1. This is an appeal filed by the assessee. It is directed against the order of the CIT(A)-III, Hyderabad, dated 21.3.02 for the assessment year 1997-98.
2. One of the main objets of the appellant-company, as per the Memorandum of Association, after its amendment, reads as under:- "3.a) To carry on and undertake the business of hire -purchase, finance, investment in shares, stocks, debentures, bonds, securities and all other kinds of investments and trading and to finance business operations of all kinds, purchasing, selling, leasing, hiring or letting on hire all kinds of plant and machinery and equipment, computers vessels, vehicles all consumer, commercial and industrial items and other products that the company may think convenient to assist in financing of all and every kind and description of hire purchase or deferred payment or similar transaction and to subsidise, finance or assist in subsidising or financing the sale and maintenance of any goods, articles or commodities of all or any kind and description upon any terms or immovable and movable property including land, buildings and also to provide advice, counsel and services.
B) To finance industrial and trading enterprises and for that purpose lend and advance monies to entrepreneurs, promoters and industrial or trading concerns on such terms and conditions and with or without securities as may be thought appropriate." In the light of the above object, it is claimed by the assessee-company that it is an investment company.
3. The appellant-company filed a revised return declaring a loss of Rs. 29,71,990, and also claimed some carry forward losses and unabsorbed depreciation of earlier years, which have to be carried forward to subsequent years. The audited annual report for the year ended 31st March, 1997, relevant for the assessment year 1997-98, to the extent relevant for our purposes, reads as under:- The computation of total income, as per the revised return filed by the assessee reads as under- loss to be carried forward and set off against future year's profits 4. At this stage, it may be mentioned that the sales figure of Rs. 2,98,17,270 reflected in the Profit & Loss Account, extracted above, consists of the following two items- 5. This decrease in stocks shown at Rs. 1,40,47,723 and included on the expenditure side of the Profit & Loss Account relates to the decrease exclusively in the value of the shares held by the assessee as stock in trade.
6. The assessing officer invoked the provisions of Section 73 read with its Explanation and held that the loss incurred by the assessee in the purchase and sale of shares must be regarded as loss in speculation business, and that such loss is eligible for set off against only profits and gains of another speculation business, and as such denied the set off of the said loss against other incomes derived by the assessee-company during the year. He however, did not differentiate between the purchase and sale of shares and purchase and sale of yarn and computed the total income at Rs. 53,37,163 as per the following computation- It may be observed that the assessing officer has not allowed the expenditure claimed by the assessee at Rs. 3,80,80,238, and this was done on the ground that it related to the speculation business. In other words, the assessing officer invoked the provisions of Section 73 read with its Explanation, with reference to the entire business activity of the assessee.
7. When the matter reached the CIT(A), he agreed with the assessing officer that the provisions of Explanation to Section 73 were attracted to the facts of the case of the assessee, but he restricted the application to the business by way of purchase and sale of shares. In other words, he excluded the business of purchase and sale of yarn from the ambit of Explanation to Section 73. Thus, he regarded the business by way of purchase and sale of yarn as the normal business of the assessee and not speculation business. According to him, only the business and purchase and sale of shares constituted speculation business, and as such, it is only the result of this activity of the assessee that was held to be not eligible for set off against other income. Before coming to this conclusion, the learned CIT(A) issued a show-cause notice dated 8.3.2002, proposing enhancement of income, and the said show-cause notice reads as under:- "Please refer to the appeal filed against the scrutiny asst. order dt. 22.3.2000 in the case of M/s. Melvillie Finvest Ltd. On going throught the asst. order, the details filed before me and the assessment folder, I come to the conclusion that your total income has been computed wrongly at Rs. 54,49,940 According to me, the total income should be computed as under:- Income from other sources :-Dividend Income (as per Sec. 56(2)(1)also read 129 ITR 260 (Bombay) & 125 ITR 227(Guj.) Less: Decrease in stock 1,40,47,723 To purchase of shares 1,25,28,799) Finance chargas _26,86,203 Since speculation loss can be adjusted only against the income from speculation and since the income from business and income from other sources cannot be adjusted against the speculation loss, the total income will be Rs. 1,41,01,670 as against Rs. 54,49,940 determined by the AO. 2. I have considered the decision of the Karnataka High Court in 195 ITR 404 quoted by your Authorised Representative and the facts in your case will not apply to the facts in that case. Also if the investment in shares was made as investment, then the value of the investment cannot be reduced at the end of the year as they were not stock-in-trade.
3. In these circumstances, you are requested to give your comments before 18-3-2002 in writing. In case if you want to appear before me personally and argue the case, you or your Authorised Representative can appear before me on 13-3-2002 at 10.30 AM and advance your arguments. In case I neither get written objection nor any body appears on 18-3-2002 and advance of the arguments, it will be presumed that you have no objection and the enhancement will be made accordingly." Before the CIT(A), it was argued on behalf of the assessee that the assessee-company held shares as investments, and such investments were shown in the Balance Sheet as on 31st March, 1997, i.e. on the last day of the accounting year 1996-97 at Rs. 1,33,48,429, and so, the assessee is an investment company, to which Explanation to Section 73 is not applicable. The CIT(A) rejected the said contention, and relying upon the decision of the Calcutta High Court in Eastern Aviation and Industries Ltd. v. CIT (208 ITR 1023), he held that the assessee's business of purchase and sale of shares is hit by Explanation to Section 73, as its gross total income did not consist mainly of the specified categories of income, which are the following -(a)income from house property, (b)interest on securities and (c) Capital gains. He computed the total income of the assessee at Rs. 1,61,25,189 with the following observations- "11. During the course of final hearing, the A.R. also submitted that the entire finance charges of Rs. 26,86,203 did not pertain to only purchase of shares and it was incurred for reducing the unsecured loans and sundry creditors. The A.R. has submitted that out of Rs. 150-lakhs or unsecured loans as on 31.3.97, a sum of Rs. 45-lakhs was borrowed during the year and no shares were purchased in the year. It is also stated that the sundry creditors have come down from Rs. 295.60 lakhs to Rs. 141.97 lakhs during the year under consideration and the unsecured loans were used mainly for reducing the sundry creditors. AT the time of hearing. I asked the A.R. as to how much finance charges was attributable to the purchase of shares and how much finance charges were attributable to other income, the A.R. expressed his inability to furnish these details.
12. Eventhough the appellant had purchased worth Rs. 1.25-crs.
during this year, and therefore, what the A.R. has stated is not correct, however, giving the appellant the benefit of doubt, I hold that 1/3rd of the finance charges does not pertain to the share transactions. Therefore, out of finance charges of Rs. 26,86,203, I hold that 1/3rd of the sum, namely Rs. 8,85,401/- does not pertain to loss that arose on account of speculation. Therefore, I reduce the loss from speculation mentioned in my letter dated 8.3.2002 from Rs. 1,70,20,590/- to Rs. 1,61,25,189/-. Therefore, I calculate the total income of the appellant as under:- Dividend Income (as per Sec. 56(2)(1) also read 129 ITR 260 (Bombay) & 125 ITR 227 (Guj) The A.O. is directed to calculate the tax on the above total income and send a Demand Notice for the extra amount to the appellant.
Needless to mention that the speculation loss of Rs. 1,61,25,189 is to be allowed to be carried forward and given set off according to the relevant provisions of the Act.
8. The CIT(A) also rejected the contention of the assessee that the erosion in the market value of the shares should not be taken into consideration as part of the business of the purchase and sale of shares, and so, should not be considered as speculation loss, on the ground that such loss arose on account of share transaction. He, however, held that the entire finance charges of Rs. 26,86,203 did not pertain only to the purchase and sale of shares and so held that 1/3rd of finance charges did not pertain to the share transactions. He accordingly held that an amount of Rs. 8,95,401 out of finance charges did not pertain to loss that arose on account of speculation.
Accordingly, he determined the loss on speculation at Rs. 1,61,25,189.
9. Before us, the learned counsel for the assessee reiterated the contentions made out before the CIT(A). Firstly, it is argued relying on the investments in shares, shown in the Balance Sheet as on 31.3.1997 at Rs. 1,33,48,429, and Clause-3 of the Memorandum of Association extracted hereinabove, that the assessee is an investment company, and so, provisions of Explanation to Section 73 did not apply.
It is also claimed that the assessee has been surviving only because of the income under the head 'income by way of dividends' assessed under the head 'income by way of dividends' assessed under the head 'other sources', and there are substantial losses in the business activity in the purchase and sale of shares and the purchase and sale of yarn, and so, it must be held that the gross total income of the assessee consisted mainly of the income under the head 'other sources', and so, the provisions of Section 73 are not applicable to the assessee-company.
10. The second limb of the argument advanced on behalf of the assessee is that the speculation loss from the share transactions should exclude the decrease in the value of shares shown at Rs. 1,40,47,723, as this does not arise from the purchase and sale of shares, but it is only a notional figure being the decrease in the value of shares, and has nothing to do with either the purchase or sale of shares, and has nothing to do with either the purchase or sale of shares. It is contended that the assessee has been offering to tax any increase in the market value of the shares in earlier years, and as such neither the increase nor the decrease in the value of the shares should be taken into consideration for arriving at the speculation loss of the year.
11. The last limb of the argument advanced by the learned counsel for the assessee is that the CIT(A) erred in not considering the purchase and sale of yarn as speculation activity. It is explained that the yarn was purchased at Surat and Bombay and it was also sold at the same place, and if the share transactions are considered as speculation activity, the transactions relating to yarn should also be considered as speculation activity.
12. The learned Departmental Representative, on the other hand, pleaded that there has been an amendment in Explanation to Section 73 brought out by the Finance Act, 1987, with effect from 1.4.1987, and the expression "other than a company as defined in Clause (ii) of Section 109" that figured in the said Explanation earlier had been substituted by the expression--"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'. In the light of this, he pleaded that it is immaterial whether the assessee-company was an investment company or not for the application of the Explanation to Section 73. He also pointed out that what has to be seen is whether the gross total income of the assessee consisted mainly of the specified categories of income, and even losses have to be counted as income, while considering the application of the Explanation. If a substantial portion of the income of the assessee consisted of loss from share transactions, it has to be held that the Explanation to Section 73 is applicable, even if a small portion of the gross total income consisted of income assessable under the head "other sources". In other words, the learned Departmental Representative explained that simply because the loss is a negative figure, it cannot be held that the gross total income consisted mainly of other activities which yielded marginal positive incomes. For this proposition, he relied on the decision of the Hon'ble Calcutta High Court in the case of Aryasthan Corporation Ltd. v. CIT--(253 ITR 401) and in the case of Easter Aviation and Industries Ltd. v. CIT (206 ITR 1023). He also pointed out that the decrease in value of stock is a part of speculation loss, as the rest of the loss relatable to the share transactions. For this proposition, he relied upon the decision of the Tribunal in the case of Prudential Construction Company Ltd. v.CIT--(75 ITD 338) to which one of us. viz. the Judicial member, is a party. In this context he also relied upon another decision of Hyderabad Bench 'B' of the Tribunal in Martin (India) Ltd. v. DCIT(80 ITD 399), which was rendered by us only constituting as 'B' Bench.
13. The learned counsel for the assessee, in reply, countered that omission of the reference to an investment company, in Explanation to Section 73 brought out by the Finance Act, 1987 is only consequential to the deletion of other sections like Sections 104 to 109 of the Income-tax Act, and this omission has no bearing on the issued raised in this appeal.
14. We are of the view that the Revenue deserves to succeed substantially. Section 73, to the extent relevant for our purpose reads as under- "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." It is evident that the above Explanation is attracted, when the following conditions are satisfied cumulatively- (b) It's gross total income does not consist mainly of the following incomes- (c) The principal business of the assessee is not banking or granting of loans and advances (d) A part of the business of the assessee consists of purchase and sale of shares.
We find that the income assessable under the head 'other sources' in the case on hand, is marginal figure of Rs. 2,89,445. As mentioned in the show-cause notice issued by the CIT(A), which we have extracted above, the income from purchase and sale of yarn waste, before deduction of expenditure is Rs. 94,94,319, and income from business, i.e. inclusive of commission, interest and miscellaneous income is Rs. 1,19,12,225. The loss from the share transactions is Rs. 1,70,20,590, as indicated in the same show-cause notice given by the CIT(A). With these figures of substantial income from business, which included transactions from sale of yarn and transactions resulting in substantial loss from purchase and sale of shares, it can hardly be said that the gross total income of the assessee consisted mainly of the specified categories of income like (a)Interest on securities, (b) Income from house property; (c) Capita gains; (d) Income from other sources.
15. The decrease in the value of the stock is an integral part of the share transactions, and so, it has also to be considered as speculation loss in the light of the decision of the Tribunal in the case of Prudential Construction Company (supra), wherein, as per the relevant portion of the head-note, it was held as under- "The assessee had contended that at the most the loss relating to purchase and sale of shares could be treated as speculation loss and not the loss resulting on account of valuation of the closing stock.
Where the assessee was carrying on business of purchase and sale of shares, the value of opening stock and the closing stock formed integral part of the computation of profit or loss from share trading. The correct profit or loss could not be determined without taking into account the value of opening stock and the value of closing stock. In fact, in the profit and loss account, the entire loss arising on account of share transactions, including valuation of closing stock, had been adjusted against the profit and gains from business. The assessee had adjusted the entire loss to the business profit. Therefore, while making the adjustment under Section 143(1)(a), the Assessing Officer was duty bound to examine this aspect as to whether loss arising from the share transactions was correctly adjusted against business profit or not. Since the assessee had adjusted the entire loss, the Assessing Officer was justified in treating the entire loss as speculation loss. There could not be any controversy as made out by the assessee that the loss on share transactions had to be determined by excluding the value of closing stock of the shares. It was only made out by the assessee or wriggle out the rigours of Explanation to Section 73." The above observations were made in the context of adjustments made under Section 143(1)(a). they apply with greater force even in the context of regular assessment proceedings, like the present one.
16. The fact that substantial funds of the assessee are held as investments, and are reflected at Rs. 1,33,48,429, in the Balance Sheet as on 31.3.1997, is not very material for considering the application of the Explanation to Section 73 of the Act. In the light of clear language of Section 73, what has to be seen is only the composition of the gross total income and not the percentage of the funds of the assessee held as investments. This criterion has no bearing at all on the consideration of the issue on hand. In the case of Easter Aviation and Industries Ltd. (supra) relied upon by the learned Departmental Representative, the Hon'ble Calcutta High Court observed as under- "It is by now well settled that 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 computation, wherever it becomes material, in the same mode of the taxable income of the assessee.
Reference, in this context may be made to the decision of the Supreme Court in CIT v. Harprasad and Co.P. Ltd. (1975(99 ITR 118.
The Supreme court in the case of CIT v. J.H. Gotla (1985)-136 ITR 323, in construing the word "income" in section-word "income" would include loss.
In this view of the matter, it must be held that the assessee for the year under reference cannot be said to be a "company whose gross total income consists mainly of income chargeable under the heads 'interest on securities', 'Income from house property'. 'Capital gains' and 'Income from other sources', "since business loss exceeds income computed under the head "Income from other sources". As such, the Explanation to Section 73 is 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." The other decision of the Hon'ble Calcutta High Court in Aryasthan Corporation Ltd. v. CIT (253 ITR 401) is also to the same effect, and supports the conclusion we have drawn herein-above. In the circumstances, we are driven to the conclusion that the provisions of Explanation to Section 73 are attracted and the loss from share transactions has to be held as speculation loss.
17. Now, it remains to be considered whether the transactions of purchase and sale of yarn have also to be considered as speculation activity of the assessee. We are afraid that this is a plea taken for the first time before the Tribunal, and so cannot be entertained by us.
A plea that requires investigation into fresh facts cannot be entertained for the first time by the Tribunal. The assessee did not take this plea even in response to the show-cause notice issued by the CIT(A), let alone before the assessing officer. The CIT(A) specifically mentioned in the show-cause notice that he proposed to treat only the loss from the share transactions as speculation loss. Even at that stage, the assessee did not take the plea that purchase and sale of yarn also constituted the speculative activities of the assessee, and such a plea is taken for the first time before us. In the circumstances, we cannot entertain this plea urged for the first time before us.
18. In the circumstances, we have to uphold the order of the CIT(A).
Before we close the matter, we may however mention that the assessee did claim certain carried forward losses and unabsorbed depreciation of earlier years in the revised return filed by it. If the share transactions are held as speculation activity and the loss therefrom is not set off against other income, the assessee may become eligible for set off of other determined carried forward non-speculative business loss against the business profit of this year. The assessee has not taken a ground before us on this issue, nor did the learned counsel for the assessee taken a plea for this benefit during the hearing. This may be so because the assessee has also along been contending that the transactions of purchase and sale of shares did not constitute speculation activity, and the provisions of Section 73 were not attracted. As we have rejected this plea, and gave a finding to the contrary, we deem it fair and proper to direct the assessing officer to examine this issue and give set off for carried forward losses and unabsorbed depreciation of earlier years against income of the year under appeal, if otherwise found eligible. With these observations, we uphold the impugned order of the CIT(A), and reject the contentions of the assessee in this appeal.