erred in levying interest u/s.234B of the I.T.Act."
4. The relevant facts giving rise to these appeals are that assessee is a Private Limited Company and is engaged in the business of trading in shares, giving loans and advances and property development. For the assessment year under consideration, assessee filed return of income on 30.10.2004 declaring total income at Rs.Nil.
5. Assessee has shown following incomes for the assessment year under consideration:
i) Sale of shares & securities : Rs. 9,81,993
ii) Rent Income : Rs. 4,96,155
iii) Interest income : Rs. 7,74,028
iv) Income from joint venture : Rs. 9,28,046
v) Profit on sale of office premises : Rs.1,58,88,033
6. During the course of assessment proceedings, the AO asked the assessee to explain as to why the loss on account of diminution of shares/loss on account of sales of shares should not be treated as speculation loss as per provisions of Explanation to Section 73 of the Act. Assessee stated that its principal business is that of granting loan/advances/finance and, accordingly, provisions of Explanation to Section 73 of the Act are not attracted. It was also stated that income of the assessee in the relevant 3 Pursarth Trading Co. Pvt Ltd.
assessment year under consideration has mainly arisen from income from capital gains & income from house property.
7. Assessing Officer did not accept the contention of the assessee. He stated that capital gain has arisen to the assessee under section 50 of the Act and not the normal capital gain arising out of sale of investment during the year. He stated that said short term capital gain u/s 50 is due to legal fiction in the Act and the main source of income of the assessee is by way of dealing in securities. He concluded that assessee cannot be treated as an investment company as the main income of the assessee is from share business. He stated that assessee does not fall in the exception to the said Explanation to Section 73 of the Act. Therefore, AO considered the loss on account of diminution in valuation of trading stock of shares as speculation loss resulting in speculation business and stated that it cannot be set off against profit from business other than speculation business. AO concluded that the loss in share transaction is at Rs.32,43,945 as per para 3.3.8 of the assessment order. Further, he also considered the expenditure of Rs.12,17,314 incurred in share trading activity, the calculation of which he has worked out in para 3.3.9 of the assessment order.
8. Further, AO also stated that the short term capital gain on account of sale of premises at Pune cannot be set off against brought forward business loss of the assessee in view of above provisions of section 72(1) of the Act.
9. Being aggrieved, assessee filed appeal before the first appellate authority.
10. Ld CIT(A) by impugned order held that capital gain arising to the assessee u/s.50 of the Act have to be treated as capital gains only in quite normal sense and, accordingly, did not agree with the AO that it should be treated differently other than capital gain. In view of his above findings, ld CIT(A) has stated that assessee has derived its income of Rs.1,97,18,710 comprising of capital gains u/s.50 to the tune of Rs.1,95,68,230 and house property income to the tune of Rs.4,18,603 which is more than the loss of shares as arrived at by the AO at Rs.32,43,945. ld CIT(A) has held that provisions of Explanation to Section 73 of the Act is not applicable. Consequently, ld 4 Pursarth Trading Co. Pvt Ltd.
CIT(A) has treated the said share loss of Rs.32,43,945 as business loss of the assessment year under consideration and directed the AO to allow the same to be set off against other income under the head of the current year. Ld CIT(A) held that unabsorbed brought forward loss cannot be allowed against assessee's other income under other head in the current year.
11. In view of above, assessee as well as department are in appeal before the Tribunal.
12. In the appeal filed by the assessee, as may be observed from the grounds of appeal, the only issue involved is as to whether short term capital gain computed under section 50 of the Act could be set off against brought forward business loss.
13. During the course of hearing, ld A.R. submitted that short term capital gain u/s.50 of the Act is nothing but business income and to substantiate his above submission, he placed reliance on the decision of ITAT in the case of J.K. Chemicals vs ACIT (I.T.A. No.8206 and 8618/Bom/89) dated 1.11.1993, wherein, the Tribunal held that computation of short term capital gain/loss has to be computed in accordance with the provisions of section 50 of the Act but the same has to be dealt with under the head "profits and gains of business or profession". Ld A.R. submitted that similar issue was also considered by the Tribunal in the case of Digital Electronics Ltd vs ACIT, 49 DTR (Mumbai)(Trib) 484 and the Tribunal relying on the above decision of J.K. Chemicals (supra) held that the income earned by the assessee in the relevant assessment year on sale of factory building, plant and machinery although not taxable as 'profits and gains of business or profession' is an income in the nature of income of business though assessed as capital gains under section 50 of the Act. Therefore, assessee is entitled to set off of brought forward business loss against said capital gains. Ld A.R. also referred the decision of ITAT, Vishakhapatnam Bench in the case of Sri Padmavathi Srinivasa Cotton Ginning and Pressing Factory v. Deputy Commissioner of Income-tax, 318 ITR 156(AT) and submitted that the Tribunal in the said case has also held that assessee is entitled to claim set off of unabsorbed depreciation and eligible business loss, if any, against short term capital gain computed 5 Pursarth Trading Co. Pvt Ltd.
under section 50 of the Act. He submitted that above cases squarely apply to the case of the assessee and, therefore, brought forward business loss should be set off against short term capital gain computed under section 50 of the Act. Ld A.R. also referred the decision of Hon'ble Delhi High Court in the case of Lavish Apartment (P) Ltd vs. ACIT, (2012) 23 Taxmann.com 414(Delhi). However, on perusal thereof, it is observed that the judgment is not relevant to the issue before us as in that case, the Hon'ble Court has held that considering facts of the case, rental income, hire charges from car and computer and commission income, all represented profits and gains of business carried on by assessee in the relevant assessment year, although they were assessed under respective heads and, accordingly, brought forward business loss can be set off against these items of income. Ld A.R. submitted that there is a close nexus of the assets sold by the assessee which were used for the business purpose and the character of receipt on sale of the said assets and, therefore, said STCG computed u/s.50 of the Act has to be considered as business income of the assessee. When the attention of ld A.R. was drawn to the decision of Special Bench ITAT (Bangalore) in the case of M/s. Nandi Steels Ltd. vs ACIT, 17 Taxmann.93(Bang)(SB)/(2012) 13 ITR (Trib) 494 (SB) wherein, Tribunal has held that capital gain arising to the assessee on sale of land used for business purposes cannot be set off against carry forward business loss, ld A.R. submitted that ITAT Bangalore (SB) had not considered the character of receipt on sale of land which was used for business purposes as the same was not argued before it. He further submitted that Special Bench relied on the decision of Hon'ble Supreme Court in the case of CIT vs. Express Newspaper Ltd, 53 ITR 250(SC). Ld A.R. submitted that the case of Special Bench, if read in entirety, it cannot be made applicable to the case of the assessee and rather cases cited by him are applicable, and are relevant. Ld A.R. relying on the decision of Hon'ble Supreme Court in the case of Goodyear India Ltd. v. State of Haryana, 188 ITR 402(SC) and also the decision in the case of Commissioner of Income-tax v. Sun Engineering Works P. Ltd., 198 ITR 297 (SC) submitted that Hon'ble apex Court has held that the judgment must be read as a whole and the observations from the judgment have to be considered in the light of the questions which were before the court. It is neither desirable nor permissible to pick out a word or a sentence from the judgment of the Supreme Court divorced from the context of the question under consideration and treats it to be the complete law 6 Pursarth Trading Co. Pvt Ltd.
declared by the court. Ld A.R. submitted that the decision of Special Bench in the case of Nandi Steels (supra) should not be considered while deciding the issue of set off of short term capital gain computed under section 50 of the Act against brought forward business loss as in that case, the issue was not properly considered.
14. On the other hand, ld D.R. submitted that the issue under consideration is squarely covered by the decision of ITAT Bangalore (SB) in the case of Nandi Steel Ltd (supra). He submitted that the said decision of Special Bench is based on the decision of Hon'ble apex court in the case of Express Newspapers Ltd (supra). He supported the action of AO.
15. We have considered submissions of ld representatives of parties, orders of authorities below and the cases cited before us.
16. At the outset, we may state that findings given by the AO is contrary in itself. On the one hand, AO has held that capital gain arising to the assessee u/s. 50 of the Act is not normal capital gain arising out of sale of investments and has considered it akin to business profit while considering applicability of the Explanation to Section 73 of the Act. Accordingly, AO has held that the share loss to the assessee is more than the income of the assessee under the head "interest on securities", "income from house property", "capital gains" and "income from other sources". Therefore, assessee is not entitled to the exception as provided in explanation to Section 73 of the Act and, accordingly, considered the share loss to the assessee as speculation loss. On the other hand, AO while considering the set off of brought forward business loss of the earlier years, has held that it can not be allowed to set off of the capital gain computed under section 50 of the Act on the ground that said short term capital gain on sale of asset is capital gain and it is not a business income. In the first appeal, ld CIT(A) has held that capital gain arising u/s.50 of the Act should not be treated differently than the other capital gain. Ld CIT(A) has held that provisions of section 45 do not specify the capital gains arrived at u/s.50 to be treated differently. Thus, for all the purposes of Income tax Act, 1961, the capital gains arising u/s.50 of the Act have to be treated as capital gains only in quite normal sense and not otherwise. In view thereof, ld CIT(A) has treated the said short 7 Pursarth Trading Co. Pvt Ltd.
term capital gain computed u/s.50 of the Act as normal capital gain and has held that income of the assessee from capital gain and house property is more than the loss arrived at by the AO on trading of shares. Therefore, said share loss cannot be treated as speculation loss in view of exception to Explanation of Section 73 of the Act. Since ld CIT(A) has treated the capital gain computed u/s.50 of the Act as normal capital gain, he has also held that the unabsorbed business loss cannot be allowed to be set off against capital gain computed u/s.50 of the Act.
17. On consideration of the cases cited by ld A.R., we observe that the Tribunal in the case of J.K. Chemicals Ltd (supra) which was decided by the Tribunal vide order dated1.11.1993, the case of Digital Electronics Ltd(supra) which was decided by order dated 20.10.2010 and also the decision of ITAT Vishakhapatnam Bench in the case of Sri Padmavathi Srinivasa Cotton Ginning and Pressing Factory(supra), which was decided on 6.3.2009 (supra) have held that capital gain computed u/s.50 of the Act is the income in the nature of business income even though it is not taxable as profits and gains of business or profession. The Tribunal has held that assessee is entitled to claim set off of unabsorbed business loss and unabsorbed depreciation against short term capital gain computed u/s.50 of the Act. However, we observe that similar issue came before the Tribunal Bangalore Bench and the Special Bench ITAT (Bangalore) vide order dated 9..12.2011 (supra) has held that income earned by the assessee by carrying on the business by use of the stock-in-trade only is the business income of the assessee. Thus, the business loss that can be carried forward under section 72 can also be set off only against the business income of the assessee, be it from the same business or from any other business. The Tribunal while rejecting the contention of the assessee has held that factory building and plant & machinery that stood on the same land which were connected to the business of the assessee and the gain from sale of those assets could not be business profit and, therefore, cannot be set off against the carried forward business losses from earlier years. The Tribunal also rejected the contention of the assessee that since the said fixed assets of the assessee had direct nexus with the business carried on by the assessee are business assets, any gains from the sale of such assets would also have the character of business income. It is held by the Special Bench that the capital is to be used for the purpose of carrying on the business of the 8 Pursarth Trading Co. Pvt Ltd.
assessee and it shall remain the business of the assessee till it is either converted into stock-in-trade or disposed of. The income earned by the assessee by carrying on the business by the use of stock in trade only is the business income of the assessee and likewise any expenditure incurred by the assessee for carrying on business and for earning income from such business or profession is only allowable as deduction. The Tribunal after considering the decision of Hon'ble Apex Court in the case of Express Newspapers Ltd (supra) held that capital gain on sale of capital assets is not to be set off against brought forward losses of earlier years. Thus, the Tribunal decided the issue against the assessee.
18. Keeping in view of above decisions cited by ld A.R. and also the decision of Special Bench in the case of Nandi Steel Ltd (supra) relied by ld D.R., which is subsequent to the decisions relied by ld A.R., and also keeping in view the principle that the decision of Special Bench prevails over the decisions of Division Benches, we hold that capital gain even though computed u/s.50 of the Act, cannot be treated differently and same is to be considered as capital gain and consequently, brought forward business loss could not be set off against capital gain that has arisen to the assessee in the assessment year under consideration on account of sale of its premises at Pune. Hence, we uphold the order of ld CIT(A) by rejecting grounds of appeal taken by assessee in its appeal.
19. Now coming to grounds of appeal taken by department, as to whether the share loss is to be considered as speculation loss or business loss of the assessee, we hold that in view of the fact that the short term capital gain computed u/s.50 of the Act has been held by us as capital gain of the assessee and admittedly, the income of the assessee from capital gain and house property is more than the share loss computed by the AO, we agree with ld CIT(A) that Explanation to Section 73 of the Act is not applicable. Hence, the share loss cannot be deemed to be loss from speculation business in the assessment year under consideration. Therefore, we uphold the order of ld CIT(A) in directing the AO to allow set off of share loss against income under other heads for the assessment year under consideration. Consequently, action of the AO to apportion expenses towards speculation loss is also set aside as the same will form part 9 Pursarth Trading Co. Pvt Ltd.
of business expenses of the assessee, which are allowable as per provisions of the Act. Hence, both grounds of appeal taken by department are rejected by upholding the order of ld CIT(A).
20 In the result, the appeal of the assessee as well as the department are dismissed.
Pronounced in the open court on 28th December, 2012
Sd/- Sd/-
(RAJENDRA) (B.R. MITTAL)
Accountant Member Judicial Member
Mumbai, Dated 28th December, 2012
Parida
Copy to:
1. The appellant
2. The respondent
3. Commissioner of Income Tax (Appeals),V, Mumbai
4. Commissioner of Income Tax, MC-V , Mumbai
5. Departmental Representative, Bench 'J' Mumbai
//TRUE COPY// BY ORDER
ASSTT. REGISTRAR, ITAT, MUMBAI