1. The Revenue as well as the assessee are in appeal against the CIT(A)'s order, dt. 28th Oct. 1999 passed in the matter of an assessment under Section 143(3) of the Act for the asst. yr. 1996-97.
2. The only ground raised by the assessee in the appeal filed by it is directed against the CIT(A)'s order in upholding the treatment of loss from share trading activity of Rs. 2,47,97,775 as speculative loss within the meaning of Explanation to Section 73 of the Act.
3. On perusal of P&L a/c, it was noticed that the assessee had incurred loss from share trading at Rs. 2,47,97,775. In the course of assessment proceedings, the AO drew the assessee's attention to the provisions of Section 73 r/w Explanation thereto and required the assessee to explain as to why the loss from share trading should not be treated as speculative business loss as per the provisions contained in the Explanation to Section 73 of the Act. In reply thereto, the assessee submitted an explanation dt. 23rd Jan., 1998 before the AO stating that provisions of Explanation to Section 73 are not applicable to the investment company as defined in Clause (ii) of Section 109 of the Companies (sic-IT) Act. The assessee submitted before the AO that inasmuch as the assessee is an investment company, provisions of Explanation to Section 73 are not to be applied. The aforesaid explanation of the assessee has been carefully considered by the AO, who held that the term 'investment company' had already been omitted long before w.e.f. 1st April, 1988 from the Explanation to Section 73 of the Act, the decisions applicable to the investment company are not applicable to the assessee's case, inasmuch as the assessee's case is related to the period relevant to the asst. yr. 1996-97. The AO further stated that as per provisions of Explanation to Section 73, as stood in the asst. yr. 1996-97, Explanation to Section 73 is not applicable only to a company, the principal business of which is the business of banking or granting of loans and advances. He further stated that the assessee-company is not a company whose principal business is of banking or of granting of loans and advances and thus, the assessee is not entitled to have the benefit of the exclusion provisions provided under the Explanation to Section 73 of the Act.
4. On appeal, the CIT(A) confirmed the AO's action in invoking the provisions of Explanation to Section 73 of the Act to the assessee's case by observing and holding as under: Perusal of the P&L a/c during the course of assessment proceedings revealed to the AO that the appellant had shown loss from share trading business at Rs. 2,47,97,775. In the opinion of the AO, the said loss was to be treated as a loss from speculation business as per the provisions of Section 783 r/w Explanation thereto. The appellant's contention before the AO in this regard was that the Explanation to Section 73 was not applicable to the appellant, as the appellant was an investment company. However, the AO was not satisfied with the explanation put forth by the appellant in this regard. The AO has mentioned in this connection in the assessment order that the principal business of the appellant-company was not the business of banking or granting of loans or advances. Besides, the gross total income of the appellant-company did not mainly consist of income under the heads 'Interest on securities', 'Income from house property', 'Capital gains', or 'Income from other sources'. Therefore, in the opinion of the AO, to the extent the appellant was dealing in purchase and sale of shares of other companies, it was deemed to be carrying on speculation business, in view of the Explanation to Section 73 of the IT Act. As regards the appellant's contention that these provisions were not applicable to an investment company, the AO has mentioned that the words 'investment company' have been omitted from the Explanation to Section 73 of the IT Act long before, i.e., from 1st April, 1988, onwards. For the reasons mentioned above and for the other detailed reasons mentioned by him in the assessment order, the AO treated the aforementioned loss of Rs. 2,47,97,775 as speculation loss and did not allow any set off of the same against other heads of income.
Before me, the Authorised Representative was not able to furnish any arguments to seriously contradict the averments made by the AO in the assessment order. I, therefore, find no reason to interfere with the action of the AO in this regard and dismiss the ground of appeal.
5. In the course of hearing of this appeal before us, the learned Counsel for the assessee has not been able to show any material or evidence supporting the assessee's case that the assessee is a company, principal business of which is of banking or of granting of loans and advances. It is also not the assessee's case that the assessee's gross total income consists mainly of income, which is chargeable under the heads 'Income on securities', 'Income from house property', 'Capital gains', and 'Income from other sources'. Considering the discussion above as well as the detailed reasons given by the AO as well as by the CIT(A) in their respective orders, we are of the considered view that the AO has rightly invoked the provisions of Explanation to Section 73 to the assessee's share trading activity, where the assessee had incurred a loss of Rs. 2,47,97,775. The ground raised by the assessee is, therefore, rejected.
7. The only issue involved in the grounds of appeal raised by the Revenue is with regard to the treatment of interest income of Rs. 26,27,472 earned on fully convertible debentures as a part of assessee's business activity of sale and purchase of shares. With regard to the issue as to whether the interest income of Rs. 27,67,347 earned on FCDs is to be treated as a part of assessee's activities of share trading business, the assessee submitted before the CIT(A) the following submissions: (i) A perusal of P&L a/c of the company reveals that it earned income by way of sale of shares, interest and dividend which formed part of the same business activity.
(ii) The assessed business profit of Rs. 32,69,150 in effect comprises of interest of Rs. 27,67,347 and balance of dividend of Rs. 5,01,803. Out of interest of Rs. 26,27,472 is on FCDs of Western India Industries Ltd. held as stock-in-trade which were subsequently converted into shares and sold during the year. The trading loss of Rs. 2,47,97,775 includes loss on sale of these shares.
(iii) The aforesaid interest and dividend income also arose from the same activity of buying and selling of shares and securities.
Consequently, if the share trading activity is considered as 'speculative business' the source of interest/dividend is also the same, i.e., share trading business. Therefore, the income from interest/dividend must also be considered as arising from 'speculative business' and set off against the trading loss.
(iv) As stated above, the interest of Rs. 26,27,472 is received on FCDs which were eventually converted into shares and sold resulting in loss. Thus loss forms part of the total trading loss of Rs. 2,47,97,775. There is thus, direct nexus between the receipt of interest and the trading loss since both have arisen in respect of same securities and in the course of carrying on the same activity.
The interest income and trading loss on these securities are, therefore, inseparable and part and parcel of the same activity and hence, must be set off against each other.
(v) The various decisions of the Supreme Court support the contention that even if dividend income is assessable under the head 'Other source', the dividend received on shares held as stock-in-trade is in reality business income and carried forward business loss can be set off against it.
Refer following commentary in Chaturvedi and Pithisaria, Vol. 2, p.
3255: For and from asst. yr. 1955-56, dividend income came to be assessed under the head 'Income from other sources', if shares are held by an assessee as part of his trading assets, dividend on those shares would still form part of the income from business and carried forward business loss can well be set off against such dividend income [Western States Trading Co. (P) Ltd. v. CIT , CTT v. Shrikishan Chandmal (1966) 60 ITR 303(MP), CIT v. Bhavnagar Trust Corporation (P) Ltd. , CIT v. R Dalmia .
In Brooke Bond & Co. Ltd. v. CTT , it has been held that carried forward business loss could not be set off against dividend income of the current accounting year unless such dividend income is of the nature of business income.
assessee-company, which carried on banking business, held Government securities as part of its trading assets. It was held that its unabsorbed loss from banking business was to be carried and set off against the entire income of future years from banking business including interests on securities.
(vi) Our contention is also supported by the decision of Calcutta High Court in the case of CTT v. Nirmal Kumar & Co.
. In this case, the assessee was a broker. He suffered loss from transactions in PDOs and also earned commission on those transactions. The AO did not set off the loss from PDO transactions (being speculative loss) against income from commission. The High Court held that since the commission income was earned out of same transactions in which loss was incurred, both the loss and income were of same character and must be set off against each other.
In our case, the loss is incurred from trading in shares and securities. The interest and dividend is earned on the same securities. Consequently, the ratio of decision of Calcutta High Court is squarely applicable in our case.
(vii) We, therefore, request your honour to kindly direct the AO to consider at least the interest income of Rs. 26,27,472 on FCDs as 'speculative income' and set off the speculative loss against them.
8. After considering the assessee's submission, the CIT(A) decided the issue as under: I have considered the arguments put forth. Since it is clear from the facts of the case that the interest of Rs. 26,27,472 was received on FCDs which were eventually converted into shares and sold resulting into loss, and the said loss forms a part of the total trading loss of Rs. 2,47,97,775, I agree with the Authorised Representative that there is direct nexus between the receipt of interest and trading loss. Therefore, in view of the various decisions quoted by the Authorised Representative, I hereby direct that the AO should consider the interest income of Rs. 26,27,472 on FCDs as speculative income and set off the speculative loss against the same. Since no such nexus has been proved by the appellant in respect of dividend, the dividend can not be considered as part of the speculative activity and therefore, not allowed to be set off against the speculative loss.
9. In the course of hearing before us. the Departmental stand is summarized in writing as under: The assessee-company is engaged in sale and purchase of shares and is duly covered by the provisions of Section 73 which are deemed provisions holding that any loss arising from sale/purchase of shares in respect of certain companies are to be treated as speculation losses. Such loss can be set off only against the profits arising from the speculation business.
In the case of the assessee, there were losses on account of sale and purchase of shares amounting to Rs. 2,47,97,775. The assessee has also earned interest on fully convertible debentures amounting to Rs. 26,27,472.
The income/loss arising from sale/purchase of shares can by no way treated at par with the interest income arising from fully convertible debentures. The learned CIT(A) has held that the interest income and trading loss on the securities are inseparable and, therefore, arising from same activity.
The analysis of the learned CIT(A) is not correct in the facts and circumstances of the case as well as in the light of legal position.
The interest income earned from fully convertible debenture is to be treated as income from other sources and cannot be treated at par with any other interest earning instruments such as FDRs/TDRs. The value of FDRs at the time of sale after grant of interest is not a mathematical result of the price before the interest and the amount of interest granted. Rather, there are underlined issue related to stock market mechanism which came into apply the value of debentures at the time of sale is more as a result of the fundamentals of the company and the temperament in overall economically environment, etc.
In a nutshell, although the interest income earned from FCD is a predetermined amount, the income/loss arising out of sale/purchase of share is not dependent or dependent on the interest alone and is the result of number of complex factors which are almost impossible to determine.
In view of such an unpredictable nature of share price on the stock market, the provisions of Section 73 specifically forbid the assessee from setting off loss, sale/ purchase of shares from other positive business incomes. Therefore, a distinction has been made in the character of the income arising from the interest on FCDs and income/loss arising from sale/purchase of FCDs and shares.
In view of the above discussion, the income earned from interest on FCDs cannot be set off against the losses incurred by the assessee on sale/purchase of shares in view of specific provisions of Section 73.
Reliance is placed on following cases in which speculation activity has been treated as separate from non-speculation income arising from the same business:CIT v. Pangal Vittal Nayak & Co. (P) Ltd. 10. On the other hand, the learned Counsel for the assessee submitted that the decision of the CIT(A) was correct both in law as well as in facts, inasmuch as the interest of Rs. 26,27,472 were received on fully convertible debentures, which were converted into shares of Western India Industries Ltd. and on sale of these shares there was loss of Rs. 58,59,875 and, therefore, net loss on sale of shares of Western India Industries Ltd. is to be computed after deducting the interest earned of Rs. 26,27,472. He further submitted that the proposition that income from interest or dividend from securities or shares held as stock-in-trade is part of share trading business is supported by the decisions of the Court in the following cases:Western States Trading Co. (P) Ltd. v. CIT 11. We have considered the rival contentions of both the parties and have gone through the orders of the authorities below.
12. On perusal of provisions of Explanation to Section 73 of the Act, it is seen that where any part of the business of a company other than excluded category of company consists in the purchase and sale of shares of other companies, such company shall, for the purposes of Section 73, 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 an admitted position that the business of purchase and sale of shares also consists of acquiring fully convertible debentures, which are ultimately converted into shares. It is also not in dispute that the fully convertible debentures were held by the present assessee as stock-in-trade. Therefore, the income by way of interest on fully convertible debentures is to be treated as income of business in nature as per principle laid down by the Hon'ble Supreme Court in the case of Western States Trading Co. (P) Ltd. v. CIT (supra), which was followed by the Hon'ble Madras High Court in the case of Ramnath Goenka (supra) holding that the amount of dividend would form part of the income from business of the assessee if shares were part of assessee's trading asset, even when the dividend received on those shares had been computed as being part of the assessee's income under the head 'Other sources'. In the case on hand, it is not in dispute that the assessee had received interest on FCDs which were held as stock-in-trade.
Interest earned on FCDs held as stock-in-trade retains the character of business income, inasmuch as interest has been directly derived from the assets held as stock-in-trade. Explanation to Section 73 is only applicable to the net loss derived by the assessee from the business consisting of sale and purchase of shares. Interest on FCD has been undoubtedly received by the assessee in the course of its carrying on business of sale and purchase of shares. Therefore, net loss from sale and purchase of shares is to be determined only after considering all income and losses derived by the assessee from the said activity for the purpose of Section 73 of the Act. In the light of the admitted position that interest amounting to Rs. 26,27,472 has been earned by the assessee on fully convertible debentures, which were ultimately converted into shares and were held as stock-in-trade, it would be incorrect to say that the said interest income is to be treated as income from other sources. Investment made by the assessee in the fully convertible debentures was with a view to acquire the shares on conversion. FCDs were held as stock-in-trade. Loss arising from the sale of shares convened from the FCDs has been treated as business loss by the AO himself. We, therefore, find no reason as to why interest earned on FCDs which were ultimately converted into shares is not to be treated as business income in nature. The Departmental contention that interest income earned from FCDs is to be treated as income from other sources is not correct and justified. The decisions relied on by the learned Departmental Representative are not applicable to the instant case, inasmuch as interest income earned by the assessee on FCDs is first to be adjusted against the loss arising from the sale of shares and then net amount of loss is to be treated as a loss arising from the business consisting of sale and purchase of shares and then the amount is to be treated as a speculative loss within the meaning of Explanation to Section 73 of the Act. In this view of the matter, we, therefore, uphold the order of the CIT(A) in directing the AO to consider interest income of Rs. 26,27,472 received on FCDs as income from business consisting of sale and purchase of shares and to treat the same as speculative income along with the speculative loss within the meaning of Explanation to Section 73 of the Act. This ground raised by the Revenue is, therefore, rejected.
13. In the result, the assessee's appeal as well as the Revenue's appeal are both dismissed.