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Himalaya Co. Ltd. Vs. Income-tax Officer. - Court Judgment

SooperKanoon Citation

Subject

Direct Taxation

Court

Kolkata High Court

Decided On

Case Number

IT APPEAL NO. 169 (CAL.) OF 1987 [ASSESSMENT YEAR 1979-80]

Reported in

[1989]30ITD139(Cal)

Appellant

Himalaya Co. Ltd.

Respondent

income-tax Officer.

Excerpt:


- .....year 1979-80 for which the previous year ended on 31-12-1978.2. the assessment of the assessee for the assessment year 1979-80 was completed under section 143(3) on 29-10-1981 computing the total income at rs. 96,189. out of the total income so computed, there was business income of rs. 65,079 and dividend income of rs. 31,360 after allowing the deduction under section 80m. in the course of the assessment, losses carried forward from earlier years were not set off inadvertently. the assessee filed petition under section 154 on 1-3-1985 claiming set off of the losses carried forward. the its on scrutiny of the assessment records of assessment years 1976-77 and 1977-78 found there were unabsorbed business losses if rs. 26,623 and rs. 87.752 respectively. since there was a mistake apparent from the record, he passed an order under section 154 on 16-7-1985 wherein he allowed set off of the business losses of earlier years to the extent of business income of the assessment year 1979-80 as under :-'business income as per order dated 29-10-1981rs. 65,079less : business loss of earlier years set off as follows :-assessment year 1976-7726,623assessment year 1977-7838,456 65,079 .....

Judgment:


ORDER

Per Shri A. Satyanarayana, Accountant Member - This appeal filed by the assessee is against the order of the CIT (A) dated 12-9-1986 for the assessment year 1979-80 for which the previous year ended on 31-12-1978.

2. The assessment of the assessee for the assessment year 1979-80 was completed under section 143(3) on 29-10-1981 computing the total income at Rs. 96,189. Out of the total income so computed, there was business income of Rs. 65,079 and dividend income of Rs. 31,360 after allowing the deduction under section 80M. In the course of the assessment, losses carried forward from earlier years were not set off inadvertently. The assessee filed petition under section 154 on 1-3-1985 claiming set off of the losses carried forward. The ITS on scrutiny of the assessment records of assessment years 1976-77 and 1977-78 found there were unabsorbed business losses if Rs. 26,623 and Rs. 87.752 respectively. Since there was a mistake apparent from the record, he passed an order under section 154 on 16-7-1985 wherein he allowed set off of the business losses of earlier years to the extent of business income of the assessment year 1979-80 as under :-

'Business income as per order dated 29-10-1981

Rs. 65,079

Less : Business loss of earlier years set off as follows :-

Assessment year 1976-77

26,623

Assessment year 1977-78

38,456

65,079

Nil'

The ITO taxed the net dividend income of Rs. 31,110 (after allowing deduction under section 80M at Rs. 47,040 and deduction under section 80G at Rs. 250) without setting off of any portion of the business losses of the earlier years against the said income. Aggrieved by the order under section 154 the assessee preferred an appeal to the CIT (A).

3. Before the CIT (A) the assessee contended that although dividend income was assessable separately under the head Other sources, yet since the assessee was a dealer in shares, the dividend income had to be treated as 'business income' for the purpose of set off of earlier years business losses. He relied on the cases of United Commercial Bank Ltd. v. CIT : [1957]32ITR688(SC) , CIT v. Cocanada Radhaswami Bank Ltd. : [1965]57ITR306(SC) and CIT v. Chugandas & Co. : [1965]55ITR17(SC) . The CIT (A) noted that the Supreme Court in Cocanada Radhaswami Bank Ltd.s case (supra) and Chugandas & Co.s case (supra) laid down that although the interest on securities is to be assessed separately under a specific head, year if the assets the income by way of interest from securities does not cease to be part of the income from business and hence liable to be set off against the losses of earlier years. He found that the assessee was dealing in shares and the shares which produced the dividend income were held by the assessee as its stock-in-trade. He was of the opinion that the dividend income should be considered as assessees business income for the purpose of being set off against the business losses of assessee brought forward from earlier years. However, he found a hitch in the said regard in view of the amendment brought to section 73 with effect from 1-4-1977. He held that the assessee-company could not be considered as an investment company as defined in section 109, since the major portion of its income was constituted by business income. He also held that it cannot be considered as a company the principal business of which was the business of banking or the granting of loans and advances. He was of the opinion that the assessee-company was squarely hit by the Explanation to section 73 of the Income-tax Act, 1961. He also noted that in the assessment year 1977-78 and the following assessment years the business losses of the assessee arose out of its business of purchase and sale of shares and hence in accordance with the said Explanation, the said business loss has to be considered as a business loss incurred in a speculative business. He also held that the dividend income of the assessment year 1979-80 could be considered as business income of non-speculative business and would be available for being set off against the brought forward losses of earlier years of a non-speculative business only. He, therefore, directed the ITO to examine the issue from the angle of Explanation to section 73 and to find out whether brought forward losses of any earlier year in respect of a non-speculative business were available for set off against the dividend income of the assessment year 1979-80. If any such brought forward loss of such non-speculative business of earlier years be available, the said loss was to be set off against the dividend income of 1979-80 assessment year to the extent available of such losses. If otherwise, dividend income has to be assessed separately and any brought forward loss of a speculative business of earlier years is still to be carried forward in accordance with the provisions of section 73. Dis-satisfied with the order of the CIT (A) the assessee preferred the present appeal before the Tribunal.

4. The assessees counsel filed a paper book of 8 pages and copies of assessees letters dated 25-2-1985 and 1-12-1981 addressed to the ITO. His arguments were to the following effect : The assessment was completed on 29-10-1981. The assessee by its letter dated 1-12-1981 requested the ITO to keep the disputed demand of Rs. 35,642 in abeyance till the disposal of the appeal. By letter dated 25-2-1985 filed in the Income-tax Office on 1-3-1985 the assessee requested for rectification of the apparent mistake of not giving set off of brought forward business losses of the earlier assessment years 1976-77 and 1977-78 of Rs. 46,028 and Rs. 50,161 respectively. The ITO passed an order under section 154 on 16-7-1985. In that order the ITO has allowed set off of business losses of assessment years 1976-77 and 1977-78 to the extent of business income of Rs. 65,079 only. He has not allowed set off against the income from dividends assessed as 'income from other sources.' According to the decision of the Supreme Court in Western States Trading Co. (P.) Ltd. : [1971]80ITR21(SC) if the 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 and the assessee would, therefore, be entitled to claim set off of loss from its business carried forward from earlier years against dividend income of the current year from the shares held as stock-in-trade of his business. In this case the CIT (A) had found that the assessee was dealing in shares and the shares which produced the dividend income were held by the assessee as its stock-in-trade. So the set off of earlier years business losses against dividend income of assessment year 1979-80 should have been allowed by the lower authorities. Further the CIT (A) committed a factual mistake in not treating the assessee as an investment company. Because according to the assessment order dated 29-10-1981 the business income was computed at Rs. 65,079 and the income from dividend (before allowing deduction under section 80M of Rs. 47,040) was computed at Rs. 78,400. According to section 109(ii) of the Income-tax Act, 1961 investment company means a company whose gross total income consist mainly of income which is chargeable under the heads, 'Interest on securities', 'Income from house property', 'Capital gains' and 'Income income means total income computed in accordance with the provisions of this Act before making any deduction under' Chapter VI-A As the dividend income of Rs. 78,400 is more than the business income of Rs. 65,079 the assessee is an investment company and so the Explanation to section 73 was not attracted in the assessees case. In fact in the assessment year 1978-79 the ITO had allowed set off of carried forward business losses of earlier years against business income and income from dividends. This can be seen from the copy of the assessment order dated 7-2-1985 placed at pages 1 and 2 of the paper book. The CIT (A) for the assessment year 1981-82 by his order dated 17-2-1984 directed the ITO to set off of business losses of earlier years brought forward against the dividend income of the assessment year 1981-82. This appellate order can be seen at page 7 and 8 the paper book filed.

5. The arguments of the Departmental Representative were to the following effect : If income from dividends is treated as business income, in that case, the assessee becomes non-investment company be out of income chargeable to tax under the heads 'interest on securities', 'income from house property', 'capital gains' and 'income from other sources.' The assessee gets benefits of set off of losses against the business income and income from other sources. The assessee cannot be treated as an investment company as Explanation to section 73 applied to the facts and circumstances of the case. The CIT (A) is fully justified in his order.

6. On reply the assessees counsel urged that the dividend income though chargeable under the head 'income from other sources' does not cease to be business income as laid down by the Supreme Court in : [1965]57ITR306(SC) .

7. We have considered the rival submissions and perused the papers filed before us and cases cited before us. The CIT (A) himself found as a matter of fact that the assessee was dealing in shares and the shares which produced dividend income were held by the assessee as its stock-in-trade. He also noted that in the two cases of the Supreme Court cited by the assessee in Chugandas & Co.s case (supra) and Cocanada Radhaswami Bank Ltd.s case (supra), it was held that although the interest on securities is to be assessed separately under a specific head yet if the assessee be a dealer in securities and the securities be held as trading assets the income by way of interest from securities does not cease to be part of the income from business and hence liable to be set off against business losses of earlier years. But the CIT (A) found stumbling block in his way in Explanation to section 73 of the Act which was introduced with effect from 1-4-1977 by the Taxation Laws (Amendment) Act, 1975. The CIT (A) fell into an error in applying the said Explanation to section 73 to the facts of the instant case. In the assessees case the business income of the assessee was computed by the ITO at Rs. 65,079. From the dividend income of Rs. 78,400, the ITO allowed deduction under section 80M to the extent of Rs. 47,040. He also gave deduction for Rs. 250 from the dividend income under section 80G. Thus the income from dividends charged under the head 'income from other sources' got reduced to Rs. 31,110. By comparing the business income from of Rs. 65,079 and dividend income assessed under the head 'other sources' of Rs. 31,110, he came to the conclusion that the major portion of assessees income was constituted by business income and so the assessee cannot be considered as an investment company as defined in section 109(ii). The CIT (A) should have compared the business income of Rs. 65,079 and the dividend income of Rs. 78,400 by virtue of section 109(iv). Section 109(iv) defines gross total income as total income computed in accordance with the provisions of the Act before making any deduction under Chapter VI-A. The provisions for giving deduction under section 80M is contained in Chapter VI-A of the Income-tax Act, 1961. So the CIT (A) should have compared the figures of Rs. 65,079 charged as business income and Rs. 78,400 being dividend income charged as 'income from other sources', 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.' If such a comparison is done the assessee had to be treated as an investment company because its gross total income of Rs. 96,189 consisted mainly of dividend income of Rs. 78,400 before deduction under section 80 M, assessed under the head 'income from other sources.' When the assessee company has to be treated as an investment company the Explanation to section 73 would not apply. In the circumstances we hold that the assessee is entitled to set off of its business losses of earlier years to the extent of Rs. 31,110 also.

8. In the result, the appeal is allowed.


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