Murli Packing and Trading (P.) Vs. Income-tax Officer - Court Judgment

Excerpt:
1. this set of two appeals relates to the assessment years 1981-82 and 1982-83. as both these appeals involve common grounds and contentions, they are disposed of by this combine order, for the sake of convenience.2. the assessee is a private limited company which carries on business as a dealer in paper-board and packing. it also derives income from commission on hiring of chlorine cylinder and is a dealer in shares as well. the assessee initially claimed before the ito speculation loss of rs. 12,043 for the assessment year 1981-82 and rs. 10,743 for the assessment year 1982-83. at the time of hearing, it was submitted on behalf of the assessee that the loss in shares was not a speculation loss but a loss as a dealer in shares. in this view of the matter, the ito adjusted the loss in shares against income from dividend and determined the gross total income for both the years under appeal at a loss of rs. 9,551 and rs. 5,732, respectively. as a result, he negatived the claim for deduction under section 80m of the income-tax act, 1961 ('the act').3. being aggrieved, the assessee carried the matter in appeal before the commissioner (appeals). it was contended that in course of assessment proceedings provisions of section 73 read with explanation of the act thereto was not considered by the ito. according to the learned representative of the assessee, under the said explanation except in case of an investment company as defined in clause (ii) of section 109 of the act or a banking company the loss arising in purchase and sale of shares to any company shall be deemed to be arising out of speculation business to the extent to which the business consists of purchase and sale of such shares. thus, it was contended that so far as 'the loss arising in purchase and sale of shares was concerned, by fiction enacted under section 73 read with explanation thereto such loss has to be treated as speculation loss. therefore, the said loss cannot be set off against other income of the assessee, namely, dividend in the present case. such loss should be carried forward and set off against gain from speculation business. as a consequence, the assessee was entitled to relief under section 80m in respect of its dividend income. the commissioner (appeals), however, held that the assessee was an investment company and as such the loss on sale of shares could not be considered as a speculation loss within the meaning of explanation to section 73. he, thus, upheld the view of the ito.4. being aggrieved, the assessee has come up in appeal before us. shri shah reiterated the same contentions as were placed before the commissioner (appeals). the learned departmental representative, on the other hand, supported the order of the commissioner (appeals).4.1 we have considered the rival submissions. the controversy falls in a very narrow compass and revolves round the true meaning of explanation to section 73. the said explanation reads as follows : where any part of the business of a company (other than an investment company, as defined in clause (ii) of section 109, 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.a plain reading of the above explanation would show that in case of a company where any part of the business carried on by it consists in sale and purchase of shares of other companies, such company, for the purpose of section 73, shall be deemed to be carrying on a speculation business to the extent to which the business consists of purchase and sale of such shares. thus, by a fiction enacted in the explanation, a company which is a dealer in shares suffers any loss on purchase and sale of shares, such loss shall be deemed to be loss arising out of speculation business. now by virtue of explanation 2 to section 28 of the act speculation business shall be deemed to be distinct and separate from any other business. thus, once by a fiction enacted under the said explanation to section 73, a business in purchase and sale of shares is notionally treated as a speculation business it has to be treated as a distinct and separate business. the consequence is quite clear. by virtue of section 73, any loss in respect of speculation business carried on by the assessee shall not be set off except against profits and gains, if any, arising from speculation business. thus, where a company incurs a loss in speculation simpliciter or loss in purchase and sale of shares, the loss falling in either category is to be treated as a speculation loss for the purpose of set off and carried forward as envisaged under section 73.5. however, there is an exception which is inbuilt in the said explanation. the said explanation is not applicable to an investment company as defined in clause (ii) of section 109 or a company the principal business of which is the business of banking or the granting of loans and advances.6. it is, therefore, clear to us that when any company carries on a business in purchase and sale of shares of other companies, the loss arising therefrom by fiction is to be treated as a speculation loss.however, such a company can escape the rigours of the said explanation by showing that it is cither an investment company or a banking company. thus, the burden is on the assessee to claim exemption from the operation of the said explanation. unfortunately, this aspect of the matter has escaped attention of the ito and the commissioner (appeals) with respect has not appreciated the purpose and the purport of the said explanation. it is not for the revenue authorities to apply the provisions of section 109(ii) and hold that the assessee is an investment company and thereby the loss incurred by it cannot be treated as a speculation loss. it is for the assessee for whose benefit the exception is engrafted to establish its claim in order to avoid applicability of the explanation. on facts of the present case, the following position clearly emerges --firstly, the assessee is a company which is dealing in shares of other companies, secondly, it has suffered a loss on purchase and sale of shares of other companies for both the years under appeal, thirdly, such loss as incurred by it by fiction enacted under explanation to section 73 has to be treated as a loss arising out of speculation business and lastly, the assessee is neither an investment company nor a banking company ; because no such claim is made by the assessee-company. as a result, the loss incurred by it as aforesaid is required to be carried forward in accordance with the provisions of section 73. this would mean that the income from dividend cannot be adjusted or set off against the loss in purchase and sale of shares. the dividend income which would, therefore, result in positive figure would form part of the gross total income exigible to relief under section 80m for both the years. we, accordingly, direct the ito to allow the said relief to the assessee-company in accordance with law.

Judgment:
1. This set of two appeals relates to the assessment years 1981-82 and 1982-83. As both these appeals involve common grounds and contentions, They are disposed of by this combine order, for the sake of convenience.

2. The assessee is a private limited company which carries on business as a dealer in paper-board and packing. It also derives income from commission on hiring of chlorine cylinder and is a dealer in shares as well. The assessee initially claimed before the ITO speculation loss of Rs. 12,043 for the assessment year 1981-82 and Rs. 10,743 for the assessment year 1982-83. At the time of hearing, it was submitted on behalf of the assessee that the loss in shares was not a speculation loss but a loss as a dealer in shares. In this view of the matter, the ITO adjusted the loss in shares against income from dividend and determined the gross total income for both the years under appeal at a loss of Rs. 9,551 and Rs. 5,732, respectively. As a result, he negatived the claim for deduction under Section 80M of the Income-tax Act, 1961 ('the Act').

3. Being aggrieved, the assessee carried the matter in appeal before the Commissioner (Appeals). It was contended that in course of assessment proceedings provisions of Section 73 read with Explanation of the Act thereto was not considered by the ITO. According to the learned representative of the assessee, under the said Explanation except in case of an investment company as defined in clause (ii) of section 109 of the Act or a banking company the loss arising in purchase and sale of shares to any company shall be deemed to be arising out of speculation business to the extent to which the business consists of purchase and sale of such shares. Thus, it was contended that so far as 'the loss arising in purchase and sale of shares was concerned, by fiction enacted under Section 73 read with Explanation thereto such loss has to be treated as speculation loss. Therefore, the said loss cannot be set off against other income of the assessee, namely, dividend in the present case. Such loss should be carried forward and set off against gain from speculation business. As a consequence, the assessee was entitled to relief under Section 80M in respect of its dividend income. The Commissioner (Appeals), however, held that the assessee was an investment company and as such the loss on sale of shares could not be considered as a speculation loss within the meaning of Explanation to Section 73. He, thus, upheld the view of the ITO.4. Being aggrieved, the assessee has come up in appeal before us. Shri Shah reiterated the same contentions as were placed before the Commissioner (Appeals). The learned departmental representative, on the other hand, supported the order of the Commissioner (Appeals).

4.1 We have considered the rival submissions. The controversy falls in a very narrow compass and revolves round the true meaning of Explanation to Section 73. The said Explanation reads as follows : Where any part of the business of a company (other than an investment company, as defined in clause (ii) of Section 109, 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.

A plain reading of the above Explanation would show that in case of a company where any part of the business carried on by it consists in sale and purchase of shares of other companies, such company, for the purpose of Section 73, shall be deemed to be carrying on a speculation business to the extent to which the business consists of purchase and sale of such shares. Thus, by a fiction enacted in the Explanation, a company which is a dealer in shares suffers any loss on purchase and sale of shares, such loss shall be deemed to be loss arising out of speculation business. Now by virtue of Explanation 2 to Section 28 of the Act speculation business shall be deemed to be distinct and separate from any other business. Thus, once by a fiction enacted under the said Explanation to Section 73, a business in purchase and sale of shares is notionally treated as a speculation business it has to be treated as a distinct and separate business. The consequence is quite clear. By virtue of Section 73, any loss in respect of speculation business carried on by the assessee shall not be set off except against profits and gains, if any, arising from speculation business. Thus, where a company incurs a loss in speculation simpliciter or loss in purchase and sale of shares, the loss falling in either category is to be treated as a speculation loss for the purpose of set off and carried forward as envisaged under Section 73.

5. However, there is an exception which is inbuilt in the said Explanation. The said Explanation is not applicable to an investment company as defined in clause (ii) of Section 109 or a company the principal business of which is the business of banking or the granting of loans and advances.

6. It is, therefore, clear to us that when any company carries on a business in purchase and sale of shares of other companies, the loss arising therefrom by fiction is to be treated as a speculation loss.

However, such a company can escape the rigours of the said Explanation by showing that it is cither an investment company or a banking company. Thus, the burden is on the assessee to claim exemption from the operation of the said Explanation. Unfortunately, this aspect of the matter has escaped attention of the ITO and the Commissioner (Appeals) with respect has not appreciated the purpose and the purport of the said Explanation. It is not for the revenue authorities to apply the provisions of section 109(ii) and hold that the assessee is an investment company and thereby the loss incurred by it cannot be treated as a speculation loss. It is for the assessee for whose benefit the exception is engrafted to establish its claim in order to avoid applicability of the Explanation. On facts of the present case, the following position clearly emerges --firstly, the assessee is a company which is dealing in shares of other companies, secondly, it has suffered a loss on purchase and sale of shares of other companies for both the years under appeal, thirdly, such loss as incurred by it by fiction enacted under Explanation to Section 73 has to be treated as a loss arising out of speculation business and lastly, the assessee is neither an investment company nor a banking company ; because no such claim is made by the assessee-company. As a result, the loss incurred by it as aforesaid is required to be carried forward in accordance with the provisions of Section 73. This would mean that the income from dividend cannot be adjusted or set off against the loss in purchase and sale of shares. The dividend income which would, therefore, result in positive figure would form part of the gross total income exigible to relief under Section 80M for both the years. We, accordingly, direct the ITO to allow the said relief to the assessee-company in accordance with law.