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TMI Blog2003 (8) TMI 544X X X X Extracts X X X X X X X X Extracts X X X X ..... facts and in the circumstances of the case and in law, the learned CIT(A) erred in directing to restrict the expenses on earning the dividend income at Rs. 6,429 (being 1% of dividend income) as against Rs. 1,65,097 worked out by Assessing Officer as attributable to earning of dividend income, without appreciating the facts and circumstances on which findings of Assessing Officer in the assessment order was based. The learned CIT(A) further failed to appreciate that action of Assessing Officer in working out the expenses on earning dividend income has been upheld and as such ought to have upheld the disallowance of expenses of Rs. 1,65,097 which is just and reasonable." 3. The learned representatives of the parties have been heard, their arguments considered and records perused. 4. The assessee is a Private Limited Company engaged in the business of purchase and sale of shares. The assessee filed its return for the assessment year 1990-91, declaring loss of Rs. 43,35,281 on 27-12-1990. The Assessing Officer computed the total income of the assessee in his order dated 20-7-1992 at Rs. 3,56,220. He started the computation of total income from net loss as per profit and loss account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the previous year relevant to the assessment year 1990-91, the assessee had purchased shares worth Rs. 240.02 lakhs but had not sold any shares. Hence, the assessee had not incurred any loss in share trading. (2) The loss was mainly due to payment of interest and other expenses incurred during the course of business. The loss could not therefore be treated as speculation loss by invoking explanation to section 73. (3) The Assessing Officer determined the gross total income of the assessee at Rs. 6,42,900 being the income from dividend and as per the Explanation to section 73, section 73 is not applicable where the gross total income of the company consists mainly of "income from interest on securities, income from house property, capital gains and income from other sources". Since the income of the assessee was only income from other sources, the provisions of section 73 is not applicable. Therefore, the loss incurred should be treated as business loss and should be set off against dividend income and the balance should be carried forward as business loss. 6. The CIT(A) considered the submissions of the assessee. He rejected the assessee';s contention that its loss canno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t would be evident from Schedule-O of the annual accounts for the year ended 31-3-1990 that during the year, the assessee purchased 2,13,800 equity shares worth Rs. 238.73 lakhs of Reliance Industries Limited only. He argued that to fall within the mischief of the Explanation to section 73, the assessee';s business must consist of purchase and sale of shares. He emphasized that there should be purchase and sale of shares of companies and not of a company. In the case of the assessee, there is purchase of shares of a company, namely, Reliance Industries Limited and there is no sale of shares at all in the year of account. Relying on the decision in Laxmi Feeds &; Exports Ltd. v. Asstt. CIT (1997) 62 ITD 315(Mum.). He argued that plurality of transaction and plurality of companies is a pre-condition for attracting the provisions of Explanation to section 73. This precondition, he submitted, is not satisfied in the case of the assessee, as there is purchase of shares of a single company and there is no sale of shares at all in the year of account. The learned Counsel for the assessee further submitted that an investment company is outside the mischief of the Explanation to section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a segregation of "net loss computed in respect of speculation business carried on by the assessee" in the matter of carry-forward of losses. The assessee';s case, therefore, falls within the net of section 73. 9. We have given careful consideration to the rival submissions. The admitted facts as culled from the material on record are these. It is the second year of the company';s business. From the Director';s Report, which forms part of the annual accounts of the company for the year ended 31-3-1990, it is obvious that during the previous year relevant to the assessment year under consideration, the assessee company dealt in shares and securities, which fact is also corroborated by Para 3 of Schedule ';O'; of the aforesaid annual accounts, wherein, it is stated that since the company is dealing in shares, the same has been treated as stock-in-trade. It is also stated in the Director';s Report (Page 3 of the Paper Book) that the company incurred loss of Rs. 55.97 lakhs, hence, the dividend is not recommended. Balance Sheet as at 31-3-1990 (copy at page 8 of the Paper Book)shows that the company was started with share capital of Rs. 8,000 which increased to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eal to the Tribunal or by way of cross objection. Thus, the findings of the CIT(A), namely, that even though the assessee has not sold any shares in the year of account, its loss can be treated as loss incurred from share trading and even if there was no sale of shares in the year of account, the business of the company was still that of purchase and sale of shares, have attained finality. 13. The effect of the above findings of the CIT(A) which has become final is that the loss incurred by the assessee is from the assessee';s business of purchase and sale of shares. In this view of the matter, reliance by the learned Counsel for the assessee on the decision of Laxmi Feeds &; Exports Ltd. (supra) is misplaced. In CIT v. Sun Distributors &; Mining Co. Ltd. (1993) 68 Taxman 223, their Lordships of Hon';ble Calcutta High Court held that it is not a requirement of section 73 that both purchase and sale of shares should take place in the same year. What is required to attract section 73 is that the business of the assessee should consist of purchase and sale of shares. Their Lordships observed as under :- "Section 73 will apply where any part of the business of the company co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f a company consists in the purchase and sale of shares of other companies, such company shall, for the purposes of section 73, 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. 15. In view of the above findings of the CIT(A) read with the decision of the Hon';ble Calcutta High Court in Sun Distributors &; Mining Co. Ltd.';s case (supra), the case of the assessee is caught within the mischief of Explanation to section 73. This will not be so, if gross total income of the assessee 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". We may call it as "excluded category". The finding of the CIT(A) in this regard is that since the gross total income of the assessee consists of only income from other sources, the provisions of section 73 is not applicable in its case and therefore, the loss incurred is to be treated as business loss. It is this finding, which has been challenged by the revenue. 16. From the facts of the assessee';s case enumerated earlier, it may be noted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stment company" as under :- ""investment company" means 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"." 20. It would thus appear that the definition of "Investment Company" is similar to Companies which fall into excluded category under Explanation to section 73. In that case, gross total income of the assessee was Rs. 19,66,798 out of which, Rs. 10,67,474 happens to form the income from House property, Other sources and Capital gains. The Assessing Officer held the company to be an ';investment company'; within the meaning of section 109(ii) of the Act. On the basis of that, the income from the aforesaid source was more than 50% of its gross total income. On appeal, the CIT(A) and the Tribunal did not agree with the finding of the Assessing Officer. The revenue filed reference before the Hon';ble High Court and the High Court laid down the test which is to be applied for determining whether a company can be termed as "investment company" or not. At page 545 of the report, their Lordships observed thus :- "From t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oked at from this angle, and having regard to the admitted facts of the assessee';s case before us, the primary activity of the assessee is purchase and sale of shares. This is the only business activity of the assessee. From the extract of the observation of the Hon';ble High Court at page 545 of the report given above, it is obvious that their Lordships have held that a company engaged mainly in business or industrial activities cannot be held to be an "investment company" merely because in particular year, its income from such business or industrial activity is insignificant or a negative figure. It is an undisputed fact that the assessee before us is engaged mainly, which word is akin to wholly in the business of purchase and sale of shares. If that be so, in our opinion, the decision (supra) of the Hon';ble Jurisdictional High Court would not render any assistance to the assessee and the assessee';s case would not fall within the excluded category of Explanation to section 73. In other words, the case of the assessee, in our considered opinion, falls within the ambit of the Explanation to section 73. 23. In Eastern Aviation &; Industries Ltd.';s case (supr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id 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 theTribunal as a loss in speculative business." 24. The conclusion which emerges from the discussion above is that the loss from trading in shares has to be treated as speculation loss. In this view of the matter, we reverse the findings of the CIT(A) on the point and allow ground No. 1 of the revenue. 25. Apropos ground No. 2 above. The Assessing Officer apportioned the total expenses including the interest, in the ratio of dividend income and arrived at expenses of Rs. 1,65,097, as against expenditure of Rs. 200 claimed by the assessee, which according to him would have been incurred for earning dividend income of Rs. 6,42,900, for the purpo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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