TMI Blog2007 (4) TMI 290X X X X Extracts X X X X X X X X Extracts X X X X ..... rned CIT(A) erred in holding that for the purposes of calculating gross total income, as provided in bracketed portion of Explanation to s. 73 of the IT Act, 1961, the appellant should include loss on dealing in shares. 4. The learned AO erred in not allowing set off of the dividend income against loss on dealing in shares on the ground that dividend is assessed under the head 'Income from other sources', and furthermore same cannot be treated as income from speculative business. 2. The assessment year involved is 1997-98 and the impugned assessment is framed under s. 143(3) of the IT Act, 1961 (hereinafter referred to as 'the Act'). 3. The material facts are as follows. The assessee is engaged in the business of dealings in shares and securities. In the course of scrutiny assessment proceedings, the AO noticed that assessee's loss from this business is Rs. 91,66,327, that its income from other sources is Rs. 10,13,826, and the assessee has claimed a set off of business losses against income from other sources. On these facts, the AO issued a notice to the assessee requiring him to show cause as to why, in the light of the provisions of Explanation to s. 73 which, according t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taxed as 'income from other sources'. In any event, the AO added that even if dividend income is to be treated as business income, it cannot be said to be the profit of speculation business as losses incurred on 'sale and purchase of shares is deemed to be losses of speculation business by the virtue of special provisions of the Act', and, therefore, 'even if dividend income is to be treated as business income, the same cannot be said to be profit of speculation business because there is no deeming provision for the same'. The AO finally concluded that the assessee's argument to the effect that gross total income mainly consists of dividend income is also not acceptable because there is no deeming provision for the same. On the basis of this reasoning, the AO declined the set off of losses incurred in share dealings against dividend income earned by the assessee. 5. Aggrieved, assessee carried the matter in appeal before the CIT(A) but without any success. In an order in which the emphasis apparently was on the economy of words rather than the need to set out the reasons for coming to particular conclusion, and after long quotes from the assessment order from the erudite submiss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there being no contrary decision on this issue by any other High Court, the Tribunal cannot disregard the Hon'ble Calcutta High Court. As for the other issues raised by the assessee, learned Departmental Representative mainly relies upon the orders of the authorities below and vehemently submits that these legal contentions are devoid of any merits at all. We are thus urged to approve the orders of the authorities below and decline to interfere in the matter. In rejoinder, learned counsel for the assessee submits that the said Calcutta High Court decision has been duly considered in the orders passed by the Tribunal, and yet those Benches of the Tribunal have expressly followed the orders by the coordinate Benches in preference over judgment of the non-jurisdictional High Court. It is submitted that while a non-jurisdictional High Court is not a binding precedent for the Tribunal, an order passed by a co-ordinate Bench is surely a binding precedent. It is not open to us, as put by the learned counsel in his own humble but unambiguous way, to take any other view of the matter on this issue than the view taken by the co-ordinate Benches, and, just in case the view so taken does not m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar that when an assessee carries on speculative transactions in the course of, what can be described as, business, such business is to be deemed as distinct from any other business carried on by the assessee. The emphasis is on a business as a whole. The computation of profits of such a speculation business has to be therefore something more than arithmetical exercise of aggregating the profits and losses from the speculative transactions. It must, therefore, take into account all profits and losses which are attributable to such speculation business. Explanation to s. 73 expands the scope of 'speculation business' a little further, by introducing a deeming fiction. This deeming fiction provides that where business of a company includes purchasing and selling of shares of other companies, to that extent, the company shall be deemed to be carrying 'speculation business'. Once again, the emphasis is on the business as a whole and not to the transactions of sale and purchase per se. What is to be, therefore, computed as 'losses of speculation business', in the context of bar on set off in s. 73(1), is of the business as a whole and not merely the aggregate or net result of profits and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of Aman Portfolio (P) Ltd. vs. Dy. CIT (2005) 92 TTJ (Del) 351 : (2005) 92 ITD 324 (Del). In this decision, our Tribunal had an occasion to analyze the scope of Explanation to s. 73 and the background in which it was introduced. It was noted that the Explanation to s. 73 was introduced, w.e.f. 1st April, 1977, by the Taxation Laws (Amendment) Act, 1975, and that applicability of this Explanation is confined to the companies, and, even amongst companies, it is not applicable to the companies whose gross total income mainly consists of income chargeable under the head interest on securities, income from house property, capital gains and income from other sources. It is also not applicable to the companies whose main business is banking or granting of loans and advances. The legislature apparently thought that the business of sale and purchase or shares should be deemed to be speculative business as there was evidence to show that some companies were adopting a device to manipulate the prices of shares, which are dealt with amongst the controlling groups, to reduce their taxable income. That was the reason, as noted by the Tribunal in Aman Portfolio's case, that the Explanation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usly be viewed as devices to reduce profits. The exclusion clause took care on his. As for the companies which were in the business of granting loans and advances also, the transactions for sale of securities given to, or held by, such finance companies were inevitable, and to keep these genuine transactions out of the legal provision enacted for neutralising an unscrupulous manoeuvring for reducing or avoiding taxes, exclusion clauses inbuilt in the Explanation extended to such finance companies as well. It is thus clear that the underlying rationale and philosophy of the exclusion clauses is that on account of introduction of such sweeping generalisations, as are inherent in the scheme of the Explanation to s. 73, genuine losses incurred as an integral and inextricable part of the business are not declined set off against profits from such businesses. This object is quite in tandem with the overall object of introducing Explanation to s. 73, as set out in the CBDT Circular No. 204, dt. 24th July, 1976, "to curb device sometimes resorted to by business houses and controlling groups of companies to manipulate and reduce the taxable income of the companies under their control", and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scheme is what income-tax is and s. 6 only classifies the taxable income under different heads for the purpose of computation of net income of the assessee. While sub-s. (1) of s. 24 provides for setting off the loss under one of the heads mentioned in s. 6 against the profits under a different head in the same year, sub-s. (2) provides for carrying forward of the loss for one year and setting off the same against the profits and gains of the assessee from the business in subsequent year or years. It was emphasized in the aforesaid decision that sub-s. (2) of s. 24 is in contradiction with sub-s. (1) and is concerned only with the business and not under with its head under s. 6 of the Act. Dividends are included in the meaning of income under sub-s. (1A) of s. 12 which is a residuary head. Applying the principles adverted to before, the amount of dividends would form part of the income from 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 as claimed against the loss from its business incurred in previous years. It does not appear to have been disputed at any stage that the shares formed part of the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of purchase and sale of shares of other companies. Normally, therefore, the profits earned by the business of the assessee company are to be treated as profits of the speculation business. Clearly this reading of the legal provision is at huge variance with undisputed object and purpose of the legal provision. While the intent was to only to ensure that artificial losses manoeuvred in the hands of the assessee companies which have profits from other business, are not allowed to be set off against profits of their such other business, even in a situation, only business of the assessee is dealing in shares, the provisions of Explanation to s. 73 find application. 16. That takes us to the question whether it is open to us to read down the provisions of Explanation to s. 73 so as to bring the legal provision in harmony with the object and purpose of the legal provision. One way of so reading down the provisions could be, as was held by the Tribunal in Aman Portfolio's case, that the provisions of Explanation to s. 73 could not be invoked unless there was some material on record to show that the assessee is a company controlled by a business house and the share transactions in questi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is no dispute that the dividend was earned from the shares which were held as stock-in-trade. Once the dividend is found to have been earned on the shares held as stock-in-trade, the dividend income so earned cannot be viewed as divorced from the business in the course of which the shares were so held as stock-in-trade. That business, by the virtue of deeming fiction under Explanation to s. 73, has been treated as a speculation business in entirety. Therefore, the dividends so earned by the assessee are also to be viewed as profits of the speculation business, even as admittedly these profits, consisting of dividends earned on shares held as stock-in-trade, are to be assessed as income from other sources. What follows, therefore, is that in case an assessee has only one business, which is treated as speculation business under Explanation to s. 73, in which the assessee has incurred a loss, and the assessee has an income of the same speculation business which is assessed under a head of income other than 'profits and gains from business and profession', the restriction on set off under s. 73(1) will not come into play. The said restriction is relevant only when the positive income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss', under the specified circumstances, will cover to the extent 'assessee's business consists of the purchase and sale of such shares'. The definition thus sought to be placed is of 'speculation business' and not 'speculation profits'. As to what will constitute profits from such business, this is to be essentially governed by the normal accounting principles and business practices......." These observations in Paharpur Cooling Tower's case were quoted, with approval, by a Special Bench of this Tribunal in the case of AMP Spinning Weaving Mills (P) Ltd. vs. ITO (2006) 101 TTJ (Ahd)(SB) 1113 : (2006) 100 ITD 142 (Ahd)(SB). In this view of the matter, the conclusion of the AO to the effect that deeming fiction covers only losses on purchases and sales of shares, and does not extend to other incomes in the business of purchases and sales of shares, is clearly erroneous and unsustainable in law. Once we vacate this conclusion arrived at by the AO, we have to proceed on the basis that losses of the speculation business are to be computed in accordance with commercial principles which essentially take into account all gains and losses incidental to the main activity. It is an unambi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this order, is more in tandem with the intent of legislature as well as object and purpose of the intent of legislature. For this reason, as also on account of the well accepted principle enunciated by the Hon'ble Supreme Court in the case of CIT vs. Vegetable Products Ltd. (1973) 1973 CTR (SC) 177 : (1973) 88 ITR 192 (SC) that when two reasonable constructions are possible, the construction favouring the taxpayer is to be adopted, the view that loss of a speculation business, chargeable under the head business income, is to be set off against speculation business profits, not chargeable under the head business income, has to be adopted. We do so, and adopt the interpretation which is not only in favour of the assessee but also in harmony with the object and purposes of the legislative provision in question. 19. In the light of the above discussions, the issue as to whether the case of the assessee will be covered by the income composition exclusion clause or not is academic. It does not call for our consideration. Our decision in this case hinges on the fact that shares from which dividends were earned were held by the assessee during the course of the speculation business, and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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