1. The present Special Bench has been constituted under Section 255(3) of the IT Act, 1961, to consider and decide the following issue : "On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in holding that provisions of Section 73 r/w Explanation thereto are not applicable in the assessee company and thereby further erred in directing to allow the set off of losses incurred in the business of purchase and sale of shares against the other income. The said view is well supported by the decided case of Hon'ble Calcutta High Court in Eastern Aviation & Industries Ltd. v. CIT (1994) 208 ITR 1023 (Cal)." 2. When the Court was assembled, Shri K.C. Naredi, the learned CIT (Departmental Representative), sought the attention of the Bench 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 (Departmental Representative) has produced a copy of the communication that he has received from Shri M.G. Zade, ITO, 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 intervenes, 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 (Departmental Representative) 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 fabrics and also from service charges.
The assessee-company is also engaged in buying and selling of shares and holding them as stock-in-trade.
(2) The assessee-company has disclosed a gross total income of Rs. 9,21,556 in its computation of income for the impugned asst. yr.
1989-90. The gross total income is made up of as follows :Income from business Rs. 97,358 (-)Income from other sources Rs. 10,18,914 (+)Gross total income RS. 9,21,556 (3) The income from business is a loss of Rs. 97,358. Income from other sources consisted of dividend income earned from shares held by the assessee-company as stock-in-trade.
(4). The assessee-company had purchased and sold shares during the previous year relevant to the assessment year under appeal, and had incurred a loss of Rs. 2,84,26,411. The negative income of Rs. 97,358 (loss) under the head "Income from business" has been worked out after setting off of the share trading loss of Rs. 2,84,26,411 against the positive income from the business of sales and service.
(5) In the assessment proceedings, the AO held that the share trading loss of Rs. 2,84,26,411 was in the nature of speculation loss within the meaning of Explanation to Section 73 of the IT Act and, therefore, it was not permissible to set off the above share trading loss against other items of business income of the assessee.
(6) The assessee-company objected to the above finding of the AO. The assessee-company relied on the law stated in Section 43(5) of the Act where speculative transaction is defined as a contract settlement otherwise than by way of actual delivery of scrips. The assessee-company stated that it had sold the shares from the opening stock held by it; dividend was earned on the shares and actual delivery of scrips was made. The assessee-company also relied on Clause (b) of proviso to Section 43(5) which provided an exception to speculative transaction, if the contract of sale was made to guard against loss in shareholding through price fluctuations.
(7) The AO did not accept the objections made by the assessee-company. He held that the provisions of Section 43(5) do not have application in this case as the present case is governed by Explanation to Section 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 AO 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, dt. 24th July, 1976 [(1977) 110 ITR (St) 21, 32).
(iii) The law stated in Explanation to Section 73 does not endorse the intention of a company to project the dividend income as the main element of its total income by setting of the loss in share dealings against other business income.
(iv) To determine whether the gross total income consisted mainly of income from other sources, etc., first the business income is to be seen without considering loss in share dealings.
(v) The definition of "gross total income" under Section 80B(5) is not relevant in deciding the present issue. And (vi) The principal business activity of the assessee-company is important in considering the Explanation to Section 73 and not the composition of gross total income as argued by the assessee-company.
(10) Accordingly, the AO disallowed the set off of share trading loss of Rs. 2,84,26,411 against other items of business income and added back the said amount to the taxable income of the assessee-company.
(11) When the matter was taken in appeal, the assessee-company repeated all the contentions raised before the AO and further contended that : (i) The assessee-company was dealing in shares as one of its business and, therefore, loss if any could be set off against the profits of other business carried on by it, under the same head of income as provided in Section 70; (ii) Remainder loss if any could again be set off against income from other heads as provided in Section 71; (iii) The gross total income had to be computed first applying the provisions of Sections 70 and 71 and then only the applicability of Explanation to Section 73 could be looked into; (iv) Otherwise, if it was necessary, the law contained in the said Explanation itself would have provided for the exclusion of any particular item from the concept of gross total income; for example, the concept of gross total income with its contextual identity has been given in Sections 32A(3), 32AB(1)(b), 36(1)(viia), 36(1)(viiia), 37(2A), 44C and 80J(3) of the IT Act, 1961.
(v) There is no such exclusion for the loss incurred by the assessee-company in dealing shares from the gross total income earned under Section 73. It was necessary to determine the gross total income without applying the provisions of Explanation to Section 73 and on that basis if the gross total income consisted wholly of dividend income which is chargeable under the head "Income from other sources" then, the loss incurred by the assessee-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 : (b) M. Gulab Singh & Sons (P) Ltd v. IAC (1993) 45 TTJ (CM) 49 : (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 AO 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 IT 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 Tribunal decisions cited (supra), since the appellant's losses from share dealings would have to be set off against the other business incomes, the provisions of Section 73 and the Explanation thereto would not apply in the appellant's case. The AO is, therefore, directed to allow set off of loss amounting to Rs. 2,84,26,411 against the business income." (13) The Revenue challenges the above finding and direction of the CIT(A) in the impugned appeal in ITA No. 5220/Bom/1994, on the following ground : "On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in holding that provision of Section 73 r/w Explanation thereto are not applicable to the assessee-company and thereby further erred in directing to allow the set off of losses incurred in the business of purchases and sale of shares against the other income. The said view is well supported by the decided case of Hon'ble Calcutta High Court in the case of Eastern Aviation & Industries Ltd. v. CIT (supra)." 6. In the course of preliminary hearing of this appeal, the Revenue sought the matter to be heard by a Special Bench for the reason of a cleavage of judgments amongst co-ordinate Benches of the Tribunal. In the following cases, the Tribunal has held that the business income is to be arrived at after setting off of various income and loss arising out of various business activities under the same head "Income from business". If such business income is less than the total of income from other heads, the assessee would not be caught under the mischief of Explanation to Section 73 as it would satisfy the condition for getting excluded from the ambit of deemed speculation loss.Dy. CIT v. Pams Investments & Trading Co. (P) Ltd. (ITA No. 7789/Bom/1992, dt. 5th July, 2002)Manasi Trading (P) Ltd. v. Asstt. CIT (ITA No. 2l55/Bom/1992, dt. 28th July, 2000)Contony Trading Enterprises Ltd. v. Asstt. CIT (ITA Nos. 1430 & 1431/Bom/1992, dt. 31st March, 1993) 7. On the other hand, in the following decisions, the Tribunal has taken the view that while examining the applicability of Explanation to Section 73, the entire business activities of the assessee-company need to be considered and not the composition of the gross total income alone :ITO v. Srichakra Textiles (P) Ltd. (ITA No. 6640/Bom/1992, dt.
31st May, 2001) (iii) Prudential Construction Co. Ltd. v. Asstt. CIT (2001) 70 TTJ (Hyd) 228 : (2000) 75 ITD 338 (Hyd) (v) Off-shore India Ltd. v. ITO (1986) 24 TTJ (Cal) 86 : (1986) 15 ITD 549 (Cal).
8. Therefore, at the instance of Revenue, the matter was placed before the Hon'ble President of the Tribunal, who has constituted the Special Bench to deliver upon the issue raised in appeal by the Revenue.
9. Shri K.G. Naredi, the learned CIT (Departmental Representative), 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 (supra).
(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 issue has to be considered in the light of abovementioned object as explained in CBDT Circular No. 204, dt.
24th July, 1976 (supra) and in the light of the facts of this case where the assessee-company belongs to the group of companies controlled by Reliance group and the share trading loss considered in this case was the result of in-house trading of shares to create book loss for purposes of setting off against other business income, ultimately to reduce the tax liability of the group companies.
(3) That the assessee-company is making out a case of exclusion from Explanation to Section 73 on the ground that its gross total income consisted mainly of income under the head "Income from other sources" (being dividend income) and not "Business income". This argument is misleading. The applicability of Explanation to Section 73 is to be considered in the light of the principal business carried on by the assessee-company and not on the basis of the composition of gross total income which may change from assessment year to assessment year.
(4) That the applicability of Explanation to Section 73 is not a simple arithmetical proposition relating to the composition of gross total income. Whether the transactions entered into by the assessee-company in the purchase and sale of shares amounted to speculation or not could be better understood only if the totality of the business activities carried on by the assessee-company is looked into.
(5) That the principal business of the assessee-company is trading in steel, yarn and fabrics and rendering of other services. The income earned by the assessee-company out of the above principal business was Rs. 2,83,29,053 (p. 9 of paper book filed by Revenue), This positive business income was much higher than the dividend income of Rs. 10,18,914 brought by the assessee-company under the head "Income from other sources". The regular business income of the assessee-company was much higher than its income from other sources and, therefore, the assessee-company could not claim immunity from Explanation to Section 73 of the Act.
(6) The above composition of assessee's income is the correct state of affairs. The positive income earned from the principal business carried on by the assessee-company was reduced to a loss only because of the share trading loss was set off against it. The real composition of assessee's income needs to be looked into before such set off.
(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.
"Section 109 of the IT 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. The decisive factor for determining whether a company is an "investment company" or any other company is, therefore, the true nature of the primary activities of the company. If the activities of the company are such that its total gross income "mainly" consists of income from securities, etc, it would be termed as an investment company. The word "mainly" is somewhat akin to "wholly" and has been used to mean the whole or a substantial portion of the total gross income of the assessee. It cannot be construed to mean "not less than fifty-one per cent"Nava Bharat Enterprises (P) Ltd. v. CIT "Any company which is mainly engaged in the business of generation or distribution of electricity or any other form of power or in the construction of ships or in the manufacture or processing of goods or in mining would fall within the purview of "industrial company" as defined in Section 2(6)(c) of the Finance Act, 1969, notwithstanding the fact that its income from the specified activity is less than 51 per cent of its total income. The Explanation to the section applies only to case where the company is not mainly engaged in the specified activity but still the income attributable to such specified activity is 51 per cent or more of its total income, The circular of CBDT also supports the above view. The word "attributable" employed in Section 2(6)(c) of the Finance Act, 1969, has a much wider meaning than the words "derived from".
(8) That even if the composition of gross total income of the assessee-company is considered for the purpose of Explanation to Section 73, as against the test of principal business carried on by the assessee, income under the head "Other sources" could not be held higher than "business income". This is because the shares were held by the assessee-company as its stock-in-trade and dividends on those shares would form part of the income from the business of the assessee. In that case, the dividends of Rs. 10,18,914 declared by the assessee under the head "Other sources" need to be considered as its business income in which case the business income of the assessee-company would be more than the income under any of the heads mentioned in the exclusion to Explanation to Section 73; rather, there would be no income under any other heads, then business income.Western States Trading 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 form 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 IT Act, 1922." "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 also find that this business of the assessee-company of buying and selling of units is a business as contemplated under Section 32AB of the Act. The question then is, is it an eligible business under the said section The term 'eligible business' is defined under Sub-section (2) of Section 32AB. As per the definition, all the businesses of an assessee-company will be an eligible business unless it falls under the type of business enumerated in Sub-clauses (a) and (b) of Section 32AB(2). It is nobody's case that this business of the assessee-company is one of those businesses which fall under business enumerated in Sub-clauses (a) and (b) of Sub-section (2) of Section 32AB. Therefore, there is no doubt that the business of the assessee-company is an eligible business. The fact that it is shown under a different head of income would not deprive the company of its benefit under Section 32AB so long as it is held that the investment, in the units of the UTI by the assessee-company is in the course of its 'eligible business'.
Therefore, in our opinion, the dividend income earned by the assessee-company from its investment in the UTI should be included in computing the profits of eligible business under Section 32AB of the Act." (10) That, further, the composition of the gross total income of the assessee-company is not to be construed as explained by the assessee. While contenting that income from other sources in the form of dividends (Rs. 10,18,914) was higher than the profits and gains of business (loss of Rs. 97,358), the assessee-company has omitted to treat business loss as negative income. The share trading loss of the assessee-company was Rs. 2,84,26,411 as against dividend income of Rs. 10,18,914. The business income in the form of negative income was definitely more than the income from other sources by way of dividends and the assessee-company cannot claim that it is excluded from Explanation to Section 73 on the ground that its gross total income mainly consisted of income from other sources.
"The expression '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'. Further, the Explanation to Section 73 of the IT 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 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. 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."Aryasthan Corpn. Ltd. v. CIT "The words 'income' and '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."ITO v. Srichakra Textiles (P) Ltd. (supra) has held under the same circumstances that an assessee is covered by Explanation to Section 73 and, therefore, share trading loss could not be set off against other business income. That the ground raised before the Tribunal in Srichakra Textiles (P) Ltd's case (supra) was : "On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in directing the AO to allow the set off of the loss from trading in shares against other business income in terms of Explanation to Section 73; the share trading is not in ordinary course of business but was clear measure of speculation. The CIT(A) has failed to appreciate the fact that as trading in shares in instant case is speculation loss hence cannot be adjusted against business income." (13) That the Tribunal has applied the ratio laid down by the jurisdictional High Court in CIT v. Amritalal & Co. Ltd. (supra) that to arrive at the conclusion whether a company is an investment company or not, the decisive factor is the nature of the activities of the company which gives rise to the income and not the actual income from such activities during a particular assessment year. The above decision was followed by the Tribunal as the circumstances in which the company was to be treated as an investment company and circumstances in which a company is excluded from Explanation to Section 73 are identically stated in Section 109 (since repealed) and in Section 73 of the IT Act, 1961.Western States Trading Co. (P) Ltd. v. CIT (supra) to hold that dividends received on shares held as stock-in-trade have to be treated as business income. The Tribunal has held as under : "Applying the ratio laid down by Hon'ble apex Court in the case of Western States Trading Co. (P) Ltd. (supra), dividend income is to be assessed under the head income from business. After doing so, because income of the assessee will be Rs. 17,50,851 (,4,26,051 + 13,24,800), its 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. (supra) 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 para 7 above.
10. The learned CIT 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) (iv) CIT v. New India Investment Corpn. Ltd. (1994) 205 ITR 618 (Cal) 11. The learned CIT further contended that the meaning of the expression "gross total income" defined in Section 80B(5) applies to Chapter VI-A alone and not to Chapter VI in which Section 73 is provided. He referred to the p. 3346 of Income-tax Law by Chaturvedi & Pithisaria, Fifth Edition, Part-II, in support of the above proposition. The learned CIT also submitted that the dividend income earned by the assessee-company was only incidental and not the main income of the assessee-company.
12. Shri J.D. Mistry, the learned counsel appearing for the assessee-company, submitted that he has no quarrel with the Revenue regarding the non-applicability of Section 43(5) of the Act in deciding the issue. He agreed that the issue has to be considered in the light of Section 73 and the Explanation thereto. He also submitted that the assessee-company never intended to overlook the features of speculation loss and rules relating to its set off and carry forward and therefore, such disputes as contemplated by the Revenue do not arise in this case. He, therefore, pointed out that the decisions in Sri Ranga Vilas Ginning & Oil Mills v. CIT (supra), CIT v. Puttaiah Seshaiah & Co. (supra), Navnitlal Ambalal v. CIT (supra), CIT v. New India Investment Corpn. Ltd. (supra) and Merfin (India) Ltd. v. Dy. CIT (supra) relied on by the learned CIT have no application in this case.
13. The detailed contentions and arguments made by Shri J.D. Mistry are briefly stated as under : (1) That, the assessee-company is carrying on various business like trading in steel, yarn, fabrics and also in shares in addition to rendering of commercial services. The income/loss of the different businesses have to be considered together under the head "Profits and gains of business or profession".
(2) That, the normal presumption is that loss of any one business has to be set off against the income of other business, all coming under the same head of business income. The above presumption is the substance of law stated in Section 70. The Revenue has not pointed out any provision of law in the IT Act which does not support the above presumption regarding intra-head set off of income/loss arising out of different businesses carried on by an assessee. The assessee-company has set off its share trading 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 assesses. 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 the Explanation to Section 73 which suggests 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 gross total income of the assessee. The gross total income of the assesses-company was Rs. 9,21,556 computed under the head "Income from other sources" being dividends earned on the shares held by the assessee. As whole of the gross total income of the assessee-company consisted of income which is chargeable under the head "Income from other sources", the assessee is excluded from the ambit of Explanation to Section 73.
(6) That dividend is always chargeable under the head "Income from other sources". Section 56(2)(i) mandates that dividends shall be chargeable to income-tax under the head "Income from other sources".
The principle regarding income chargeable under appropriate heads of income has been pronounced by the Supreme Court in its judgments rendered in United Commercial Bank Ltd. v. CIT (1957) 32 ITR 688 (SC) and CIT v. Cocanada Radhaswami Bank Ltd. (1965) 57 ITR 306 (SC).
(7) In the case of United Commercial Bank Ltd. v. CIT (supra), the Supreme Court after an exhaustive review of the authorities held that the head of income, profits and gains enumerated in the different clauses of Section 6 of the Indian IT Act, 1922 were mutually exclusive, each specific head covering items of income arising from a particular source. On that reasoning, the Court held that even though the securities were part of the trading assets of the assessee-company doing business, the income therefrom had to be assessed as "interest on securities" under Section 8 of that Act.
The said decision was followed by the Supreme Court in its later decision in the case of CIT v. Cocanada Radhaswami Bank Ltd. (supra).
(8) That in the light of the legal position explained above, the contention of the Revenue that dividends earned by the assessee-company from the shares held by it as stock-in-trade should be considered as "business income" rather than "income from other sources" is not sustainable in law. The reliance placed by the Revenue on the Supreme Court decisions in Western States Trading Co.
(P) Ltd. v. CIT (supra) and Apollo Tyres Ltd. v. CIT (supra) is out of context.
(9) That, the contention of the Revenue regarding business loss being in the nature of negative income should have been compared to the positive income from other sources is not applicable to the facts of the present case. In the case cited by the Revenue in Eastern Aviation & Industries Ltd. v. CIT (supra), 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 Corporation Ltd. v. CIT (supra) 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 on by the Revenue have no application in assessee's case.
(11) That, the contention of the Revenue that the applicability of Explanation to Section 73 is to be considered in the light of the principal business carried on by the assessee-company and not on the basis of the composition of gross total income, is not in accordance with the correct interpretation of the law stated in Explanation to Section 73 of the IT Act, 1961. The provisions contained in Explanation to Section 73 are in the nature of a deeming provision, which need to be construed strictly without any intentment or enlargement. The applicability of Explanation to Section 73 would depend only on the composition of the gross total income of an assessee. The Explanation clearly stated that where any part of the business of a company consists in purchase and sale of shares, such company shall, for the purpose of Section 73 be deemed to be carrying on a speculation business only if the gross total income of the company mainly consisted of income chargeable under the heads other than "Interest on securities, income-from house property, capital gains and income from other sources". That, the Explanation to Section 73 would apply to a company only if its gross total income mainly consisted of business income. The deeming provision does not lay down any other test to identify a company covered by Explanation to Section 73, other than the test of "gross total income".
(12) That, while examining the composition of the gross total income, the Revenue is trying to identify the principal business carried on by the assessee, as its main source of income. The inquiry regarding "source of income" is relevant in identifying the principal business of an assessee. In computing gross total income, what is relevant is "heads of income". That there should not be any confusion between "source of income and heads of income". In the context of Explanation to Section 73 which is based on the concept of gross total income, the relevant factor to be looked into is "heads of income".
(13) That, the argument of the Revenue that the test to be applied to ascertain the nature of activity carried on by a company is to examine the principal business carried on by it and not the examination of the composition of gross total income on an year to year basis, is not correct. That the reliance placed by Revenue on the decisions of the Bombay High Court in CIT v. Amritlal & Co. Ltd. (supra) and that of Andhra Pradesh High Court in Nav Bharat Enterprises (P) Ltd. v. CIT (14) That the fundamental distinction between the above two cases relied oh 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 sources 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 Tribunal, Mumbai 'B' Bench, in ITO v. Srichakra Textiles (P) Ltd. (supra) mainly for the reason that while arriving at the above decision, the Tribunal has relied on the decision of the Supreme Court in Western States Trading Co. (P) Ltd. v. CIT (supra) and the decision of the Bombay High Court in CIT v. Amritlal & Co. Ltd. (supra).
(16) It is not that the Explanation to Section 73 was considered by the Tribunal in the case of Srichakra Textiles (P) Ltd. (supra) and a few other cases alone. In fact, the very same issue was considered by different Benches of the Tribunal in a number of cases, like, (3) Reliance Transport & Travels Ltd. v. Dy. CIT (ITA No: 1733/Bom/1991, dt. 27th April, 1992)Sitcon Commercials (P) Ltd. v. Asstt. CIT (ITA No. 8036/Bom/1992, dt. 30th March, 1993), Mumbai Bench D (5) Adamson Commercials Ltd. v. Dy. CIT (ITA No. 8582/Bom/1992, dt.
8th June, 1993), Mumbai Bench BSinora Trading Ltd. v. Asstt. CIT (ITA No. 2157/Bom/1992, dt.
28th June, 1993), Mumbai Bench C (7) Sanket Commercials Ltd. v. Dy. CIT (ITA No. 8592/Bom/1992, dt.
23rd Sept., 1993), Mumbai Bench CScotline Trading Ltd. v. Asstt. CIT (ITA No. 2156/Bom/1992, dt.
12th Oct., 1993), Mumbai Bench C (9) Rajniketan Traders Ltd v. Asstt. CIT (ITA No. 4618/Bom/1993, dt.
18th Aug., 1994), Mumbai Bench C (10) Asstt. CIT v. Vision Trading Co. (P) Ltd. (ITA Nos. 3359 & 3360/Bom/1992, dt. 14th Sept., 1998), Mumbai Bench BManor Trading Ltd. v. Asstt. CIT (ITA No. 768/Bom/1992, dt.
26th Feb., 1999), Mumbai Bench SMC (12) Santoor Commercials Ltd. v. Asstt. CIT (ITA No. 435/Bom/1972, dt. 28th Dec., 1998), Mumbai Bench C (13) Asstt. CIT v. Crator Trading Enterprises Ltd. (ITA No. 8927/Bom/1992, dt. 22nd Sept., 1998), Mumbai Bench C (14) Asstt. CIT v. Madona Commercial (P) Ltd. (ITA No. 9558/Bom/1991, dt. 17th Sept., 1998), Mumbai Bench DMansi Trading (P) Ltd. v. Asstt. CIT (ITA No. 2331/Bom/1991, dt. 3rd Aug., 1998), Mumbai Bench BDy. CIT v. Bloom Trading Co. (P) Ltd. (ITA No. 6629/Bom/1991, dt. 27th April, 1996), Mumbai Bench BVision Trading Co. (P) Ltd. v. Asstt. CIT (ITA No. 2914/Bom/1990, dt. 11th Dec., 1997), Mumbai Bench C (18) Asstt, CIT (Inv.) v. Hero Textiles & Trading Ltd. (ITA No. 7272/Bom/1992, dt. 28th Nov., 2000), Mumbai Bench B (19) ITO v. Akhil Fabrics Ltd. (ITA No. 8902/Bom/1992, dt. 14th May, 2001), Mumbai Bench BUtkarsh Textiles Trading Ltd. v. Asstt. CIT (ITA No. 8492/Bom/1992, dt. 13th July, 1998), Mumbai Bench A (21) Dy. CIT v. Pams Investment & Trading Co. Ltd. (ITA No. 7789/Bom/1992, dt. 5th July, 2002), Mumbai Bench E (22) Dy. CIT v. Radiant Texfabs Ltd. (ITA No. 6947/Bom/1994, dt.
21st Nov., 2002), Mumbai Bench CManasi Trading (P) Ltd. v. Asstt. CIT (ITA No. 2155/Bom/1992, dt. 28th July, 2000), Mumbai Bench C (24) Kunjvan Texfabs Ltd. v. Dy. CIT (ITA No. 660/Bom/1996, dt. 27th May, 2003), Mumbai Bench F (25) Dy. CIT v. Ascent Trade Corpn. Ltd. (ITA No. 7303/Mum/1995, dt.
24th March, 2003), Mumbai Bench H (26) ITO v. Vosdon Trading Co. Ltd. (ITA No. 6972/Mum/1992, dt. 26th Sept., 2001), Mumbai Bench E (27) Asstt. CIT v. Sinora Trading Ltd. (ITA No. 7648/Bom/1992, dt.
15th Oct., 2001), Mumbai Bench B. (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 deliverance of judgment in Srichakra Textiles (P) Ltd.'s case (supra) (which was delivered on 30th May, 2001).
(18) It is also not that the relevant judicial pronouncements relied on by the Tribunal in Srichakra Textiles (P) Ltd.'s case (supra) were not considered by the Tribunal in those decisions delivered in favour of the assessees. The decision of the Bombay High Court in CIT v. Amritlal & Co. Ltd. (supra) relied on by the Tribunal in the case of Srichakra Textiles (P) Ltd. (supra) was in fact considered and discussed in Dy. CIT v. Bloom Trading Co. (P) Ltd. (supra) and Utkarsh Textiles Trading Ltd. v. Asstt. CIT (supra). Those decisions were delivered in 1996 and 1999 before the order was passed in the case of Srichakra Textiles (P) Ltd. (supra).Western States Trading Co. (P) Ltd. v. CIT (supra), relied on by the Tribunal in the case of Srichakra Textiles (P) Ltd. (supra) was considered in the cases of Dy. CIT v. Pams Investments & Trading Co. (P) Ltd. (supra) and Dy. CIT v. Radiant Texfabs Ltd. (supra).
(20) The decision of Andhra Pradesh High Court cited by the Revenue in Nav Bharat Enterprises (P) Ltd. v. CIT (supra) was considered by the Tribunal in the decisions of Sitcon Commercials (P) Ltd. v. Asstt. CITContony Trading Enterprises Ltd. v. Asstt. CIT (supra), Adamson Commercials Ltd. v. Dy. CIT (supra), Sanket Commercials Ltd. v. Dy. CIT (supra) and Rajniketan Traders Ltd. v. Asstt. CIT (supra).
(21) The decision of the Calcutta High Court in Eastern Aviation & Industries Ltd. v. CIT (supra) was considered by the Tribunal in its decisions rendered in Santoor Commercials Ltd. v. Asstt. CIT (supra) and Utkarsh Textiles Trading Ltd. v. Asstt. CIT (22) Again, the decision of Calcutta High Court in the case of CIT v. Arvind Investments Ltd. (supra) was considered by the Tribunal in its decisions in ITO v. Akhil Fabrics Ltd. (supra) and Sinora Trading Ltd. v. Asstt. CIT (23) The decision of the Tribunal relied on by the Revenue in the case of Srichakra Textiles (P) Ltd. (supra) itself was considered by the Tribunal in the cases of Kunjvan Texfabs Ltd. v. Dy. CIT (supra) and Dy. CIT v. Ascent Trade Corpn. Ltd. (supra).
(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" needs 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 Explanation to Section 73 needs to be considered only on the basis of the composition of gross total income of an assessee-company for a particular assessment year.
15. We heard both the sides in details and considered the issue in the light of the relevant statute and the judicial pronouncements.
16. The assessee-company had raised certain contentions before the AO regarding the provisions of Section 43(5) vis-a-vis the Explanation to Section 73 of the IT Act, 1961. But anyhow, at the time of hearing, it was agreed upon by the learned counsel appearing for the assessee that the present issue is to be examined in the light of Explanation to Section 73 alone. The learned counsel for the assessee has also submitted that the assessee does not contest the special features of speculation loss explained in the provisions of law regarding its eligibility for setting off and carry forward, Therefore, we make it clear that the following decisions relied on by the learned CIT (Departmental Representative) at the time of hearing do not have any direct bearing on the issue to be decided in this case : 17. An speculative transaction and the loss arising out of an speculative transaction have been highlighted in the scheme of IT Act, 1961, more particularly in the context of computation of income under the head "Profits and gains of business or profession", for the purpose of restricting the scope of setting off and carry forward of such loss.
The law, for that matter, treats speculative transaction carried on by an assessee as a distinct and separate business if the nature of such transactions is such that it constitutes a business. This is provided under Expln. 2 to Section 28 of the Act. Likewise, the definition of the term speculative transaction is provided in Section 43(5) in a substantive manner. Generally speaking, the ambit and scope of speculative transaction and speculation loss need to be confined within the limit provided by law contained in the abovementioned provisions.
But, further to take care of any device that may 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 IT 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.
"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 consists in the purchase and sale of shares of other company, such company shall, for the purposes of this section, be deemed to be carrying on an speculation business to the extent to which the business consists of the purchase and sale of such shares".
20. The transactions of purchase and sale of shares would be held as speculation business only if the company was hit by the Explanation to Section 73. The implication of the Explanation is that if a company incurs an speculation loss in a manner deemed in the Explanation, such loss shall not be set off except against profits and gains, if any, of another speculation business.
21. But the Explanation has provided two exceptions. The first exception is available in the case of 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". The second exception is in the case of a company whose principal business is the business of banking or the granting of loans and advances.
22. The first category of exception is identified by the composition of its gross total income. The words used in the statute "(.....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") provide thrust on the composition of the gross total income of that company. If the gross total income of the company mainly consists of income falling under the abovementioned heads, Explanation to Section 73 does not apply. If the gross total income of the company is mainly made up of income under the head "Profits and gains of business or profession", it is caught by the mischief of Explanation to Section 73. Therefore, we have to see that the first category of exception is made on. the basis of the "character of its gross total income".
23. As far as the second category of exception is concerned, the thrust is made on the nature of business carried on by the company. If the company is carrying as its principal business, the business of banking or the granting of loans and advances, Explanation to Section 73 does not apply. The company is excluded from the ambit of Explanation on the basis of the nature of the principal business carried on by it.
24. The two kinds 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, we have to examine whether the gross total income of the assessee-company consists mainly of income which is chargeable under the head "Income from other sources" or not.
26. The Revenue has placed heavy reliance on the decision of the Bombay High Court in CIT v. Amritlal & Co. Ltd. (supra) and of Andhra Pradesh High Court in Nav Bharat Enterprises (P) Ltd. v. CIT (supra). In Amritlal & Co. Ltd.'s case (supra), the Court was in fact examining whether the assessee-company in that case could be held as an investment company for purpose of Section 104 of the IT Act, 1961 (since deleted). Section 104 of the IT Act, as it stood at the relevant time, provided for levy of income-tax on undistributed income of certain companies. The rate of tax so leviable was a differential rate ranging from 25 per cent to 50 per cent depending upon the nature of the company. The companies were classified under three heads, viz., investment company, trading company and any other company, for the purpose of Section 104. If the company was an investment company, the rate of tax was 50 per cent. If the company was a trading company, the rate was 35 per cent. If the company was any other company, the rate was 25 per cent. The examination made by the Court in that case, therefore, was whether the assessee-company could be treated as an investment company for the purpose of levying tax at 50 per cent. In that case, the income of the assessee-company right from asst. yrs.
1951-52 to 1977-78 showed that assessee's income from business always far exceeded its non-business income. It was only in the case of four asst. yrs. 1968-69, 1969-70, 1971-72 and 1972-73 that other income exceeded the business income of the assessee. In a period of 27 years, only in the case of four assessment years that the business income of that assessee-company fell short of 50 per cent of its gross total income. For all other assessment years, the business income far exceeded the income from other heads. In the facts and circumstances of that case, the Court held that only for the reason that the income from other heads exceeded the business income for some assessment years, the basic nature of the assessee-company could not be changed. The assessee-company was dealing in dyes' and chemicals manufactured by others. The primary business carried on by the assessee was that of trading. 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 pf 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 basic intention of the provision contained in Section 104. In that case, the test laid down by the Court was the test of principal business carried on by the company in its normal course. The real intention was not to examine the composition of income but the basic and fundamental source of income. Therefore, the decision relied on by the Revenue in CIT v. Amritlal & Co. (supra) is not applicable to the present case.Nava Bharat Enterprises (P) Ltd. v. CIT (supra) was examining whether the assessee in that case would fall within the purview of "industrial company" as defined in Section 2(6)(c) of the Finance Act, 1969, notwithstanding the fact that its income from the specified activity was less than 51 per cent of its total income. In that case, the Court was in fact examining the basic character of the activities carried on by the company even though there may be seasonal changes in the composition of its total income. The rule laid down by the Court is that the ups and downs in various heads of income in certain assessment years should not go to determine the fundamental character of a company. A useful extract from the judgment as found in pp. 812 and 813 is extracted below ; "We are of the opinion that the construction placed by the CBDT upon the definition represents the correct view, Adopting the view contended for by the Department would result in anomalous and inequitable results. Take the case of a company which is engaged in generation of electricity. Its investment in that behalf is ten crores of rupees. It also engages itself in trading activities, which is not one of the specified activities. The investment in trading activities is, say, 50 lakhs, of rupees. Suppose in a given assessment year, its income from generation of electricity is 'nil' while its income from trading activities is one lakh of rupees.
According to the Department's contention, it would not be an industrial company. In other words, according to the Department, it would not be a company mainly engaged in the generation of electricity, which is, ex facie and from any point of view, untrue and untenable. We are, therefore, of the opinion that the company which is mainly engaged in the specified activity shall be deemed to be an industrial company, notwithstanding the fact that 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 & Co. (supra) are identical to the details of the present case. In Amritlal & Co.'s case (supra), 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 thereto and those tests are provided for the limited purpose of the deeming provision contained in the Explanation.
As already stated, one test is with reference to the nature of gross total income and the other test is with reference to the business carried on by the assessee-company. In the present case, the only test to be carried out is regarding the composition of gross total income.
But in the above two cases relied on by the Revenue, the Courts were examining the basic character of those companies irrespective of some seasonal changes in the composition of the gross total income. It is for the above reason that we find the said two decisions relied on by the Revenue are not applicable to the present case.
31. Once we have held that the rule to be followed in the present case is the test of "gross total income", we have to examine how the gross total income of the assessee in this case is made up of. The assessee-company has earned a profit of Rs. 2,83,29,053 from its business of trading in steel, yarn and fabrics and from service charges. The assessee-company has also incurred a loss of Rs. 2,84,26,411 in the purchase and sale of shares. Altogether, the income from business is a loss of Rs. 97,358. The assessee-company has further earned dividend income of Rs. 10,18,914 from shares held as its stock-in-trade. The loss of Rs. 97,358 has been computed under the head "Profits and gains of business or profession". The dividend income of Rs. 10,18,914 has been computed under the head "Income from other sources". After the set off of the dividend income and the business loss, the gross total income has been worked out to Rs. 9,21,556 which is entirely made up of dividend income computed under the head "Income from other sources".
32. In the present case, the gross total income is made up of dividend income chargeable to tax under the head "Income from other sources".
The character of gross total income for the purpose of Explanation to Section 73 is to be examined in the light of the "chargeability" to tax, of various components of the gross total income under the specified heads of income. The "chargeability" is to be looked into with reference to the heads of income. The emphasis given to "chargeability" on the basis of the heads of income is apparent from the relevant text of law given in Explanation to Section 73, which is extracted below : "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." 33. The chargeability of income under an 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 important in the context of "charge" of income-tax, The charge is on total income. The total income is the aggregate of incomes "chargeable" under different heads specified in Section 14. Income which is not chargeable under any of the specified heads of income cannot be brought to tax at all. While examining the issue in the light of the IT Act, 1922, the Supreme Court in the case of Nalinikant Ambalal Mody v. S.A.L. Narayan Row, CIT (1966) 61 ITR 428 (SC) has held that income which falls under one head, but cannot be brought to tax under that head, under the rules of computation under that head is not to be taxed under "other sources" and is not to be included in "total income". The Supreme Court has held in United Commercial Bank Ltd. v. CIT (supra) that heads of income are mutually exclusive and income falling under one head must be assessed under that head only; assessee and Revenue have no option. Therefore, the Court held that the head of income of which the source is "interest on securities" has its characteristics for income-tax purposes and falls under the specific head covered by Section 8 of the 1922 Act, and where an item falls specifically under one head, it has to be charged under that head and no other. Accordingly, the Court held in that case that income from "interest on securities" would fall under Section 8 of the 1922 Act even though securities were held by a banker as part of its trading assets in the course of business, and such income cannot be brought to tax as business income.
34. Following the above principles, the Supreme Court has held in CIT v. Chugandas & Co. (1965) 55 ITR 17 (SC) that even if an item of income is earned in the course of carrying on a business, it will not necessarily fall within the heading "Profits and gains of business". If securities constitute stock-in-trade of the business of an assessee, interest received from those securities will, for the purpose of determining the taxable income, be shown under the head "Interest on securities". Similarly, dividends from shares will be shown under "other sources".
35. In the case of CIT v. Cocanada Radhaswami Bank Ltd. (supra), the Supreme Court was examining again the statutory nature of computation of total income under different heads. The Court held that the scheme of the Act is that income-tax is one tax and Section 6 of the 1922 Act only classified the taxable income under different heads for the purpose of computation of net income of an assessee. The Court held in that case 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 a 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 the 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 at p. 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 a 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 case which yielded the income form part of the trading assets of the assessee The Tribunal and the High Court found that they were the assessee's trading assets and the income therefrom was, therefore, the income of the business. If it was the income of the business, Section 24(2) of the Act was immediately attracted. If the income from the securities was the income from its business, the loss could, in terms of that section, be set off against that income." 36. Therefore, the question whether the dividend income earned by the assessee-company from the shares held as its stock-in-trade is "chargeable" under the head "Other sources" is to be examined in the light of the rule regarding classification of income under different heads for computing the total income. As classification of income under specified heads is important in computing the total income which is the basis of charge of income-tax, the provisions and rules relating to classification and computation of income have to be strictly construed in the light of the Supreme Court decisions considered above including the decisions in United Commercial bank Ltd. v. CIT (supra) and CIT v.Cocanada Radhaswami Bank Ltd. (supra), relied on by the assessee's counsel.
37. The examination leads us to the provisions contained in Section 56 of the IT Act, 1961. Section 56(2)(i) mandates that "dividends" shall be chargeable to income-tax under the head "Income from other sources".
The nature and composition of gross total income for the purpose of Explanation to Section 73 need to be examined on the basis whether the main chunk of the gross total income is made up of income "Chargeable" under the head "Income from other sources". The provisions of Section 56(2)(i) provides that dividend shall be "chargeable" under the head "Income from other sources". The gross total income in the present case is made up of dividend from shares held as stock-in-trade. Therefore, it is to be seen that the gross total income in the present case is chargeable under the head "Income from other sources".
38. In this context, we have to refer to the two decisions relied on by the Revenue in support of the argument that the dividend income in the hands of the assessee-company should be considered as its "income from business" for the reason that the shares were held by the assessee-company as its stock-in-trade. The Revenue has placed reliance on the Supreme Court decisions in Western States Trading Co. (P) Ltd. v. CITIn Western States Trading Co. (P) Ltd. v. CIT (supra), 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 set off 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 CIT v. Cocanada Radhaswami Bank (supra)] that Section 6 of the Act classifies the taxable income under the several heads but the scheme is that income-tax is one tax and Section 6 only classifies the taxable income under different heads for the purpose of computation of the net income of the assessee. While Sub-section (1) of Section 24 provides for setting off the loss under one of the heads mentioned in Section 6 against the profits under a different head in the same year, Sub-section (2) provides for the carrying forward of the loss for one year and setting off the same against the profits or gains of the assessee from the business in the subsequent year or years.
It was emphasized in the aforesaid decision that Sub-section (2) of Section 24 in contradistinction to Sub-section (1) is concerned only with the business and not with its heads under Section 6 of the Act.
Dividends are included in the meaning of income under Sub-section (1A) of Section 12 which is the residuary head. Applying the principles adverted to before, the amount of dividends would form a part of the income from the 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 during the previous year...." 40. In the above case, the Supreme Court has only reiterated the principles laid down by the Court in CIT v. Cocanada Radhaswami Bank Ltd. (supra), In CIT v. Cocanada Radhaswami Bank Ltd. (supra), the Supreme Court has held that the scheme of the Act is that income-tax is one tax. Section 6 of the 1922 Act (corresponding to Section 14 of the 1961 Act) only classifies the taxable income under different heads for the purpose of computation of net income of the assessee. Though for the purpose of computation of income, interest on securities is separately classified, income by way of interest from securities does not cease to be a part of the business income, if the securities are part of the trading asset. 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. In the decision of CIT v. Cocanada Radhaswami Bank Ltd. (supra), the Supreme Court was following its own earlier decision in United Commercial Bank Ltd. v.CIT (supra) where it was held that income from "interest on securities" would fall under Section 8 of the 1922 Act (corresponding to Section 18 of 1961 Act) even though 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 cases of United Commercial Bank Ltd. v. CIT (supra) and CIT v. Cocanada Radhaswami Bank Ltd. (supra), 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 an 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.In Western State Trading Co. (P) Ltd. v. CIT (supra), 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 though dividend income from shares held as stock-in-trade was "chargeable" under the head "Other sources", the said dividend income could be treated as part of business income for the purpose of carry forward and set off. The Court has not held that such dividend income was chargeable under the head "Profits and gains of business or profession".
43. In the case of Apollo Tyres Ltd. v. CIT (supra), the Supreme Court was examining whether dividend income earned by the assessee-company from its investments made in the units of Unit Trust of India could be considered as "income derived from an eligible business". This examination was made for the purpose of Section 32AB of the IT Act. The Supreme Court held that the Tribunal has already made a finding of fact that the units were held by the company as its business stock and investing in units was one of the business activities of the assessee-company. The. Court examined the de facto nature of unit dividends in the hands of the assessee-company in the context of Section 32AB and held that it would be income derived from business, In that case also the Court has not held that dividend income is chargeable under the head "Profits and gains of business or profession".
44. The Supreme Court in the cases of Western States Trading Co. (P) Ltd. (supra) and Apollo Tyres Ltd. (supra) has not reconsidered the principles laid down in the earlier decisions of United Commercial Bank Ltd.'s case (supra) and Cocanada Radhaswami Bank Ltd. 's case (supra) regarding the classification and computation of income under different heads and its chargeability to tax. In fact, the earlier decisions are exactly followed in the later decisions. The Court in fact examined the genesis of the income earned by the companies by way of dividends from shares and units. The genesis was gone into for determining whether the dividends were earned out of regular business activities of the companies, so that dividends could be construed as business income for purposes of set off of business loss and for computing eligible business profit under Section 32AB. The Court has not held in those cases that dividends in such circumstances would be chargeable to tax under the head "Profits and gains of business or profession".
45. In the light of the discussions in the above paragraphs, the contention of the Revenue that dividend income earned by the assessee-company from 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 (supra) and Apollo Tyres Ltd. v. CIT (supra) 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 (SC), 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. Therefore, there is no legitimacy for an enquiry with the nature of business carried on by a company which has not been suggested in the said Explanation. The only inquiry suggested therein, is regarding the composition of gross total income.
47. The contention of the Revenue that the composition of the gross total income in assessee's case needs to be examined by treating the business loss as the negative income of the assessee, has to be considered next. The Revenue has relied on the decisions of the Calcutta High Court in Eastern Aviation & Industries Ltd. v. CIT (supra) and Aryasthan Corpn. Ltd. v. CIT 48. In the case of Eastern Aviation & Industries Ltd. v. CIT (supra), the assessee had a share trading loss of Rs. 12,90,145 and a speculation loss of Rs. 7,95,447. The positive income from other sources was Rs. 3,87,603. In Aryasthan Corpn. Ltd. v. CIT (supra) also, the facts were identical where the business loss was higher than positive income from other sources. But in assessee's case, dividend income is higher than the business loss. Income from other sources by way of dividend was Rs. 10,18,914 whereas income from business was a loss of Rs. 97,358. Even when business loss is treated as negative profit, the negative profit was less than the positive income from dividends. Therefore, on the facts of the present case, the above two decisions of the Calcutta High Court are not applicable to issue.
49. The Revenue has also raised certain supporting arguments that the case need to be considered in the light of the intention of the legislature in enacting Explanation to Section 73, which has been clarified in CBDT Circular No. 204, dt. 24th July, 1976 (supra), and that the meaning of the expression "gross total income" defined in Section 80B(5) cannot be imported into the context of Section 73 of the Act.
50. There are no materials on record to show that the assessee-company did make loss in the share trading activities in order to reduce the tax incidence. In respect of the contention regarding "gross total income", Section 73 does not provide for any special treatment. The Supreme Court has held in CIT v. Venkateswara Hatcheries (P) Ltd. and Ors. (1999) 237 ITR 174 (SC) that the same word occurring more than once in the Act should generally be given the same meaning, but the context may indicate the contrary legislative 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". The composition of gross total income alone needs to be looked into.
(4) That, in the case of a company falling under the second category above, the test is to examine the principal business carried on by the company to ascertain whether the principal business is that of banking or the granting of loans and advances. The nature of the principal business carried on by the company alone needs to be looked into.
52. In the light of the above, we hold that in the present case, the CIT(A) was right in holding that provisions of Section 73 r/w Explanation thereto, are not applicable to the assessee-company. The CIT(A) is justified in directing to allow the set off of losses incurred in the business of purchase and sale of shares against the other income. The decision of the Calcutta High Court in Eastern Aviation & Industries Ltd. v. CIT (supra) is not applicable to assessee's case as the facts relating to the composition of the gross total income are different.
53. The case is sent back to the regular Bench to decide the appeal in the light of the above findings. The other ground raised in the appeal shall be decided by the said Bench.