TMI Blog2012 (6) TMI 38X X X X Extracts X X X X X X X X Extracts X X X X ..... he income of the assessee from loans and advances - Decided in favor of assessee. - IT APPEAL NOS. 282 & 284 OF 2000 - - - Dated:- 30-5-2012 - ASHOK BHUSHAN AND PRAKASH KRISHNA, JJ. ORDER Ashok Bhushan, J. These two appeals under Section 260-A of the Income Tax Act, 1961 (hereinafter referred to as the Act) have been filed against the common judgment and order dated 30th June, 2000 passed by Income Tax Appellate Tribunal in Income Tax Appeal No.1075 of 1999 (for the assessment year 1998-99) and the Income Tax Appeal No.805 of 1999 (for the assessment year 1996-97). 2. Both the appeals raising same substantial questions of law, have been heard together and are being decided by this common judgment. 3. For deciding the questions of law in these appeals, it shall be sufficient to refer to the facts of Income Tax Appeal No. 282 of 2000. 4. The assessee, a registered company, submitted return for the assessment year 1998-99 declaring net loss of Rs. 1,53,198/-. The case was picked up for limited scrutiny and a notice was served on the assessee as to why the business of sale and purchase of shares may not be treated as speculation business as per Explanation t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther on the facts and in the circumstances of the case the Income Tax Appellate Tribunal was correct in law in holding that because of exclusionary nature of assessee's income, the orders of the authorities below could not be sustained?" 5. Sri Sambhu Chopra, learned counsel for the revenue in support of the appeal, contended that assessee is not covered under the exclusionary clause as contained in Explanation to Section 73 of the Act. It is contended that principal business of the company is not granting loans and advances and the principal business of the company is to be looked into from the memorandum of association. It is contended that exclusionary clause of the Explanation being not applicable, the purchase and sale of shares is a speculation business, losses of which cannot be set off against other income of the assessee and speculation losses can be set off only against the profits of the speculation business which loss was rightly carried forward by the assessing officer in the next year. It is further submitted that for determining the principal business of a company, the profit and loss account of one year is not relevant and the said issue can be determined while ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eculation loss". The net income was determined as Rs. 9,59,252/- and net profit was determined as Rs. 9,27,137/-. Thus the assessing officer has determined that the only income which was received by the company, was the interest income. The main object of the company as contained in the memorandum of association of the company, was noticed by the assessing officer, which is as under:- "To carry on the business of acquiring, holding and dealing in land, plantation of eucalyptus, teak, popular rubber trees....." The word "business" has been defined in Section 2(13) of the Act which reads as under:- "2(13) 'business' includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture;" 9. Chapter-IV of the Act relates to computation of total income. Part-D of Chapter-IV bears the heading "profits and gains of business or profession". Section 28 enumerates the income which is chargeable to income tax under the head "profit and gains of business or profession". Section 28(1) mentions the profit and gains of any business or profession which was carried on by the assessee at any time during the previous year. Section 28(i), (ii ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rst computed. 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", "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." 11. Section 73 of the Act provides that any loss computed in respect of speculation business carried on by the assessee, shall not be set off except against profits and gains, if any, of another speculation business. Section 73(1) of the Act uses the words "business carried on". The Explanation also uses the phrase "where any part of the business of the company.... consists in the purchase and sale of shares of other companies". Section 28(1) provides for charging of income tax on profits and gains of any business or profession which wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the company. The words "carried on" mean actual carrying of the activity. The words "carried on" has to be read in context of what actually was done by the company in the relevant year, rather than what was main object in the memorandum of association of the company. Thus the submission of counsel for the revenue that since in the memorandum of association the activity or business, which is shown to have been carried on by the assessee, is not included, it is not entitled to be considered in exclusionary clause, has to be rejected. 12. Now we come to the question as to whether the business of the assessee, as carried on in the relevant assessment year, falls in any of the exclusionary categories as mentioned in the Explanation to Section 73 of the Act. The details of the gross income has already been noted above as is delineated in the assessment order. For qualifying the exclusionary category, the condition to be fulfilled is that gross total income consists mainly of income which is chargeable under the heads - (a) "Interest on securities", (b) "Income from house property", (c) "Capital gains" and (d) "Income from other sources". The said provision uses the words "mainly of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion to Section 73. Following was laid down by the Bombay High Court in the said judgment:- "In our view, the submission which has been urged on behalf of the Revenue cannot be accepted. Leaving aside for a moment, the exception, which is carved out by the explanation to Section 73, the explanation creates a deeming fiction by which a company is deemed to be carrying on a speculation business where any part of its business consists in the purchase and sale of shares of other companies. Now, the exception which is carved out applies to a situation where the gross total income of a company consists mainly of income which is chargeable under the heads "Interest on securities", "Income from house property", "Capital gains" and "Income from other sources". Now, ordinarily income which arises from one source which falls under the head of profits and gains of business or profession can be set off against the loss which arises from another source under the same head. Sub Section (1) of Section 73 however sets up a bar to the setting off of a loss which arises in respect of speculation business against the profits and gains of any other business. Consequently, a loss which has arisen on ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e under that head, both being sources under the same head. The assessee had a dividend income of Rs. 4.7 lacs (income from other sources). The Tribunal was justified, in coming to the conclusion that the assessee fell within the purview of the exception carved out in the explanation to Section 73 and that consequently the assessee would not be deemed to be carrying on a speculation business for the purpose of Sec. 73(1)." 16. The proposition as laid down by the Bombay High Court in the above case fully supports the submission of the assessee in the present case. In the said case during the relevant assessment year the assessee returned an income of Rs. 2,25,04,588/- from service charges. The assessee had a loss of Rs. 2,23,32,127/- in shares trading. The assessee had also dividend income of Rs. 4,79,325/-. The assessee claimed that in computing the gross total income for the purpose of the Explanation to section 73, the income from service charges had to be adjusted against the loss in shares trading. The contention of the assessee was accepted by the Commissioner (Appeals) and the Tribunal. The revenue filed appeal before the High Court. The Division Bench in its judgment, as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if "in any assessment year" the income of the assessee which is chargeable under any of the heads specified in clause (ii) is not less than 51 per cent. of the amount of its gross total income, it will have to be treated as "investment company" for that assessment year. Had that been intent, the Legislature would have said so in specific terms as has been done in the Explanation to sub-section (4) of section 104 of the Act (as it stood at the material time) which provides that for the purposes of clause (a) thereof "the business of a company shall be deemed to consist mainly in the construction of ships or in the manufacture or processing of goods, etc., if the income attributable to any of these activities included in the gross total income of the relevant previous year is not less than fifty-one per cent. of such income." There is no such deeming provision in the definition of investment company." 18. In the aforesaid case, the Division Bench had found that during a period of 27 years only in four year including the year in question, due to one reason or the other, its income from business fell short of fifty-one percent of its gross total income. The view of the Tribunal tak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Whether, on the facts and in the circumstances of the case, the Tribunal is correct in holding that the assessee is entitled to claim deduction of the loss of Rs. 1,56,087 under the head 'Business' and that the finding that the loss was speculation loss has to be vacated?" 21. The Calcutta High Court answered both the questions in favour of the revenue by making following observations:- "The phrase "to the extent to which the business consisted of purchase and sale of such shares" also does not indicate that the Legislature had several other actual and existing non-speculative activities of business in mind. It merely indicates that the business activity which consists of purchase and sale of shares will be treated as speculation business. If the entire business activity of a company consists of purchase and sale of shares of other companies, then the entire business will be treated as speculation business. But, if, apart from purchase and sale of shares, the company has other business activities, then those other activities will not be treated as speculation business. The circular on which reliance has been placed also does not advance the case of the assessee in any way ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f sub-section (2), the loss in respect of a speculation business which has not been set off either in whole or in part, can be carried forward and can be set off against profits and gains "of any speculation business". The express "any speculation business" means a speculation business of the assessee in respect of which profits and gains for the assessment year in question have arisen and there is no justification to restrict the content of that speculation business where profits have arisen by excluding a business involving actual delivery of shares. No such restriction is found in the Explanation. To impose one is a legislative function. In other words, once the assessee is carrying on a speculation business and the profits and gains have arisen from that business during the course of the assessment year, the assessee is entitled to set off of the losses carried forward from a speculation business arising out of a previous assessment year. In these circumstances, the view which has been formed by the Tribunal is consistent with the provisions of section 73. The questions of law shall stand answered accordingly. The appeal shall stand dismissed. There shall be no order as to co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd the learned Tribunal proceeded on an erroneous view of the proposition of law in respect of Section 73 which in Sub-section (1) makes it clear that speculation loss cannot be set off except against a speculative profit permissible of being carried forward for being set off in the subsequent years stretching to a period of eight years and not otherwise, unless the test of the Explanation is satisfied, which in our opinion, is not being satisfied in the present case." 27. In the aforesaid case the test of exclusionary clause as contained in Explanation to Section 73 of the Act being not satisfied, the question was answered against the assessee by the Calcutta High Court. But in the present case from the assessed income it cannot be said that the assessee does not come in the exclusionary clause of the Explanation to Section 73 of the Act. 28. The Tribunal after considering the relevant materials on the record returned the finding that major activity of the company is granting of loans and advances. Following conclusions were recorded by the Tribunal in paragraphs 8 and 9 of the impugned judgment:- " 8. From the above the conclusion that emerge is that the major activity ..... X X X X Extracts X X X X X X X X Extracts X X X X
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