TMI Blog2005 (1) TMI 314X X X X Extracts X X X X X X X X Extracts X X X X ..... ench to the adjournment application moved by the Revenue. The Revenue has sought adjournment of the hearing for the reason that the Special Counsel engaged by the Department to conduct its case, Shri Beni M. Chattergi has informed his inability to appear in the Court for this case and the appointment of another Counsel is in the process. The learned CIT (D.R.) has produced a copy of the communication that he has received from Shri M.G. Zade, Income-tax Officer, 3(1)(3), Mumbai, to support the adjournment motion. 3. The Bench after considering the submissions, expressed its constraints in adjourning Special Bench Cases posted for hearing after a long process of administrative proceedings and giving advance: notices to the parties concerned and the interveners, if any. The Bench expressed its inability to adjourn the hearing of the case. 4. When the adjournment sought for by the Revenue was declined by the Bench, the learned CIT (D.R.) dutifully shouldered the responsibility of conducting the case for the Revenue. 5. The facts in the present case leading to the above issue are as follows:- 1. The assessee is a company earning income from business of trading in Steel, Yarn and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 73 which is an independent and deeming provision. 8. The assessee-company defended its case under Explanation to section 73 also. The assessee-company contended that its gross total income consisted mainly of income which is chargeable under the head "income from other sources" and therefore the exclusion provided in the Explanation applied to it. 9. The claim of the assessee-company regarding non-applicability of Explanation to section 73 also was rejected by the Assessing Officer on the following grounds:- (i) Explanation to section 73 stated that where the assessee-company has more than one business activities, one of which is buying and selling of shares, shall be treated as speculative business; the view supported by the decision of CIT v. Arvind Investments Ltd. [1991] 192 ITR 365 (Cal.). (ii) The Explanation was brought in the statute book to curb the device sometimes resorted to by business houses controlling group of companies to manipulate and reduce taxable income of companies under their control as clarified in CBDT Circular-No. 204 dated 24-7-1976 [110 ITR (St.) 21, 32]. (iii) The law stated in Explanation to section 73 does not endorse the intention of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company on purchase and sale of shares would not be speculative in nature within the meaning of Explanation to section 73. (vi) Reliance was placed by the assessee-company on the following decisions:- (a) Rajan Enterprises (P.) Ltd. v. ITO [1992] 41 ITD 469 (Bom.) (b) M. Gulab Singh Sons (P.) Ltd. v. IAC [1992] 43 ITD 308 (Chd.). 12. The CIT(A) accepted the second limb of the contention advanced by the assessee-company and held as follows:- "I agree with the submissions made on behalf of the appellant that the Assessing Officer could not invoke the provisions of section 73 and Explanation thereto without adjusting the losses and gains from various sources under the head 'business' as permitted by the provisions of sections 70 and 71 of the Income-tax Act, 1961, and only then, if the appellant's case fell within the non-excluded categories of companies as per the Explanation to section 73, could these provisions be invoked. In the appellant's case, the income is mainly from other sources, and hence on the basis of the ITAT decisions cited, since the appellant's losses from share dealings would have to be set off against the other business incomes, the provisions of secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) Usha Distributors (P.) Ltd. [IT Appeal Nos, 940 491 (Bom.) of 2001 (SMC)] (iii) Prudential Construction Co. Ltd. v. Asstt. CIT [2000] 75 ITD 338 (Hyd.) (iv) Merfin (India) Ltd. v. Dy. CIT [2002] 80 ITD 399 (Hyd.) (v) Off-shore India Ltd. v. ITO [1986] 15 ITD 549 (Cal.) 8. Therefore, at the instance of Revenue, the matter was placed before the Hon'ble President of the Income-tax Appellate Tribunal, who has constituted the Special Bench to deliver upon the issue raised in appeal by the Revenue. 9. Shri K.C. Naredi, the learned CIT (DR) who appeared for the Revenue, argued his case at length. The contentions and Arguments advanced by Shri Naredi are in the following lines:- 1. That the present issue is to be considered in the light of Explanation to section 73 alone and there is no relevance for section 43(5) to be roped in as the two sections are independent In operation. - Relied on Merfin (India) Ltd. v. Dy. CIT [2002] 80 ITD 399 (Hyd.) 2. That the object of the Explanation to section 73 is to curb the device sometimes resorted to by business houses controlling group of companies to manipulate and reduce the taxable income of companies under their control. The i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f. 7. That the Courts have held in the following cases that the test to be applied to ascertain the nature of activities carried on by a company is to examine the principal/primary/fundamental business carried on by it and not to examine the composition of gross total income on a year to year basis. Relied on the following decisions: (i) CIT v. Amritlal Co. Ltd. [1995] 212 ITR 540 (Bom.) "Section 109 of the Income-tax Act, 1961, defines the expression "investment company" for purposes of sections 104, 105 and 107A. From the definition it is evident that in order to term a company an "investment company", its gross total income should consist "mainly" of income from securities, house property, capital gains, etc. The expression "mainly" appearing in the definition of investment company in clause (ii) of section 109 means "substantially" or "primarily". If the business of the company consists mainly in dealing in goods or merchandise, it cannot be held to be an "investment company" within the meaning of clause (ii) merely because, for one reason or the other, its income from business happens to fall short of its income from investments, etc., in a particular previous year. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rading Co. (P.) Ltd. v. CIT [1971] 80 ITR 21 (SC). "If shares are held by an assessee as part of his trading assets, dividends on those shares would for part of the income from business of the assessee. The assessee will therefore be entitled to claim set off of loss from its business carried forward from earlier years against dividends of the current year from the shares held as stock-in-trade of his business under section 24(2) of the Income-tax Act, 1922." (ii) Apollo Tyres Ltd. v. CIT [2002] 255 ITR 273 (SC) pp. 277, 278. "The dispute in the present case is in regard to the question whether the assessee's investment in the UTI is business, and if so, is it a business which qualifies to be an "eligible business" under section 32AB? In regard to the first aspect, we must note that the Tribunal as a question of fact based on material on record has come to the conclusion that the investment in the UTI by the assessee-company is in the course of its business and its business of manufacture and sale of tyres and sale and purchase of units of the UTI are common in nature and both the businesses are intertwined and interlaced. This finding is accepted by the High Court also. We a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Further, the Explanation to section 73 of the Income-tax Act, 1961, reads as under. "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 arid 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. 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". Both positive and negative profits are of revenue character. Both must enter into the computation, wherever it becomes material, in the taxable income of the assessee." (ii) Aryasthan Corpn. Ltd. v. CIT [2002] 253 ITR 401 (C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rn States Holding Co. (P.) Ltd., dividend income is to be assessed under the head income from business. Alter doing so, because income of the assessee will be Rs. 17,50,851 (4,26,051 + 13,24,800). It's income chargeable under the head "Interest on securities", "Income from house property", "Capital gains" and "Income from other sources" will be nil Thus, its gross total income will consist of only business income. Therefore, the assessee will fall within the Explanation of section 73." 15. That, therefore, the decision of the Tribunal in the case of Srichakra Textiles (P.) Ltd. is squarely applicable to the present issue considered by this Special Bench. That, this decision has been followed by the Tribunal in many other cases listed in paragraph 7 above. 10. The learned Commissioner further relied on the following decisions to highlight the features of speculative transaction and speculation loss. (i) Sri Ranga Vilas Ginning Oil Mills v. CIT [1982] 133 ITR 85 (Mad.) (ii) CIT v. Puttaiah Seshaiah Co. [1984] 146 ITR 168 (AP) (iii) Navnitlal Ambalal v. CIT [1976] 105 ITR 735 (Bom.) (iv) CIT v. New India Investment Corpn. Ltd. [1994] 205 ITR 618 (Cal.). 11. The learn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loss against income from other business activity of trading in Steel, Yarn, Fabrics and rendering of commercial services. Therefore, this is perfectly in accordance with law relating to computation of income. 3. That, there is no law to bifurcate the business income once computed under the head "profits and gains of business or profession" in the context of computing the gross total income of an assessee. If any specific item is to be considered differently, the same would have been specifically stated in Explanation to section 73 as in the case of sections 32A(3), 32AB(1)(b) etc. 4. That, therefore, there is no warrant to further divide the income computed under the head business and exclude share trading loss from the income of other business. Therefore, the Explanation to section 73 will come into play only after the compliance under sections 70, 71 and 72 of the Act. 5. That, the Explanation to section 73 is a deeming provision and has to be strictly construed. There is nothing in Explanation to section 73 which suggest an inquiry into the nature of business carried on by a company. On the other hand, the only inquiry contemplated therein, is regarding the composition of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Industries Ltd. v. CIT [1994] 208 ITR 1023 (Cal.), the assessee had a share trading loss of Rs. 12,90,145 and a speculation loss of Rs. 7,95,447 while the: positive income from other sources was Rs. 3,87,603. In that case, the Calcutta High Court held that loss is a negative profit and therefore the amount of negative profit will surpass the income from other sources and it could not be held as an investment company so as to get exclusion from Explanation to section 73. In Aryasthan Corpn. Ltd. v. CIT [2002] 253 ITR 401 (Cal.) also, the facts were identical where the business loss was higher than dividend income. 10. But in assessee's case, dividend income is higher than the business loss. Income from other sources by way of dividends was Rs. 10,18,914. But income from business was a loss of Rs. 97,358 alone. Even if business loss is treated as negative profit, that negative profit was less than the dividend income. Therefore, even after considering the negative profit by way of loss, the gross total income of assessee-company consisted of "income from other sources" so as to exclude itself from Explanation to section 73. Therefore, the two Calcutta High Court decisions relied ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of the Bombay High Court in CIT v. Amritlal Co. Ltd. [1995] 212 ITR 540 and that of Andhra Pradesh High Court in Nav Bharat Enterprises (P.) Ltd. v. CIT [1983] 143 ITR 804 is not proper. 14. That the fundamental distinction between the above two cases relied on by the Revenue and the present case of the assessee-company is that, in the former two cases the Courts examined the principal business activity of the company mainly for the purpose of identifying its functional character whereas in the present case the test is to examine the composition of gross total income. In the case relied on by the Revenue, the main; point of consideration was "the business carried on by the company" and whereas in the present case the main point of consideration should be "whether the assessee's gross total income consisted mainly of income from other source or income from business". The stress is on the expression "gross total income". 15. That the Revenue has placed heavy reliance on the decision of the ITAT Mumbai B Bench in ITO v. Srichakra Textiles (P.) Ltd. [IT Appeal No. 6640 (Bom.) of 1992, dated 31-5-2001] mainly for the reason that while arriving at the above decision, the Tribun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o. 8492 (Bom.) of 1992, dated 13-7-1998] (21) Dy. CIT v. Pams Investment Trading Co. Ltd. [IT Appeal No. 7789 (Bom.) of 1992, dated 5-7-2002] (22) Dy. CIT v. Radiant Texfabs Ltd. [IT Appeal No. 6947 (Bom.) of 1994, dated 21-11-2002] (23) Manasi Trading (P.) Ltd. v. Asstt. CIT [IT Appeal No. 2155 (Bom.) of 1992, dated 28-7-2000] (24) Kunjvan Texfabs Ltd. v. Dy. CIT [IT Appeal No. 660 (Bom.) of 1996, dated 27-5-2003] (25) Dy. CIT v. Ascent Trade Corpn. Ltd. [IT Appeal No. 7303 (Mum.) of 1995, dated 24-3-2003] (26) ITO v. Vosdon Trading Co. Ltd. [IT Appeal No. 6972 (Mum.) of 1992, dated 26-9-2001] (27) Asstt CIT v. Sinora Trading Ltd. [IT Appeal No. 7648 (Bom.) of 1992, dated 15-10-2001] 17. That in all the above cases, the Tribunal has considered the true spirit of Explanation to section 73. In fact, in the overwhelming majority of decisions as noted above, rendered by the Tribunal during a long period of 12 years right from 1992 to 2004, a consistent view has been followed that the crucial test in the context of Explanation to section 73 is the test of gross total income. In the list of Tribunal decisions above, 20 decisions were delivered even before the deliveran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in its decisions in ITO v. Akhil Fabrics Ltd. [IT Appeal No. 8902 (Bom.) of 1992, dated 14-5-2001] and Sinoria Trading Ltd. v. Asstt. CIT [IT Appeal No. 2157 (Bom.) of 1992, dated 28-6-1993]. 23. The decision of the Tribunal relied on by the Revenue in the case of Srichakra Textiles (P.) Ltd. itself was considered by the Tribunal in the case of Kunjvan Texfabs Ltd. v. Dy. CIT [IT Appeal No. 660 (Bom.) of 1996, dated 27-5-2003] and Dy. CIT v. Ascent Trade Corpn. Ltd. [IT Appeal No. 7303 (Mum.) of 1995, dated 24-3-2003]. 24. That the contention of the Revenue regarding gross total income in the light of the definition given under section 80B is not a sound one. If the definition under section 80B is applicable to Chapter VI-B alone, the law would have provided another definition for the purposes of section 73. It has not been so provided. In such circumstances, the meaning of the term "gross total income" need to be adopted as it is understood in the context of working out the total income of an assessee. 14. The learned Counsel further submitted that the consistent view adopted by the Tribunal in an overwhelming majority of cases is the proper view in law. Therefore, the Expla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be attempted by business houses controlling group of companies for the purpose of reducing the tax incidence, the law has annexed an Explanation to section 73 of the Income-tax Act, 1961. The said Explanation is a deeming provision whereby the transaction of a company dealing in purchase and sale of shares shall be treated as speculative transaction, subject to two exceptions. 18. The said Explanation reads as under:- '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.' 19. The law stated in the Explanation may be edited for our purpose in the following lines: "Where any part of the business of a company consist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inds of exceptions provided in Explanation to section 73 are based on two independent tests laid down in the Explanation itself. The test to be applied on the first category of company is the character of its gross total income. The test laid down in the case of the second category of company is the nature of the principal business carried on by it. In the first category, where the test is that of the character of gross total income, the other test relating to the nature of principal business carried on by it does not apply. Likewise in the second category of company where the test is the nature of the principal business carried on by it, the test of the gross total income does not apply. The two exceptions provided in Explanation to section 73 are governed by two different tests laid down in the said Explanation itself. Therefore, the examination of the exceptions provided in Explanation to section 73 is to be done strictly in accordance with the tests laid down in the Explanation. 25. The assessee-company is not carrying on, as its principal business, the business of banking or granting of loans and advances and does not come under the second category of exception. Therefore, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rading. Therefore, the nature of the company cannot all of a sudden change into that of an investment company only for the reason of seasonal changes in the composition of the gross total income of the company. In that circumstance, the Court held that the entire nature of activities carried on by the company should be looked into before branding it as an investment company or a trading company or any other company. An occasional change in the composition of the gross total income would not determine the character of the business carried on by the assessee-company. In fact the Court was examining the fundamental character of the business carried on by the assessee. The main thrust of section 104 was on the basic nature of the business carried on by a company. It is only for the purpose of classifying the companies for levying tax under section 104, different tests were laid down by the Act and definitions were given in section 109. The test laid down for the investment company was the composition of the gross total income. Therefore, the Court held that the test laid down in section 109 should not be dissociated from the context and should not be applied without looking into the ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t its income from such activity is less than fifty-one per cent of its total income, and that the 'Explanation applies only where the company is not mainly engaged in the specified activity' but still the income attributable to the specified activity is fifty-one per cent or more of its total income." 28. As seen from the above extract, the Court was examining the basic character of a company in spite of some changes found in the gross total income composition for a particular assessment year. Therefore, this case too is not applicable to the present case. 29. Further, in the present matter before us, the Revenue has not made out any case that the factual details in CIT v. Amritlal Ca [1995] 212 ITR 540 (Bom.) are identical to the details of the present case. In Amritlal and Co.'s case, the income composition of past 27 years was examined and had found that income from other sources exceeded business income only for four assessment years and for all the remaining assessment years, business income exceeded income from other sources. No such finding has been made in this case. 30. Explanation to section 73 provides two types of tests in itself for the purpose of exceptions th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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.' 33. The chargeability of income under a specified head is the prime consideration in verifying the composition of gross total income for the purpose of Explanation to section 73. As the question whether an income is chargeable under any of the specified heads of income or not is to be looked into, it is equally important to follow the principles governing the classification of income. The classification of income under different heads is import in the context of "charge" of income-tax. The charge is on total income. The total income is the aggregate of incomes "chargeable" u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e that though for the purpose of computation of income, interest is separately classified, income by way of interest from securities does not cease to be part of the income from business if the securities are part of the trading assets. The Court held that whether a particular income is part of income from a business falls to be decided not on the basis of the provisions of section 6 of 1922 Act, but on commercial principles. It is stated in page 310 of the report CIT v. Cocanada Radhaswami Bank Ltd. [1965] 57 ITR 306 (SC) that- "... The scheme of the Act is that income-tax is one tax. Section 6 only classifies the taxable income under different heads for the purpose of computation of the net income of the assessee. Though for the purpose of computation of the income, interest on securities is separately classified, income by way of interest from securities does not cease to be part of the income from business if the securities are part of the trading assets. Whether a particular income is part of the income from a business falls to be decided not on the basis of the provisions of section 6 but on commercial principles. To put it in other words, did the securities in the present ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s stock-in-trade. The Revenue has placed reliance on the Supreme Court decisions in Western States Trading Co. (P.) Ltd. v. CIT [1971] 80 ITR 21 and Apollo Tyres Ltd. v. CIT [2002] 255 ITR 273. 39. In Western States Trading Co. (P.) Ltd. v. CIT [1911] 80 ITR 21, the Supreme Court was examining the nature of dividend income under different contexts. The Court held that dividend income earned from shares held as stock-in-trade was to be computed under section 6 of the 1922 Act and the same dividend income was in the nature of business income for the purpose of carry forward and set off of loss under section 24(2) of the 1922 Act. The relevant portion from the judgment is extracted below:- "On the second question once it is accepted that the colliery business was carried on for a part of the relevant assessment year the assessee would be entitled to get a setup under section 24(2) of the Act if the shares on account of which the dividends were received formed part of the assessee's trading assets. It is well settled by the decisions of this Court (see Commissioner of Income-tax v. Cocanada Radhaswami Bank) that section 6 of the Act classifies the taxable income under the several h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sponding to section 18 of 1961 Act) even that securities were held by a banker as part of its trading asset in the course of its business and therefore such income cannot be brought to tax under section 10 of the 1922 Act [corresponding to Section 28(1) of the 1961 Act], i.e., "profits and gains of business or profession". 41. In the decisions relied on by the assessee in the case of United Commercial Bank Ltd. v. CIT [1957] 32 ITR 688 and CIT v. Cocanada Radhaswami Bank Ltd. [1965] 57 ITR 306, the Supreme Court has held: (i) That computation of income has to be made strictly under the specified heads of income. (ii) That whether an income qualified and computed under a specified head of income is still income from business for the purpose of carry forward and set off, is to be determined on commercial principles. 42. In Western State Trading Co. (P.) Ltd. v. CIT [1971] 80 ITR 21, the Supreme Court has reiterated the above principles regarding the mandatory rule of computation of income on the basis of classification of income under different heads and that of the de facto nature of income for purposes other than classification and computation. The Court held that even thou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shares held as stock-in-trade is chargeable under the head "profits and gains of business or profession", is not sustainable in law. The dividend income earned from shares is chargeable under the head "income from other sources". The gross total income in this case is made up of dividend chargeable under the head "income from other sources". The decisions of Western States Trading Co. (P.) Ltd. v. CIT [1971] 80 ITR 21 (SC) and Apollo Tyres Ltd. v. CIT [2002] 255 ITR 273 (SC) do not support the arguments advanced by the revenue. 46. Further, the test of gross total income itself suggests that the income composition alone is to be looked into as any other inquiry may lead to a case of generalization which is not contemplated in the context in which the deeming provision by way of Explanation is provided to section 73. The Explanation to section 73 is a deeming provision and has to be strictly construed. In CIT v. Mother India Refrigeration Industries (P.) Ltd. [1985] 155 ITR 711, the Supreme Court has held that the legal fictions are only for a definite purpose and they are limited to the purpose for which they are created and should not be extended beyond that legitimate field. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lative intention. There is no such indication in section 73 and the Explanation thereto. Therefore, the meaning of the Expression "gross total income" has to be construed as given in section 80B(5). 51. After considering the issue raised before us in detail, we have come to the following findings:- 1. Explanation to section 73 is not applicable to a company falling under any of the following two categories:- (i) A company whose gross total income consisted mainly of income which is chargeable under the heads "interest on securities", "income from house property", "capital gains" and "income from other sources". (ii) A company, the principal business of which is the business of banking or the granting of loans and advances. 2. That, the tests necessary for determining whether a company falls under any of the above two exceptions are provided in the Explanation itself. 3. That, in the case of a company falling under the first category above the test is to examine whether gross total income of that 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". Th ..... 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