1. This appeal by the Revenue for the assessment year 1997-98 is directed against the order dated 28-12-2000 of CIT(A)-XII, Kolkata and the only dispute is relating to application of Explanation to Section 73 of the Income-tax Act, 1961 and, accordingly, entitlement of set-off of carry forward loss of Rs. 69,20,855 claimed by the assessee. Rival contentions have been heard and records perused.
2. The relevant facts briefly stated are that the assessee-company had filed the return of income for assessment year 1997-98 on 25-11-1997 declaring a loss of Rs. 65,79,600. This case was selected for scrutiny and, accordingly, the Assessing Officer completed the assessment under Section 143(3) vide order dated 28-2-2000. The Assessing Officer computed the speculation loss at Rs. 69,20,855. The assessee had suffered loss mainly on account of purchase and sale of shares.
Dividend income of Rs. 3,41,257 was also received by the assessee in the preceding year. The Assessing Officer considering the fact that the loss suffered by the assessee was mainly on account of purchase and sale of shares, invoked Explanation to Section 73 of the Act and assessed speculation loss at Rs. 69,20,855 which was allowed to be carried forward and set off against speculation profit in the subsequent years.
3. The assessee appealed to the CIT(A) and claimed that Explanation to Section 73 was inapplicable to the assessee-company as it was engaged mainly in the activity of granting loans and advances. The CIT(A) has considered the claim of the assessee with reference to the balance sheet and decided the issue in favour of the assessee. In arriving at his decision, the CIT(A) has pointed out that the paid up capital of the company is Rs. 89.50 lacs and had borrowed funds of Rs. 2.22 crores. The total capital employed was worked out at Rs. 3.12 crores.
Against this, the amount kept in investments was Rs. 2.71 crores. Loans and advances granted was found at Rs. 89.96 lakhs. It was, accordingly, held by the CIT(A) that the company's principal business is investment and granting of loans and advances. The Ld. CIT(A) has further pointed out that as against the above investment the value of shares and securities held in stock-in-trade amounted to mere Rs. 52.90 lakhs. He, accordingly, held that the company was one which is mainly engaged in the business of granting of loans and advances and deriving income by way of dividend, interest and capital gains and accordingly Section 73 is not applicable. Reliance has been placed on the decision of the Bombay Bench of the Tribunal in the case of Rajan Enterprises (P.) Ltd v. ITO [1992] 41 ITD 469. Revenue is aggrieved.
4. It was contended by the Ld. Departmental Representative that in considering the applicability of Explanation to Section 73, the loss suffered by the assessee in dealing of shares is also to be taken into account in ascertaining as to whether the assessee's gross total income consists mainly from granting of loans and advances. It was pointed out that the assessee has substantial loss on account of trading in shares and has income of Rs. 3,41,257 only from dividends. It was, accordingly, pleaded that the decision of the CIT(A) may be reversed and that of the Assessing Officer restored.
5. The learned counsel for the assessee, on the other hand, sought to support the order of the CIT(A). My attention was also invited to the decision of the Supreme Court in the" case of CIT v. Distributors (Baroda) (P.) Ltd. [1972] 83 ITR 377, where their Lordships of the Supreme Court have elaborated the concept of "wholly or mainly" for dealing in a particular activity. According to the learned counsel, the decision of the CIT(A) is clearly in line with the principles laid down by their Lordships of Supreme Court in the aforementioned decision. The learned counsel further contended that the definition of "gross total income" in Section 80B of the Act is confined for the purposes of Chapter-VIA and, therefore, is of no help in determining the issue.
Similarly, the provision of Section 109 which stands deleted is also inapplicable, according to the learned counsel. It was, accordingly, pleaded that the appeal of the Revenue may be dismissed.
6. I have given my careful consideration to the rival contentions. In this case it is not disputed by the assessee that the loss suffered during the year under appeal is mainly on account of share dealings.
The issue involved in this case is as to whether the assessee's case falls in the excluded category under Explanation to Section 73. Since the controversy revolves around the interpretation of Explanation to Section 73, it will be useful to reproduce the same.
73(1) Any loss, computed in respect of a speculation business carried on by the assessee shall not be set off except against profits and gains, if any, of another speculation business.
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.
7. It is pertinent to mention that prior to 1-4-1988, the Explanation was applicable to companies other than investment company, as defined in Clause (ii) of Section 109. The word "other than investment company" as defined in Clause (ii) of Section 109 was substituted by Finance Act, 1987 w.e.f. 1-4-1988 by the Explanation which has been quoted above. The Ld. CIT(A) on the basis of facts and figures available in the balance sheet of the company has concluded that the assessee-company is one whose principal business is investment and granting of loans and advances. As is evident from the Explanation quoted above, the word "investment company" has been omitted w.e.f.
1-4-1988. Therefore, it is apparent that the CIT(A) has proceeded to decide, the matter on the basis of the Explanation which was prevalent prior to 1-4-1988. As per the Explanation which is applicable for assessment year 1997-98, i.e., the year under appeal, the investment companies are not as such excluded from the operation of Explanation to Section 73. Generally the said Explanation is applicable to any company whose part of the business consists in the purchase and sale of shares of other companies. The companies which are excluded from the operation of Explanation to Section 73 with effect from 1-4-1988 are as under :- Company whose gross total income consists mainly of income which is chargeable under the head- (v) A company the principal business of which is the business of banking; and (vi) A company principal business of which is of granting of loans and advances.
In order to determine as to whether the company falls within the excluded category under Explanation to Section 73, it will be relevant to find out the gross total income of the assessee. Gross total income is defined under Section 80(B) which reads as under :- (5) 'gross total income' means the total income computed in accordance with the provisions of this Act, before making any deduction under this Chapter.
The learned counsel for the assessee as pointed out earlier contended that the above definition is applicable for the limited purpose of Chapter VIA. In my view, since the gross total income is not defined anywhere in the Act, therefore, the definition under Section 80B would be relevant. Even if the definition under Section 80B is ignored, then one has to fall on the meaning of gross total income with reference to the context. One may have a look at any of the Income-tax Return Forms prescribed under the Rules and it will not be difficult to appreciate the meaning of the gross total income in the light of the provisions of the Income-tax Act notwithstanding the fact that it may not be defined specifically for any purposes other than Chapter VIA. As per the prescribed Form of Return of Income, the income from various heads is to be disclosed and the sum total of the income from various sources will constitute the gross total income. Thereafter deductions under Chapter VIA are to be reduced in order to find out the total income which is taxable. Agricultural income is to be shown separately and, therefore, this may not be included in the gross total income. It may incidentally be pointed out that under Section 2(45), total income is defined to mean the total amount of income referred to in Section 5 computed in the manner laid down in the Act. Thus, taking the definition of the total income into consideration read with the Income-tax Returns Forms as per the rules, it will not be difficult to appreciate that the meaning of the gross total income is not different than what is specifically defined for purposes of Chapter VIA. That being so, let me proceed to consider as to whether the respondent's case falls within the excluded category under Explanation to Section 73. As per P/L Account, the business loss is disclosed at Rs. 65,82,698. This is after adjustment of dividend income of Rs. 3,41,257.
Penalty of Rs. 1,600 and ITAT fee of Rs. 1,500 has been adjusted as disallowable and the net loss disclosed in the return of income is Rs. 65,79,600. No deduction under Chapter VIA has been claimed. Therefore, the gross total income of the assessee is loss of Rs. 65,79,600. The loss on sale of shares is Rs. 69,20,855. In the case of Eastern Aviation & Industries Ltd. v. CIT [1994] 208 ITR 10231,their Lordships of the Calcutta High Court have held that the words "income or profits and gains" should be understood as including losses also in so far as profits and gains represent positive income, whereas losses represent negative income. In this connection, their Lordships relied upon the decisions of the Supreme Court in the case of CIT v. Harprasad & Co.
(P.) Ltd. [1975] 99 ITR 118 and in the case of CIT v. J.H. Gotla [1985] 156 ITR 3232. On facts, their Lordships of the Calcutta High Court held that since the business loss exceeded the income computed under the head "income from other sources", as such Explanation to Section 73 was clearly applicable and 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 the Tribunal as a loss in speculative business. In the appeal before me, the income from dividend is Rs. 3,41,257 and loss in share Rs. 69,20,855. As held by the Hon'ble jurisdictional High Court of Calcutta in the case of Eastern Aviation & Inds. Ltd. (supra), the loss in share trading is also to be taken into account. Thus, the component of income/loss on share trading in this case is substantially higher than the income from dividend. Interestingly there is no income reflected in the P/L Account on account of loans and advances. The details of income as per P/L Account are given hereunder:- Profit & Loss Account for the year ended 31st March, 1997Income Rs. Rs. Rs.Profit on sale of InvestmentsPrevious year Rs. 39,122) 3,41,257Interest (Gross) (Tax deducted atPrevious year Rs. 101) 11,880Closing stock of shares 52,903,96 56,435,33Opening stock of shares 36,47,903Purchase of shares 16,43,434Other expenses 69,34,894 ------------ I, therefore, fail to appreciate the basis on which the CIT(A) has recorded a finding that the assessee's main income is derived from granting of loans and advances. As already pointed out, the investment companies are not included in the excluded category under Explanation to Section 73 w.e.f. 1-4-1988. Therefore, the criteria of investments applied by the CIT(A) in my view is erroneous. The only feature to be considered for purposes of exclusion from the operation of Explanation to Section 73 is the income criteria as specifically provided under the Explanation. The test as per the Explanation to Section 73 is the inclusion of specific incomes in the gross total income and for that purpose the gross total income includes the loss. Therefore, the decision of the CIT(A) is erroneous and contrary to the provisions of Section 73 read with the Explanation.
8. The decision of the Supreme Court in the case of Distributors (Baroda) (P.) Ltd. (supra) is inapplicable to the facts of this case as the said decision is on the definition of investment company whose business consists wholly or mainly in dealing in or holding of investments. Since the investments companies have been excluded from Explanation to Section 73 w.e.f. 1 -4-1988, the said decision of the Supreme Court is inapplicable to the facts of this case in interpreting the Explanation to Section 73. The decision of the Bombay Bench of the Tribunal in the case of Rajan Enterprises (P.) Ltd. (supra) relates to the law as applicable for assessment year 1985-86 and is, therefore, inapplicable to the facts of this case for assessment year 1997-98.
9. I, therefore, taking the totality of the facts and circumstances of the case into consideration hold that the CIT(A) was wrong to hold that the case of the assessee falls in the excluded category of companies from the operation of Section 73. The decision of the CIT(A) is, accordingly, set aside and that of Assessing Officer restored.