| SooperKanoon Citation | sooperkanoon.com/74945 |
| Court | Income Tax Appellate Tribunal ITAT Delhi |
| Decided On | May-12-2006 |
| Judge | V Gandhi, K Singhal, S Tiwari |
| Reported in | (2006)101ITD129(Delhi) |
| Appellant | Deputy Commissioner of Income Tax |
| Respondent | Jindal Exports Ltd. |
2. First ground in this appeal is directed against the learned CIT (Appeals) not proportionately attributing the interest towards earning of dividend and thereby allowing full claim of deduction under Section 80M as claimed by the assessee. Facts of the case leading to this ground of appeal briefly are that the assessee received during the year dividend income of Rs. 1,37,75,850 and claimed deduction under Section 80M of Rs. 1,31,82,228. According to the learned Assessing Officer, the proportionate amount of bank charges and interest as allocable to the earning of dividend was required to be reduced in accordance with the provisions of Section 57(1) from the dividend income declared by the assessee and deduction under Section 80M could be allowed only in respect of net amount. During the year the assessee has claimed bank charges and interest totalling at Rs. 35,89,515. Out of these amounts the learned Assessing Officer proportionately attributed a sum of Rs. 6,60,295 to the dividend income and accordingly held that the dividend income eligible for deduction under Section 80M was net amount of Rs. 1,31,15,555 only. This resulted into short deduction of 80M as compared to the amount claimed by the assessee to the extent of Rs. 66,673.
3. During the course of hearing before the learned CIT (Appeals), the assessee argued that the assessee had paid interest on packing credit loan availed by the assessee for the purpose ol export. There was no nexus whatsoever of this loan amount with the investment in shares on which dividend income had been earned by the assessee. Considering this fact the learned CIT (Appeals) held that allocation made by the Assessing Officer was not correct. He, therefore, directed the Assessing Officer to allow the assessee full deduction under Section 80M as claimed by the assessee. Aggrieved revenue is in appeal before us.
4. During the course of hearing before us the learned DR disputed the finding of the learned CIT (Appeals) that entire interest and bank charges aggregating to Rs. 35,89,5 15 pertained to packing credit loan taken by the assessee. He referred to the ledger account of the assessee in relation to bank charges and pointed out that certain amounts paid to Galaxy International were included in the bank charges.
The learned DR argued that there was no evidence that the entire interest payment related to exports only. The learned AR of the assessee insisted that the learned CIT (Appeals) had mentioned correct facts.
5. On consideration of the matter we hold that while it is true that deduction under Section 80M is admissible to an assessee on net dividend only, i.e. after reducing from gross dividend receipt of expenditure attributable to dividend income, the expenditure to be reduced from the amount of dividend income has to be worked out on actual basis only. It is only where on the facts of a particular case it may not be practicable to bifurcate the expenditure attributable to dividend income and other income that it may be possible to resort to an estimate. From the details of interest paid as given by the assessee at page 28 of the paper book, it is seen that interest was either in respect of packing credit loan or in respect of foreign bills. Thus, the interest amounting to Rs. 13,70,902 did not have any nexus with the shares purchased by the assessee-company. As to the bank charges and remaining interest paid the learned DR has raised a question in relation to payments to some parties other than bank, tor example, Galaxy International. We, therefore, restore the issue of bank charges and remaining interest to the file of the learned Assessing Officer with the direction that he can reduce from the dividend income only such bank charges and remaining interest as may be found to be directly relatable to the acquisition of shares in question by the assessee.
6. Second ground in this appeal relates to the finding of the learned CIT (Appeals) that Explanation to Section 73 does not apply in the case of the assessee and, therefore, the loss arisen out of share transaction should be treated as short-term capital loss and not as speculation loss. Facts of the case leading to this ground of appeal briefly arc that the assessee disclosed certain loss on sale of TISCO shares. The learned Assessing Officer asked the assessee to show cause as to why the loss should not be treated as speculation loss. From the particulars furnished by the assessee the Assessing Officer noticed that the assessee had purchased TLSCO shares on 2-2-1996 and sold on 5-2-1996. The entire transaction of sale and purchase had taken place within the same settlement period that indicated that actual delivery of the shares had not taken place. The assessee also did not furnish any documents regarding the actual delivery of the shares, such as distinctive numbers of shares received and sold. The learned Assessing Officer, therefore, asked the assessee as to why the loss could not be treated in the nature of speculation loss and not allowed to be set off against normal long-term capital gain of the asscssce. The learned Assessing Officer also revoked Explanation to Section 73. According to him the assessee was neither doing business of banking or granting loans and advances. Gross income of the assessee was also not mainly on account of heads of income other than "Profits and gains of business or profession". He, therefore, held that loss on sale of shares amounting to Rs. 4,90,500 claimed by the assessee was not to be set off against long-term capital gain disclosed by the assessee. He, therefore, ignored the loss and assessed long-term capital gain of Rs. 4,90,110 in full without set off any capital loss. While doing so the learned Assessing Officer rejected the reply of the assessee dated 30-3-1999 that provisions of Section 73 were not applicable because the assessee had not earned any business income from purchase and sale of shares, physical delivery of shares had been taken and the shares were purchased as investment. According to the learned Assessing Officer the assessee had purchased shares and sold them within a very short period of time and, therefore, the assessee was not an investor in shares. He was actually a trader in shares. He also held the view that for the purpose of Section 73 if there was purchase and sale of shares, Explanation applied and it was not necessary that the business as such should be done in relation to the shares. The only requirement was that the gross total income of the assessee should consist mainly of business income.
7. During the course of hearing before the learned CIT (Appeals) the assessee submitted that it had made investment in shares of TISCO Ltd. The sale had been effected when it was noticed by the assessee that there was undue depreciation in the price of TISCO shares within a short period. The assessee, therefore, took a wise decision and sold the shares. Subsequently the shares fell down by more than 50%. The assessee further argued that as it was not doing any business in shares Explanation to Section 73 was not applicable. The learned CIT (Appeals) accepted the contention of the assessee that it was not a trader in shares. The assessee was not doing any business of banking or advancing of loans either. Merely because there was a transaction in shares resulting into loss the assessee could not have been deemed to have carried out any business in shares. He, therefore, held that the learned Assessing Officer had wrongly applied the provisions of Section 73. He directed the Assessing Officer to revise the assessee's income chargeable to tax accordingly.
8. During the course of hearing before us the learned DR argued that the requirement of Explanation to Section 73 was that the assessee should have derived income mainly from business. It was not the requirement that the assessee should be trader in shares. The learned CIT (Appeals), therefore, wrongly construed the provisions of Explanation to Section 73. Alternatively, the learned DR argued that the facts showed that the assessee was trading in shares. Most of its purchases and sales were within a very short span of time. The learned A.R. of the assessee argued that these were isolated transactions and it was not part of regular business income of the assessee. The assessee had claimed deduction of short-term capital loss against long-term capital gain and that was clearly permissible. In support of his contention the learned A.R. of the assessee has placed reliance on the judgments in the case of Saroj Kumar Mazumdar v. CIT ; CIT v. S.S. Thiagarajan and G.argued that the burden to prove that a particular transaction was in the ordinary course of business lay upon the revenue. For that purpose he relied upon the judgments in 37 ITR 633 (SC) (sic) and CIT v. V.A.Trivedi .
9. We have carefully considered the rival submissions. The revenue has treated the loss arising to the assessee on sale of shares of TISCO Ltd. as speculation loss both in terms of the provisions of Section 43(5) as well as Explanation to Section 73. It has been argued by the Assessing Officer that the shares in question were purchased on 22-1-1996 and sold on 3-2-1996. Thus, the transactions were squared up within the same settlement period. On consideration we do not see much force in this argument. According to the learned A.R. of the assessee during the course of assessment proceedings it had furnished complete details of distinctive numbers of the shares purchased by the assessee.
That showed that the physical delivery of the shares had been taken. As to the sale within short period the learned AR argued that it was done because the market was falling. In our view from the circumstance alone that the shares were sold within a short span of time, it cannot be inferred that the assessee was speculating. Secondly, the learned Assessing Officer has applied Explanation to Section 73. Here it is not in dispute that the main income earned by the assessee was income from business. The defence of the assessee is that the shares were not purchased and sold as part of the business of the assessee. Shares in question were purchased as investment and sold as such. Explanation to Section 73 would apply only if the assessee's business consisted of purchase and sale of shares and not otherwise. The learned AR of the assessee relied upon a number of judgments to support the view that unless there is a systematic activity, it cannot be presumed that there was business activity. We find the various case laws relied upon by the learned AR of the assessee, all pertained to individuals. The argument of the assessee is that he is not a trader in shares. The shares of TISCO Ltd. were not purchased as stock-in-trade but investment.
Explanation to Section 73 would apply only where the shares are purchased as stock-in-trade and it would not apply where shares are purchased by a company as an investment. On a careful consideration we are unable to accept this proposition. Provisions of Explanation state, "where any part of the business of a company....". The expression employed is 'business of a company' and not 'trade of a company'. The expression 'business' has been defined for the purposes of Income-tax Act under Section 2(13) in the following manner :- business' includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture; Apparently the term "business" is of wider import than the term "trade". "Business" includes trade and much more. In the case of Mazagaon Dock Ltd. v. CIT , Hon'ble Supreme Court have held that the term "business" in a fiscal statute, must be construed in a broad rather than a restricted sense. In the case of Dr. P.Vadamalayan v. CIT , Hon'ble Madias High Court held that the definition being inclusive and not exhaustive, is indicative of extension and expansion and not restriction. It is settled legal position that business is not synonymous with trade. Lord Hallsbury have explained this aspect in the following words :- business is a wider term than, and not synonymous with trade; and means practically anything which is an occupation as distinguished from a pleasure" Hallsbury's Law of England 3rd edition, volume 38, page 10.
Anything which occupies the time, attention and labour of a person with the object of making profit and not for sport and pleasure is business - State of Andhra Pradesh v. H. Abdul Bakhi & Bros. ; Khoday Distilleries v. State of Karnataka [1955] 1 SCC 574; CIT v.Upasana Hospital ; CIT v. M.P. Bazaz provisions of Explanation to Section 73 are not restrictive to the transactions of purchase and sale of shares in a trading activity. It is important to bear in mind that the Explanation employs the expression "any part". Thus, even if the purchase and sale of shares constitute a minuscule activity, it would be hit by the provisions of Explanation to Section 73A. This aspect has been considered by Hon'ble Calcutta High Court in CIT v. Arvind Investments Ltd. . The word "any" should be given a meaning as wide as possible in the context. We, therefore, hold that in the case of a company where loss is incurred on purchase and sale of shares of another company, it would ordinarily fall to be caught in the mischief of Explanation to Section 73. It would hardly be material whether the shares were purchased on trading account or as investment of capital.
In either case they represent a business transaction. Where a businessman buys stock-in-trade, it constitutes a business expenditure.
Where a businessman buys a capital asset, say, plant and machinery, that too constitutes business expenditure only. Both are paid in the same currency and represent conversion of money into commodity.
Similarly, whether any stock-in-trade is sold at profit or capital asset is sold at profit, in both cases there is business profit only.
The distinction between a transaction on revenue account and a transaction on capital account is of import only for the purpose of a periodical measurement of business income. An expenditure which ensures for more than one accounting period has to be suitably adjusted. A similar suitable treatment is required to be given where a business receipt is result of transaction spawning several accounting years but, essentially in either case both arc business transactions only. It would, therefore, be an error to exclude an investment as being a non-business transaction. There may, however, be exceptional cases where a company purchases shares of another company entirely for the purposes of earning dividends with no profit consideration at all. In such exceptional cases, it may be argued that the transaction did not represent any part of the business of the company. On the facts and circumstances of the assessee's case it is not possible to say that the transactions are non-business transactions. It is not the case of the assessee that separate funds were invested in purchase and sale of shares. The Annual Report, Notes on Accounts, Minutes of meeting of Board of Directors, Resolution of the Board of Directors there is nothing brought to our notice to support the contention that the shares were non-business assets of the assessee. The assessee's transactions do not cease to be a business transaction for the reason only that the assessee purchased the shares as an investment even if we accept the contention of the assessee that the sale within a short span of time was due to unforeseen circumstances. In this view of the matter, we are of the view that provisions of Explanation to Section 73 have been rightly applied by the Assessing Officer. The learned CIT (Appeals) erred in taking the case of the assessee out of the Explanation to Section 73 for the reason only that the assessee was not trading in shares.
1. After going through the proposed order and having discussion with my learned Brother, I have not been to persuade myself to agree with the conclusion arrived at in para 9 of the proposed order for the reasons given hereunder: 2. The question for our consideration is whether on facts of the case, the provisions of Explanation to Section 73 of the Income-tax Act, 1961 ('Act') can be applied and consequently the loss arising on the sale of shares can be held to be speculation loss not to be set off against non-speculative income. Facts of the case have been given in para 6 of the proposed order and, therefore, need to be repeated. However relevant facts in short would be referred to, if necessary. It is the stand of the assessee from inception that it is not dealer in shares and the purchase of TISCO shares was by way of investment. CIT(A) has accepted this contention of assessee. No dispute has been raised to this finding. So the controversy before the Tribunal is whether provisions of the Explanation to Section 73 can be applied to a case where a company carrying on business in respect of items other than shares, purchases shares by way of investment and incurs loss on sale of such shares. In my humble opinion, Explanation lo Section 73 cannot be applied to such a situation. The aforesaid Explanation applies where any part of the business of a company consists in purchase and sale of shares of other companies. That means, purchase and sale of shares must be part of the business activities of assessee-company. A company can be said to carry on the business partly in shares only where shares are purchased as stock-in-trade and not otherwise. If shares are purchased by a company by way of investment, then loss arising from the sale of such shares, in my opinion, would be a capital loss and can never be considered as business loss. There cannot be any dispute that the scope of the word "business" is much wider than the word "trade" but where the Legislature says about carrying on business in purchase and sale of shares, it only means trading in shares. There is no other way in carrying on business of purchase and sale of shares as stock-in-trade.
No doubt, even a solitary transaction may be considered as business provided it is by way of adventure in the nature of trade which is not the case of revenue. Accordingly, it is not possible for me to agree to the proposition canvassed in the proposed order that purchase and sale of shares by a company would fall within the ambit of Explanation to Section 73 irrespective of the fact whether such shares are purchased as a trader or as an investor. Purchase of shares as an investor, in my considered opinion, is completely outside the ambit of the Explanation to Section 73 of the Act. Hence, it is held that loss on sale of shares was not speculative loss and consequently has to be assessed as short-term capital loss.
The aforesaid appeal filed by the revenue has been heard by us in ITAT, Delhi Bench "G", Delhi. As after consideration of the appeal there has arisen a difference in opinion between us, we hereby state the point on which we differ, for further hearing by one or more of the other Members of the Tribunal :- Whether, on the facts and in the circumstances of the case, the loss arising to the assessee amounting to Rs. 4,90,500 is to be treated as speculation loss within the meaning of Explanation to Section 73 of the Act, or to be treated as loss arising on transfer of a capital asset as claimed by the assessee? 1. On account of difference between Hon'ble Members of 'G' Bench, New Delhi, the following question has been referred to me under Section 255(4) of the income-tax Act: Whether, on the facts and in the circumstances of the case, the loss arising to the assessee amounting to Rs. 4,90,500 is to be treated as speculation loss within the meaning of Explanation to Section 73 of the Act, or to be treated as loss arising on transfer of a capital asset as claimed by the assessee 2. The facts of the case are that assessee-company, in the relevant period, filed return declaring Nil income on 30-11-1996. On scrutiny of accounts, the Assessing Officer found that assessee had claimed short-term capital loss of Rs. 4,90,500 on sale of shares of TISCO. The Assessing Officer wanted to apply Explanation to Section 73 of Income-tax Act and treat this loss as loss of speculative business adjustable only against profit from speculative business. He accordingly asked the assessee to show cause why above Explanation to Section 73 be not applied in this case.
The assessee, vide reply dated 30-3-1999, stated that shares were purchased on 22-1-1996 and on 3-2-1996, and transactions were not squared up through settlement. The assessee filed copies of contract notes and showed that distinct number of shares were purchased and sold. Shares were held as an investment and, therefore, only short-term capital gain was assessable on sale of shares. The assessee relied upon decision of Supreme Court in the case of G. Venkataswami Naidu & Co.v.CIT [1959] 35 ITR 594. The Assessing Officer rejected this contention of the assessee and held that Explanation to Section 73 was applicable in this case and loss of Rs. 4,90,500 was treated as speculative loss directed to be carried forward and not adjusted against other income.
3. The assessee challenged above action of the Assessing Officer in appeal before the CIT (Appeals) who after considering facts and circumstances of the case, directed the Assessing Officer to allow adjustment of loss to the assessee, with the following directions: I have considered the arguments raised on behalf of the appellant.
The Assessing Officer applied Section 73 which relates to cases where the assessee is not an investment company. In case of non-investment companies, if there is a business carried on of banking or the granting of loans and advances and there is purchase and sale of shares, loss will be deemed as from speculation. The appellant has not done any such business. The Assessing Officer has tried to hold that the sale of shares was an adventure in the nature of trade but it is only a presumption in the case of the appellant.
The appellant has not been doing any business of banking or advancing of loans. Merely on account of the fact that there is a transaction which has resulted in loss, it cannot be termed as business carried on by the appellant. The finding of the Assessing Officer that Section 73 was applicable in the case of the appellant is not based on correct appreciation of facts and law. The rejection of set off of loss which was short-term capital loss by the Assessing Officer was not correct. The Assessing Officer is directed to allow relief admissible in this regard.
4. The revenue being aggrieved has brought the issue in appeal before the Appellate Tribunal. The learned D.R. argued that for application of Explanation to Section 73, only requirement was that assessee should have dividend income from business. It was not necessary that assessee should be trader in shares. The learned CIT (Appeals) wrongly construed provisions of Explanation to Section 73. The learned Counsel further argued that fact show that assessee was not trading in shares.
Assessee-company was purchasing and selling shares within short span of time.
5. After considering submissions of both the parties, learned Accountant Member, who proposed the order for the Bench, held that loss claimed by the assessee was loss from speculative business in terms of Explanation to Section 73 of Income-tax Act and was, therefore, not adjustable against other income. The learned Judicial Member did not agree with this view and held that the loss was a capital loss and Explanation to Section 73 of Income-tax Act was not applicable in this case. He held that loss on sale of shares was to be assessed as short-term capital loss.
6. The learned Accountant Member further noted that before the learned CIT (Appeals), the assessee had submitted that assessee had made investment in shares of TISCO Ltd. The sale was effected as it was noted that there was undue depreciation in price of TISCO shares within a short period. The assessee, therefore, took wise decision and sold shares. If assessee had not sold the shares, it would have suffered much greater loss. The assessee further argued that it was not doing any business in shares and, therefore, application of Explanation to Section 73 of the Income-tax Act was not attracted. The shares were not held as stock as accepted by the learned CIT (Appeals). Merely because there was loss in sale of shares, it could not follow that assessee must be deemed to have carried on business in shares. The assessee had claimed deduction of short-term capital loss against short-term capital gain which was permissible. The assessee in support of its claim had relied upon following decision: 7. The learned Accountant Member in his proposed order has further observed that merely because shares were sold within short time of their purchase, it could not be inferred that loss on shares was speculative. He also accepted that shares of TISCO were purchased by the assessee as an "investment" and sold as such. All the same, the question was whether Explanation to Section 73 was applicable in the case or not. The learned Accountant Member further observed that decisions cited by the asscssee were not applicable as they all pertained to dealings of individual. Here in the case of company carrying out business activity as its main source of income, the normal presumption would be that all transactions carried on by an assessee were part of business carried on by the assessee. Therefore, transaction carried on by the assessee would not cease to be business transaction merely because the assessee purchased these shares as an investment and sold them within a short span of time due to unforeseen circumstances. On the facts of the case, transaction of sale purchase was business transaction. Although shares were not held by the assessee as trading asset, the shares were business asset. The learned Accountant Member drew an adverse inference against the assessee for not filing annual report, notes on account, minutes of meeting of Board, Resolution of Board of Directors etc. to support the contention that shares were non-business assets. The learned Accountant Member, in the proposed order concluded as under: We, therefore, hold that the purchase and sale of the shares in question was in the course of the business of the assessee, even if the income or as the case may be loss, on sale of these shares was chargeable to tax under the head "Capital gains". In this view of the matter we are of the view that provisions of Explanation to Section 73 have been rightly applied by the Assessing Officer. The learned CIT(A) erred in taking the case of the assessee out of the Explanation to Section 73 for the reason only that the assessee was not trading in shares. We, therefore, reverse the order of the learned CIT (Appeals) on this point and restore the treatment given in the assessment order by the learned Assessing Officer.
8. The learned Judicial Member did not agree with the proposed order of the learned Accountant Member. He was of the view that loss arising to the assessee on sale of shares was short-term capital loss. The conclusion of learned Judicial Member is rested on the following observations: 2. The question for our consideration is whether on facts of the case, the provisions of Explanation to Section 73 of the Income-tax Act, 1961 (Act) can be applied and consequently the loss arising on the sale of shares can be held to be speculation loss not to be set-off against non-speculative income. Facts of the case have been given in Para-6 of the proposed order and, therefore, need to be repeated. However, relevant facts in short would be referred to, if necessary. It is the stand of the assessee from inception that it is not dealer in shares and the purchase of TISCO shares was by way of investment. CIT(A) has accepted this contention of assessee. No dispute has been raised to this finding. So the controversy before the Tribunal is whether provisions of the Explanation to Section 73 can be applied to a case where a company carrying on business in respect of items other than shares, purchases shares by way of investment and incurs loss on sale of such shares. In my humble opinion, Explanation to Section 73 cannot be applied to such a situation. The aforesaid Explanation applies where any part of the business of a company consists in purchase and sale of shares of other companies. That means, purchase and sale of shares must be part of the business activities of assessee-company. A company can be said to carry on the business partly in shares only where shares are purchased as stock-in-trade and not otherwise. Tf shares are purchased by a company by way of investment, then loss arising from the sale of such shares, in my opinion, would be a capital loss and can never be considered as business loss. There cannot be any dispute that the scope of the word 'business' is much wider than the word 'trade' but where the Legislature says about carrying on business in purchase and sale of shares, it only means trading in shares. There is no other way in carrying on business of purchase and sale of shares as stock-in-trade. No doubt, even a solitary transaction may be considered as business provided it is by way of adventure in the nature of trade which is not the case of revenue.
Accordingly, it is not possible for me to agree to the proposition canvassed in the proposed order that purchase and sale of shares by a company would fall within the ambit of Explanation to Section 73 irrespective of the fact whether such shares are purchased as a trader or as an investor. Purchase of shares as an investor, in my considered opinion, is completely outside the ambit of the Explanation to Section 73 of the Act. Hence it is held that loss on sale of shares was not speculative loss and consequently has to be assessed as short-term capital loss.
9. On account of above difference, the matter has been referred to me.
The case was fixed for hearing and I have heard Smt. Shikha Darbari, Sr. D.R. for the revenue and Shri Ved Jain for the assessee. Learned D.R. relied upon decision of the learned Accountant Member. She pointed out that provisions of Section 73 are distinct and separate from provisions of Section 43(5) of the Income-tax Act. Provisions of Explanation to Section 73 do not make any distinction between transaction where delivery of the script is taken or contract is settled without taking delivery. All companies purchasing or selling shares, other than investment companies, and three other companies falling in exclusionary portion shown in bracket in the Explanation, are covered by the Explanation. The learned D.R. relied upon decision of Hon'ble Calcutta High Court in the case of CIT v. Arvind Investments Ltd. . She further relied upon decision of Tribunal of Delhi Benches in the case of M.D.S. Securities Ltd. [IT Appeal No. 138 (Delhi) of 2001] wherein it has been observed as under: We have carefully considered the rival submissions. We do not sec any force in the contention of the assessee that those transactions where delivery of scripts was not taken alone, can be considered to be speculation business and that too subject to various exceptions provided under the provisions of Section 43(5). The provisions of Section 73 are distinct and separate from the provisions of Section 43(5) and are intended to apply in the cases where loss is claimed by a company. The provisions of Explanation to Section 73 do not make any distinction between transactions where delivery of scripts is taken and the transactions where delivery is not taken. While the assessee is assessed in the status of the company other than investment company and its main income comprises of income chargeable to tax under the head 'Profit and gains of business or profession', any loss arising to the assessee in dealing in shares shall be treated as speculation loss and such loss can be set off only against speculation income. The Ld. Assessing Officer has rightly relied upon judgment of the Hon'ble Calcutta High Court reported in 192 ITR 365 (Cal.) We, therefore, reject these grounds of the appeal taken by the assessee.
10. The learned D.R. also relied on the decision of Delhi Bench of the Tribunal in the case of Dy. CIT v. Frontline Capital Services Ltd. [2005] 96 TTJ (Delhi) 201 : 4 SOT 473 wherein it has been observed as under: Insofar as provisions of Explanation to Section 73 are concerned, the language is quite clear. It has to be applied to all cases other than excluded category, where any part of the business of a company consist in purchase and sale of shares of other companies.
The sum and substance of Dr. Shikha's argument was that if company involved in purchase and sale of share and company is not one falling under the excluded category, then business of sale and purchase of shares in the hands of such a company will only be speculation business for purposes of Section 73 of the Income-tax Act. Speculative loss arising to such a company can only be adjusted against speculation profit. Dr. Shikha completely supported proposed order of learned Accountant Member. She pointed out that Hon'ble Judicial Member did not appreciate that purchase and sale of shares for purpose of Section 73 can only be part of business activity of the company. She submitted that expression used in Explanation to Section 73 is "consist of the purchase and sale of shares of other companies". Thus there was a conjoint purchase and sale to shares that included trading in shares for investment as well. She accordingly stressed that view expressed by the learned Accountant Member was the correct view and should be upheld.11. Shri Ved Jain, learned Counsel for the assessee, drew my attention to the reasons of amendment and introduction of Explanation to Section 73 through Taxation Laws (Amendment) Act, 1975. The Circular issued by the C.B.D.T. after amendment clearly reflected that Explanation was to apply to business of purchase and sale of shares. It was thus applicable to business and not to "isolated transactions". Shri Jain further referred to the Scheme of Income-tax Act, particularly relating to carry forward of income under various heads and, their adjustment.
It was emphasized that Section 72 provided for carry forward and set off of business loss. Section 73 provided for carry forward and adjustment of loss in speculation business. Section 74 provided for loss under the head "Capital gain". If view of the learned Accountant Member is accepted, then in case of a company, Section 74 would have no meaning as loss in share dealing in every case has to be treated as loss from speculation business and not as loss falling under the head "Capital gains". The view would make provisions of Section 74 totally redundant in the above circumstances. Shri Jain further submitted that single transaction cannot always be regarded as an adventure in nature of trade. The revenue has to prove that transaction was carried in a business like manner to take a transaction "business in the nature of the trade". It has to be shown that it was a continuous and systematic activity needing application of labour and skill with a view to earn income. Shri Jain submitted that learned Accountant Member was wrong in holding that decision cited on behalf of assessee related to individual cases. In fact two of the decisions pertain to share dealing by a company. Shri Jain emphasized that for application of Explanation to Section 73, the revenue has to prove that purchase and sale of shares was part of the business of the assessee-company. The said Explanation has no application where shares sold were held as an investment and capital gain accrued to assessee on transfer of shares. The learned Counsel accordingly supported proposed order of Judicial Member.
12. I have given careful thought to the submissions of parties and examined them in the light of material available on record. I have also considered relevant statutory provisions. Section 73 with Explanation which was invoked and applied in this case is as under: 73. (1) Any loss, computed in respect of a speculation business carried on by the assessee, shall not be set off except against profits and gains, if any, of another speculation business.
(2) Where for any assessment year any loss computed in respect of a speculation business has not been wholly set off under Sub-section (1), so much of the loss as it not so set off or the whole loss where the assessee had no income from any other speculation business, shall, subject to the other provisions of this Chapter, be carried forward to the following assessment year, and- (i) it shall be set off against the profits and gains, if any, of any speculation business carried on by him assessable for that assessment year; and (ii) if the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on.
(3) In respect of allowance on account of depreciation or capital expenditure on scientific research, the provisions of Sub-section (2) of Section 72 shall apply in relation to speculation business as they apply in relation to any other business.
(4) No loss shall be carried forward under this section for more than (eight) assessment years immediately succeeding the assessment year for which the loss was first computed.
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.
(13) 'business' includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture; The learned Accountant Member in the proposed order has after taking support from definition of "business" held that in the case of a company having business activity as its main source of income, a presumption would be that all transactions carried on by such company were part of its business. There were no separate funds for investment in purchase and sale of shares in question. Shares were business assets although they may not be trading asset. Therefore, purchase and sale of shares in question were part of business of assessee even if income or loss, as the case may be, profit on sale of these shares was chargeable to tax under the head "Capital gains". The learned Accountant Member further observed in the proposed order that word "business" is a wider term and would mean practically anything which is an occupation distinguished from a pleasure. So the question required to be considered is, whether transaction of purchase and sale of shares of TISCO can be treated as business and, therefore, a speculation business in terms of Explanation to Section 73 of the Income-tax Act.
In order to resolve above controversy, I would like to refer to certain decisions relevant on the issue before me: (a) In G. Venkataswami Naidu & Co's case (supra) their Lordships of the Supreme Court held that in reaching the conclusion that the transaction was an adventure in the nature of trade, the Tribunal had to find primary evidentiary facts and then apply the legal principles involved in the expression "adventure in the nature of trade" used by Section 2, Sub-section (4). It was patent that the clause "in the nature of trade" postulated the existence of certain elements in the adventure which in law would invest it with the character of a trade or business, and that would make the question and its decision one of mixed law and fact.
assessment years involved were 1942-43, 1943-44 and 1944-45. Their Lordships of the Supreme Court observed that the question whether sales of certain shares were by way of changing the investments or by way of trading in shares had to be decided on a consideration of different circumstances, including the frequency of the sales, the nature of the shares sold, the price received as compared with the cost price and several other relevant factors.In Karam Chand Thapar & Bros. (P.) Ltd. v. CIT two lots in the year 1941. Some of the said shares were sold in 1950 and the balance in 1955 at a loss. The assessee claimed the loss as a trading loss. The Tribunal in an appeal found that the shares had been purchased in 1941; the said shares belonged to a company managed by the assessee; the said shares were shown in the account books of the assessee as investment shares and also shown in the balance sheet as investment; the said shares were not sold when their price was high and the said shares were not sold for about 14 years. The Tribunal held on the basis of the above that the loss incurred by the assessee was a capital loss. On a reference, the High Court upheld the decision of the Tribunal. On further appeal, the Supreme Court held that on the facts as found by the Tribunal, the Tribunal was justified in drawing the inference that the loss was a capital loss. The Supreme Court held further that the question whether a particular loss is capital loss or a revenue loss is a mixed question of law and fact. The Supreme Court held further that the fact that the assessee had shown these shares as investment shares in its books as well as in its balance sheet was by itself not conclusive but it was a relevant circumstance on which the Tribunal could have relied for drawing its inference.
(d) In CIT v. Clive Row Investment Holding Co. Ltd. , the assessee had sold a number of shares in four assessment years and was sought to be taxed by the ITO on the surplus arising out of such sales. The AAC upheld the decision of the ITO. The Tribunal in further appeal held that such surplus was not liable to be assessed as business profits. The Tribunal found that the assessee had initially obtained the shares in the course of investment and at no point of time the assessee had acted as a dealer in shares. Following the decision of the Supreme Court in Karam Chand Thapar & Bros. (P.) Ltd.'s case (supra), it was held by the Hon'ble Calcutta High Court that on the specific finding of the Tribunal that the sale had not been effected in the course of the assessee's business, it could not be held that the conclusion of Tribunal was not correct.
assessee, a sterling company, had a controlling interest in an Indian company. The Indian company with the permission of the authorities concerned made a rights issue of capital. The assessee, in order to maintain its controlling interest, had to subscribe to the rights issue and for that purpose obtained an overdraft from an Indian bank. For the purpose of liquidating the said overdraft, the assessee sold a part of the shares, which resulted in a surplus. The ITO sought to tax the surplus as business income of the assessee.
The AAC and the Tribunal held that the assessee was never a dealer in shares and the purpose of acquiring the shares was to retain control over the Indian company. On a reference, the conclusion of the Tribunal was upheld by the Hon'ble High Court which found that the transaction was not an adventure in the nature of trade. The Hon'ble High Court observed that in determining whether a transaction was an investment or an adventure in the nature of trade, no universal rule or-truth could be applied. Each case had to be judged on its own merits and the Court had come to a conclusion taking into account the totality of the facts and circumstances.Mysore Rolling Mills (P.) Ltd. v. CIT , it has been observed that: The facts of each case will have to be examined to arrive at a conclusion whether the transaction in question is a speculative venture of business. The nature of the assessee's business in general, the purpose behind the particular transaction, the effect of the transaction, etc., are all to be considered. Unless it is conclusively established that the assessee entered into the transaction clearly as a speculative venture, the courts cannot infer the transaction to be a speculative venture only because the assessee derived subsequently the benefit of tax reduction.
In Arvind Investments Ltd.'s case (supra), it has been observed as under: The Explanation to Section 73 introduces a legal fiction. The section applies only to a company. It does not apply to individuals, firms, Hindu undivided families or associations of persons. The Explanation also does not apply to an investment company or a company whose principal business is banking or money-lending. If the business of a company which does not fall within the excluded categories consists of purchase and sale of shares of other companies, then such a company shall be deemed to be carrying on speculation business for the purpose of Section 73 to the extent to which the business consists of the purchase and sale of such shares.
The provisions of the Explanation to Section 73 have to be contrasted with the provision of Section 43(5), which defines 'speculative transaction' to mean a transaction which a contract for the purchase or sale of any commodity, including any stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scripts. The Explanation to Section 73 treats any purchase and/or sale of shares by certain companies to be speculative for the purpose of Section 73 only. For the purpose of setting off and carrying forward of loss, the buying and selling of shares by certain companies are regarded by the statute as speculation business, even though the transaction of purchase and sale was followed up by delivery of scripts and as such cannot be treated as 'speculative transaction' as defined in Section 43(5). The opening words of the Explanation to Section 73 are 'where any part of the business of a company.' "Any" is a word which excludes limitation or qualification. A restricted meaning should not be given to the phrase "any part of the business". The object of Circular No. 204, dated July 24, 1976, is to curb devices to manipulate and reduce the taxable income of a company under the management of a controlling group of persons. But the circular has clearly stated in paragraph 19.1 that 'the business of purchase and sale of shares by companies which are not investment or banking companies or companies carrying on business of granting loans and advances will be treated on the same footing as speculation business'. The phrase in the Explanation to Section 73 'to the extent to which the business consisted of purchase and sale of such shares' also does not indicate that the Legislature had several other actual and existing non-speculative activities of business in mind. It merely indicates that the business activity which consists of purchase and sale of shares will be treated as speculation business. If the entire business activity of a company consists of purchase and sale of shares of other companies, then the entire business will be treated as speculation business. But, if, apart from purchase and sale of shares, the company has other business activities, then those other activities will not be treated as speculation business.
Held accordingly, that the Explanation to Section 73 applied to the case of the assessee whose entire business consisted of dealing in shares. The loss incurred by the assessee was a speculation loss.
It is not possible to evolve a single test or formula which can be applied in determining whether a transaction is an adventure in the nature of trade. In cases of purchase and sale of land, generally speaking, the original intention of the partying purchasing the property, the magnitude of the transaction of purchase, the nature of the property, the length of its ownership and holding, the conduct and subsequent dealings of the assessee in respect of the property, the manner of its disposal and the frequency and multiplicity of transactions offers a valuable guide in determining whether the assessee is carrying on a trading activity and whether a particular transaction should be stamped with the character of a trading venture. There has to be an intention to trade at the time of purchase and the onus of establishing it is on the revenue.
Held, on the facts that the Tribunal was right in its view that the transaction in question was not an adventure in the nature of trade.
The assessee had entered into a solitary transaction for the acquisition of the plots of land and sold them after four years. He had not purchased any such immovable property at any time before or after. He had also not developed even the plots which he purchased.
He had only divided the same and sold as smaller extents and the development of the plots, such as laying roads, etc., were done by the assessee's vendors. Nor was there any evidence to show that there was any increase of prices of immovable property during that period.
14. It is evident from above that a single or a few isolated transactions of purchase and sale of shares may or may not be an adventure in the nature of trade. There is no presumption that a single transaction or isolated transactions are "adventure in the nature of trade". Adventure in the nature of trade posulates existence of certain elements of adventure which in law is vested with character of a trade or business. The question has to be decided on consideration of different circumstances including frequency of sales, nature of assets sold, price received as compared with cost and several other factors.
Adventure in nature of trade pre-supposes transaction being in nature of revenue transaction. Purchase and sale of capital asset per se cannot be business.
Further in spite of inclusion of "adventure or concern in nature of trade" in the definition of "business" under Section 2(13) of Income-tax Act, it is not possible to hold that every transaction of purchase and sale would be an adventure in nature of trade and, therefore, business transaction as understood in Explanation to Section 73 of the Income-tax Act. The revenue has to consider facts and circumstances of the case and establish that the transaction or transactions were carried with intention to carry trade. Several other factors, right from the beginning at the time of purchase, till the sale are required to be examined like magnitude of transaction, nature of investment, length of ownership-holding, conduct and subsequent dealing of assessee, manner of disposal. Frequency and multiplicity of transactions and other facts which are a valuable guide in determining the question whether assessee had entered into a trade venture. The revenue cannot simply rest on the definition of the term "business" and hold every transaction of sale and purchase to be a business transaction. There is no such presumption that every activity of the limited company is part of business carried on by the asses-see. The proposition cannot be accepted as in the case of Patiala Biscuit Mfg.
(P.) Ltd. v. CIT , their Lordships did not accept that isolated transaction in shares by company was an adventure in nature of trade and, therefore, business, even when memorandum permitted the company to deal in shares. It is no doubt true that term "business" is of wide import. But the question involved here is whether and in what sense term "business" has been employed in Explanation to Section 73 of the Income-tax Act. The learned Accountant Member is also not correct in holding that authorities cited on behalf of the assessee were not applicable in the present case as they deal with cases of individual only. A reference to the cited authorities clearly show that those related to cases where assessees' were companies and had purchased and sold shares.
In the present case the Assessing Officer did not bring any material on record to show shares were purchased as an adventure in nature of trade nor showed that any of factors considered by Courts to take a transaction as an 'adventure' were satisfied in this case. The position did not change in the appellate proceedings and therefore without evidence it is difficult to hold that sale/purchase of shares of TISCO by the assessee was an adventure in nature of trade or it was business or part of business.
15. Above conclusion is further supported by the language of Explanation to Section 73 and scheme of the enactment. For giving proper meaning to words "any part of business of a company", we have to take into account not only Explanation but entire Scheme of the Act, particularly of Section 73 of the Income-tax Act. Sub-section (1) of Section 73 in clear terms refers to "computed" speculation business. So business as per the aforesaid sub-section means computed business (speculation) which shall be set off against profits and gains, if any, of another speculation business. The word "business" as far as this Sub-section is concerned, can have no other meaning except business as computed under the Statute.
Sub-section (2) of the section also starts with words, "any loss computed in respect of speculation business". Therefore, there can be no doubt that this sub-section also uses word "business" in the context of computed business.
Sub-section (3) of the section provides for preference in adjustment/set off to speculation loss over unabsorbed depreciation.
The provision without any doubt relates to computation of business income and, therefore, business here cannot have meaning other than "business computed" as per provisions of Income-tax Act.
Sub-section (4) talk of carry forward of speculation for a certain period. It thus specifically referred to speculative loss computed as per other provisions of Section 73.
Thus in all the sub-sections of Section 73, business has to be understood as "computed business" income under the provisions of the Act. The word "business" is not required to be understood in isolation and out of context and given wider or narrow meaning. There is no need to give a go by to the classification of income under different heads for computation of income particularly under the head "Business". In fact language of section is so clear that there is no need to speculate as to what meaning is required to be given to word "business" for purposes of the said section.
16. The Explanation to Section 73 is part of Section 73 and by fiction makes purchase and sale of other companies by a company itself speculation business. As the Explanation creates a fictional solution, it is required to be construed in a narrow sense. There is no indication that "business" as per the Explanation can be given a meaning different from meaning given under the main section. Further the Explanation uses terms "gross total income", "income under the heads" like "Interest on securities", "Income from house property", etc. etc., making it absolutely clear that "part of business" means part of such business where income is computable under the head "Business". The Explanation provides for set off and adjustment of income/loss of particular type of business mentioned in the Explanation. Having regard to clear language, there is no need in my view to speculate what is the import of word "business" in the Explanation. There is no question drawing any sort of presumption, either in favour of carrying business or against it. Whether a single or more transactions carried on by the assessee are adventure in nature of trade so as to constitute business for purposes of computation under the head "Profit and gains of business" is a question of fact required to be determined on facts and in the circumstances of the each case.
One has to see intention of the assessee at the time of purchase of the asset and other circumstances to determine whether profit derived or loss suffered was liable to be assessed under the head "Business". As has been laid down by their Lordships of Bombay High Court, the onus to prove that the assessee carried on speculation business is always on the revenue.
The learned Accountant Member is right in holding that even capital assets held by company were business asset. This is the position when word "business" is considered in a wider sense. Every transaction carried on by the assessee relating to its asset cannot be treated as a transaction, liable to be assessed under the head "Business". It may give rise to capital gain or income assessable under the head "Other sources". The company can also have receipt of casual and non-recurring nature. The computation of income has to be done as per the machinery and rules provided by the Income-tax Act and not on general notion of term "business".
17. Now reverting to the facts of the present case, both the Members have held that shares of TISCO were held by the assessee as an investment. It was not part of trade. Therefore the profit or loss suffered, subject to other provisions, is taxable under the head "Capital gains" and not as "Business income". In the light of accepted position by both the Members that shares of TISCO were held and sold by assessee as a capital asset (investment), the loss accruing to the assessee was liable to be assessed as short-term capital loss.
Therefore, there was no question of treating it as a speculation loss by applying Explanation to Section 73 of the Income-tax Act.
18. For the aforesaid reasons, I agree with the view proposed by learned Judicial Member.
19. The case should now be put before the regular Bench, for disposal, in accordance with law.