TMI Blog2006 (8) TMI 227X X X X Extracts X X X X X X X X Extracts X X X X ..... Co. Ltd. v. CIT [1986] 162 ITR 373 and the Calcutta High Court in the case of CIT v. Nirmalkumar Co. [1986] 161 ITR 413 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 Assessing Officer by relying upon the decision of Calcutta High Court in the case of CIT v. National Grindlays Bank Ltd. [1993] 202 ITR 559, dividend income being assessable under section 56 and because of provisions of section 73, the business loss could be set off 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, 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 Assessing Officer as the entire expenses were 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) uph ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ading business if being treated as speculation loss in view or 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 [1971] 80 ITR 21, 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 in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... '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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Aryasthan Corpn. Ltd. v. CIT [2002] 253 ITR 401 (Cal.). 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 heads '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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cision 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 Nirmalkumar Co.'s case. 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 Assessing Officer held that the brokerage income should be assessed as business income and the loss should be regarded as speculation loss. The Appellate Assistant Commissioner, 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 thes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case, the assessee was carrying on the business in tea with its head office in the U.K., 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 last up to 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 action referred to its earlier decisions in the case of United Commercial Bank Ltd. v. CIT [1957] 32 ITR 688, CIT v. Chugandas Co. [1965] 55 ITR 17, CIT v. Cocanada Radhaswami Bank Ltd. [1965] 57 ITR 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -trade of his business under section 24(2) of the Indian Income-tax Act, 1922. 14.4 In the case of Cocanada Radhaswami Bank Ltd., 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 Assessing Officer 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 Income-tax 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., before the Tribunal, the assessee-company was eng ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot 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. In our view, the question has been squarely answered in the afore-referred 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, whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee 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 or earning the amount of dividends. The expenditure incurred by way of payment of interest was incurred for the purpose of carrying on the business of the assessee and that had to be deducted in its entirety under section 36(1)(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 Assessing Officer, wherein the High Court at page 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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