This is an Appeal by the Assessee directed against the Order by the Commissioner of Income Tax (Appeals)-6, Mumbai ('CIT(A)' for short) dated 04.10.2010, dismissing the Assessee's appeal contesting its assessment u/s.143(3)(ii) of the Income Tax Act, 1961 ('the Act' hereinafter) for the assessment year (A.Y.) 2004-05 vide order dated 21.11.2006.
2. The assessee not pressing its Ground # 4 before us, while Gd. # 1 is general in nature, warranting no adjudication, the only issue raised in the instant appeal, i.e., per the effective grounds #2 & #3, is the validity or otherwise in law of the treatment of the loss on share trading, the specified income under Explanation to section 73 of the Act, with assessee also challenging the quantum of the loss so assessed.
The primary figures are not disputed, being in fact furnished by the assessee itself, or otherwise borne out of its records. The dispute, in the main, as delineated before the authorities below, as also argued before us, concerns the manner in which the income, liable to be considered as speculative income, is to be quantified for the purposes of the application of sec. 73 in-as-much as the same determines if the provision is applicable to the assessee or not. The assessee claims that the loss, being a negative figure, is less than the positive figure (of income), so that it could not be said that the assessee is having the said income in the main, which is the criteria for the application of section 73 read with Explanation thereto, i.e., in the case of companies covered by it, being specified therein.
3. We have heard the parties, and perused the material on record.
3.1 It shall be relevant to reproduce the provision in its relevant parts:
'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 trading in shares or 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.'
Under the Explanation, where any part of the business of a company, other than an investment company, or a banking or finance company, consists in the purchase and sale of shares, 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 purchase and sale of shares. A speculation business is always deemed to be distinct and separate from any other business (Explanation 2 to s. 28). It is by now well settled that the words 'mainly' in the Explanation are to be construed in a mathematical sense. Accordingly, a ratio of 50%, one way or the other, would decide the issue as to the applicability or otherwise of the provision of section 73. Up till here, there is in fact no dispute. The question, however, that arises is as to how the said ratio is to be reckoned where one or more of the specified incomes, i.e., in the Explanation to the section, and with reference to which, therefore, the applicability of the said Explanation and, thus, the provision itself, is to be determined, is in the negative, signifying a loss under the relevant head/s of income or of the specified income/s. The assessee's contention is that the negative income being decidedly less than a positive one, it cannot by any means be considered as a positive equivalent to the negative figure, and the ratio (of the different specified incomes in the gross total income), worked out accordingly.
3.2 The issue thus is whether the provision is applicable to the assessee company for relevant year, i.e., in terms of the provision, or not. The same boils down to the computation of gross total income (GTI) for the purpose of section 73. The term 'gross total income' is defined under section 80B(5), even as the same is, as the said provision itself clarifies, for the purposes of that Chapter, i.e., under which the defining provision of section 80B(5) falls, or Chapter VI-A. The same, therefore, would not be relevant. Further, if the GTI is to be reckoned in terms of section 80B(5), i.e., upon aggregating different incomes, and prior to allowing any deduction under Chapter VI-A, it would only imply aggregation of incomes in terms of Chapter VI. Section 73 falls under Chapter VI, which provides the rules of aggregation of various income, i.e., falling under different heads of income. The prescription of Chapter VI A, or of section 80B (5), thus, cannot guide or predicate the applicability of section 73, falling under Chapter VI. The matter could be looked upon from another angle as well. The whole import of section 73, as afore-noted, is whether income from purchase and sale of shares is to be regarded as speculative or non-speculative business income; different consequences attending the two classifications. Per contra, the loss from the purchase and sale of shares is not to be set off against any other income for the purpose of the applicability of section 73. To what effect therefore the negativity of the income per se? The GTI, for the purpose of section 73, must therefore be computed by giving effect to provisions up to Chapter V, and indeed of Chapter VI, i.e., in-so-far as they do not impinge upon the working of section 73. Why, the Explanation thereto itself speaks of the computation of income under different heads of income. The only manner therefore in which the GTI is to reckoned is by disregarding the loss on the purchase and sale of shares, i.e., excluding the same. Why, if loss on the said activity is to taken in to account, i.e., for the purpose of computing the GTI, the corollary thereof would its adjustment u/s. 72, which is precisely what section 73 seeks to regulate, i.e., in respect of loss arising on the purchase and sale of shares by a closely held company, as in the instant case.
If the loss is, or stands to be, adjusted, the same, or the negative figure, does not survive, defeating in effect the purpose of the provision. The whole purpose of the provision is to determine as to whether the loss arising from the business of purchase and sale of shares (of the specified company) is to be regarded as normal business loss or of a speculative business, so that it would be available for set off only against profit, if any, of another speculative business and, further, to the extent unabsorbed thus, carry forward for such set off for a restricted period of four years as against the normative time period of seven years. The only implication thereof, or the manner whereby this purpose could be fulfilled, is, in our view, by ignoring the said loss. Gross total income, for the purpose of ascertaining its' constituents, can only be comprised of positive income/s. How could the extent of income assessable under any head of income be taken into account if the same stands, or stands to be, set off, wholly or partly, against income falling under another head of income? The same could well be set off against any head of income, leading, however, to different consequences in terms and in view of Explanation to section 73. The mathematical prescription of the said Explanation would therefore suggest that the loss computed for any source of income falling under any head of income would stand to be reckoned in the computation of gross total income only where and to the extent it yields a positive income for or under the relevant head of income. Gross total income, thus, for the purpose of determining the applicability of sec. 73, while admitting of inter source adjustment of income for any head of income, would exclude negative incomes, so computed for any head of income. How could, one may ask, it, i.e., a loss, which is only a negative income, be compared with a positive one? This also follows from the requirement of the section that the gross total income, i.e., a positive sum, is to be examined for its' constituents, i.e., in terms of the incomes falling under different heads of income, comprising it. A set off of income falling under one head against income from another would dilute the income from the latter, compromising thus the integrity of the composition of the total income in-as-much as the income of the latter head of the income gets reduced (to that extent). Again, for the same reason, the income from the business/s of purchase and sale of shares is to be segregated, i.e., where its net result is a loss, and shall not enter the comparison or the evaluation process provided for by the section. This is as it is only its' character, i.e., as speculative or non-speculative, and, thus, its availability for set off against any other business income, or the income falling under any head of income for that matter, that is being sought to be determined. Adjusting it, so that its' independent identity is lost, would defeat and detract from the very purpose for which its' character, by determining the applicability or otherwise of the provision of sec.73, is being ascertained. The legislative intent behind a provision, it is well settled, is to be the foundational basis for any interpretative exercise [refer: Padmasundara Rao (Decd.) and Others vs. State of Tamil Nadu and Others [2002] 255 ITR 147 (SC) = 2002-TIOL-986-SC-MISC-CB; CIT vs. Baby Marine Exports [2007] 290 ITR 323 (SC)] = 2007-TIOL-46-SC-IT, and has guided our said interpretation.
3.3 In the admitted facts of the case, the assessee has income from advisory charges and brokerage at Rs.121.81 lacs and Rs.14.93 lacs respectively. Its other incomes are rent; dividend; and capital gains (long-term), at Rs.6.39 lacs, Rs.3.41 lacs and Rs.19.68 lacs respectively. Quite plainly, the assessee's GTI, whichever way one may reckon it, cannot be considered as consisting mainly of the incomes under the heads specified under Explanation to section 73, viz. 'income from house property', 'capital gains' and 'income from other sources'. Even though we do not subscribe thereto, and is also not consistent with the forgoing discussion, the difference is so huge and apparent, that even the set off of loss on trading in shares, again a business income, incurred at Rs.44.16 lacs, would not alter this position and the assessee's principal source of income would be business income. Accordingly, the said loss is a loss from a speculation business in terms of Explanation to section 73, and is to be treated as such. We, thus, find no infirmity in the treatment of the same as a speculative loss by the Revenue. In so deciding, we also endorse the reliance by the Revenue on the decisions by the hon'ble high courts and tribunal, as cited in their orders, viz. Eastern Aviation & Industries Ltd. vs. CIT [1994] 208 ITR 1023 (Cal); CIT vs. Parkview Properties (P.) Ltd. [2003] 261 ITR 473 (Cal); JRD Securities Pvt. Ltd. vs. ACIT (in ITA No. 4943 of 2002 dated 26.10.2005); Associated Capital Market Mgnt. Pvt. Ltd. Vs. Jt. CIT (in ITA No. 1103/Mum/2001); and Prudential Construction Co. Ltd. Vs. Asst. CIT [2000] 75 ITD 338 (Hyd). We decide accordingly. This disposes the assessee's ground nos. 1 & 2.
4. Vide its third ground, the assessee states, in the alternative, that it has been allowed, as against its claim for a total expenditure of Rs.1,21,605/-, i.e., qua speculation income, expenditure only for Rs.42,735/-. A reading of the orders by the authorities below, show the A.O. to have made the allocation of the expenditure at para 2.2 of his order, so that the basis of the allocation of the commission expenditure by the A.O. has been clarified. No infirmity therein, which found confirmation with the ld. CIT(A), was brought to our notice during hearing, so that we have no reason to disturb the same. We decide accordingly. We may also clarify that in finally computing the loss on speculation business, the A.O. has also considered the said expenses as well as the dividend relatable to the speculation business, and which aspects have not been impugned by the assessee. We decide accordingly.
5. The assessee's fourth and final ground of appeal is in relation to the assessment of the rental income of Rs.6,39,473/- as 'income from other sources'. As conceded to by the ld. AR during hearing, this matter stands covered against the assessee by the order by the tribunal in the assessee's own case for the immediately preceding year, i.e., A.Y. 2003- 04, with the ld. CIT(A) in fact stating, i.e., vide the relevant para (5.1) of his order, that the assessee, in view thereof, does not press the said ground before him. The same in fact obtained before us as well, so that we find no reason for interference; the matter being even otherwise covered by the tribunal in the assessee's own case. We decide accordingly.
6. In the result, the assessee's appeal is dismissed.
(Order pronounced in the open court on 8.4.2015)
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