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TMI Blog2003 (2) TMI 171X X X X Extracts X X X X X X X X Extracts X X X X ..... and to subsidise, finance or assist in subsidising or financing the sale and maintenance of any goods, articles or commodities of all or any kind and description upon any terms or immovable and movable property including land, buildings and also to provide advice, counsel and services. B. To finance industrial and trading enterprises and for that purpose lend and advance monies to entrepreneurs, promoters and industrial or trading concerns on such terms and conditions and with or without securities as may be thought appropriate." In the light of the above object, it is claimed by the assessee-company that it is an investment company. 3. The appellant-company filed a revised return declaring a loss of Rs. 29,71,990 and also claimed some carry forward losses and unabsorbed depreciation of earlier years, which have to be carried forward to subsequent years. The audited annual report for the year ended 31st March, 1997, relevant for the assessment year 1997-98, to the extent relevant for our purposes, reads as under- "..... Profit & Loss Account for the year ended 31-3-1997 ------------------------------------------------------------------------ Particulars SCH Year ended 31-3-1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t such loss is eligible for set off against only profits and gains of another speculation business, and as such denied the set off of the said loss against other incomes derived by the assessee-company during the year. He however, did not differentiate between the purchase and sale of shares and purchase and sale of yarn and computed the total income at Rs. 53,37,163 as per the following computation- "A. Income from other sources Dividend Income Rs. 21,89,145 Less: Deduction under section 80L Rs. 15,000 Rs. 21,74,445 B. Income from business (non-speculative) Commission Income Rs. 25,29,699 Interest income Rs. 24,904 Miscellaneous Income Rs. 6,00,000 Rs. 31,54,603 C. Short Term Capital Gains on sale of Vehicle Rs. 8,120 ----------------- Total Income Rs. 53,37,168..." ----------------- It may be observed that the Assessing Officer has not allowed the expenditure claimed by the assessee at Rs. 3,80,80,238, and this was done on the ground that it related to the speculation business. In other words, the Assessing Officer invoked the provisions of section 73 read with its Explanation, with reference to the entire business activity of the assessee. 7. When the matter r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessing Officer. 2. I have considered the decision of the Karnataka High Court in 195 ITR 404 quoted by your Authorised Representative and the facts in your case will not apply to the facts in that case. Also if the investment in shares was made as investment, then the value of the investment cannot be reduced at the end of the year as they were not stock-in-trade. 3. In these circumstances, you are requested to give your comments before 18-3-2002 in writing. In case if you want to appear before me personally and argue the case, you or your. Authorised Representative can appear before me on 18-3-2002 at 10.30 AM and advance your arguments. In case I neither get written objection nor any body appears on 18-3-2002 and advance of the arguments, it will be presumed that you have no objection and the enhancement will be made accordingly." Before the CIT(A), it was argued on behalf of the assessee that the assessee-company held shares as investments, and such investments were shown in the Balance Sheet as on 31st March, 1997, i.e. on the last day of the accounting year 1996-97 at Rs. 1,33,48,429, and so, the assessee is an investment company, to which Explanation to section 73 is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... To salaries 39,070 Depreciation 85,869 Finance Charges 8,95,401 16,32,098 ----------- ------------- Income from Business 1,10,16,824 ------------- Income from other Sources: Dividend Income [as per section 56(2)(i)] also read 129 ITR 260 (Bombay) & 125 ITR 227 (Guj.) 21,89,445 Loss from speculation in terms of Explanation to section 73(4) Sale of shares 1,22,42,135 Less: Decrease in stock 1,40,47,723 To purchase of shares 1,25,28,799 Finance charges 17,90,802 ------------- 2,83,67,324 -------------- Loss from Speculation 1,61,25,189 -------------- Gross total Income 1,32,14,389 Less: Deduction under section 80L allowed by the Assessing Officer 15,000 -------------- Total Income 1,31,99,389 or 1,31,99,390 -------------- The Assessing Officer is directed to calculate the tax on the above total income and send a Demand Notice for the extra amount to the appellant. Needless to mention that the speculation loss of Rs. 1,61,25,189 is to be allowed to be carried forward and given set off according to the relevant provisions of the Act. 13. Appeal dismissed and income enhanced: 8. The CIT(A) also rejected the contention of the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erred in not considering the purchase and sale of yarn as speculation activity. It is explained that the yarn was purchased at Surat and Bombay and it was also sold at the same place, and if the share transactions are considered as speculation activity, the transactions relating to yarn should also be considered as speculation activity. 12. The learned Departmental Representative, on the other hand, pleaded that there has been an amendment in Explanation to section 73 brought out by the Finance Act, 1987, with effect from 1-4-1987, and the expression "other than a company as defined in clause (ii) of section 109" that figured in the said Explanation earlier had been substituted by the expression-"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'. In the light of this, he pleaded that it is immaterial whether the assessee-company was an investment company or not for the application of the Explanation to section 73. He also pointed out that what has to be seen is whether the gross total income of the assessee consisted ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s" 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." It is evident that the above Explanation is attracted, when the following conditions are satisfied cumulatively- (a) The appellant is a company (b) Its gross total income does not consist mainly of the following incomes- (i) Interest on securities (ii) Income from House property (iii) Capital gains (iv) Income from other sources (c) The principal business of the assessee is not banking or granting of loans and advances (d) A part of the business of the assessee consists of purchase and sale of shares. We find that the income assessable under the head 'other sources' in the case on hand, is a marginal figure of Rs. 21,89,445, as mentioned in the show-cause notice issued by the CIT(A), which we have extracted above. The income from purchase and sale of yarn waste, before deductio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gle out the rigours of Explanation to section 73." The above observations were made in the context of adjustments made under section 143(1)(a) they apply with greater force in the context of regular assessment proceedings, like the present one, 16. The fact that substantial funds of the assessee are held as investments, and are reflected at Rs. 1,33,48,429, in the Balance Sheet as on 31-3-1997, is not material for considering the application of the Explanation to section 73 of the Act. In the light of clear language of section 73, what has to be seen is only the composition of the gross total income and not the percentage of the funds of the assessee held as investments. This criterion has no bearing at all on the consideration of the issue on hand. In the case of Easter Aviation & Industries Ltd, relied upon by the learned Departmental Representative, the Hon'ble Calcutta High Court observed 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 "positive income" whereas "losses" represent "negative income", In other words, "loss" is "negative profit". ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the first time before us. In the circumstances, we cannot entertain this plea urged for the first time before us. 18. In the circumstances, we have to uphold the order of the CIT(A). Before we close the matter, we may however mention that the assessee did claim certain carried forward losses and unabsorbed depreciation of, earlier years in the revised return filed by it. If the share transactions are held as speculation activity and the loss therefrom is not set off against other income, the assessee may become eligible for set off of other determined carried forward non-speculative business loss against the business profit of this year. The assessee has not taken a ground before us on this issue, nor did the learned counsel for the assessee take a plea for this benefit during the hearing. This may be so because the assessee has all along been contending that the transactions of purchase and sale of shares did not constitute speculation activity, and the provisions of section 73 were not attracted. As we have rejected this plea, and gave a finding to the contrary, we deem it fair and proper to direct the Assessing Officer to examine this issue and give set off for carried forwa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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