Commissioner of Income Tax vs Paranjay Mercantile Ltd.

Akil Kureshi, J.—The Revenue is in appeal against the judgment of the income tax Appellate Tribunal ("the Tribunal" for short), dated November 20, 2009, raising the following questions for our consideration:

(A) Whether the Appellate Tribunal is right in law and on facts in deleting the addition of Rs. 10,35,384 made on account of treating the share trading loss as speculative loss, in accordance with the provisions of Explanation to section 73 ?

(B) Whether the Appellate Tribunal is right in law and on facts in deleting the enhancement made by the Commissioner of income tax (Appeals) of Rs. 69,230 made on account of accrued interest on loans given to Dhiren H. Vora?

Question (A) pertains to deletion of Rs. 10.35 lakhs (rounded off) made by the Assessing Officer and confirmed by the Commissioner of income tax (Appeals) treating the share trading loss of the assessee as speculative loss.

Briefly stated the facts are that the respondent-assessee is in the business of trading of shares. It also has other sources of income. For the assessment year 2000-01, the assessee claimed the loss of Rs. 10.35 lakhs to be set off against other incomes. The Assessing Officer was of the opinion that in terms of section 73 of the income tax Act, 1961 ("the Act" for short), the loss being speculative in nature could not be set off against other income. The assessee contended that the provisions of section 73 would not apply nor would the Explanation contained in the said section bring the assessee within the sweep of sub-section (1) of section 73.

It was pointed out that the assessee''s gross total income included the income from interest of Rs. 13.48 lakhs (rounded off) against the trading loss of shares of Rs. 10.35 lakhs. When the Assessing Officer did not accept such contention and disallowed the claim, the assessee preferred the appeal. The Commissioner of income tax (Appeals) rejected the assessee''s appeal upon which further appeal came to be filed before the Tribunal. The Tribunal reversed the decision of the Revenue authorities making the following observations:

We have heard the rival submission and perused the orders of the lower authorities and the materials available on record. In the instant case, for the assessment year 2000-01, the assessee earned interest income of Rs. 13,48,350 and claimed set off of loss from share trading business of Rs. 10,35,384. Similarly, in the assessment year 2001-02, the assessee declared the interest income of Rs. 6,60,765 and other income of Rs. 42,404 aggregating to Rs. 7,03,169 and claimed set off of share trading loss of Rs. 6,90,582 there against . The learned Assessing Officer observed that the assessee-company has disclosed the interest income as business income and the investment of the assessee-company in share business was more than the investment made for earning interest income opined that Explanation to section 73 was attracted in the case of the assessee. In this view of the matter, he treated the share trading loss of the assessee as speculation loss and not allowed set off for both the year under appeal. The learned Commissioner of income tax (Appeals) confirmed the above action of the learned Assessing Officer. We find from page 37 of the paper book where a copy of ledger account of Abhijay Capital Services that during the assessment year 2000-01, the assessee has advanced loan of Rs. 3,13,48,350 to the said concern and earned interest of Rs. 13,48,350. Thus, it is observed that the entire interest of Rs. 13,48,350 was earned by the assessee from advancing loan from one party only during the assessment year 2000-01. Further, on page 64 of the paper book contain the ledger account of Dindayal Associates for the assessment year 2001-02 and we find therefrom the interest income of Rs. 6,60,765 earned during the year. Thus, again it is observed that the entire interest income of the assessment year 2001-02 was also earned from one party. The assessee has also filed at page 54 of the paper book details of other income which comprises of profit on sale of computer on Rs. 38,904 and other income of Rs. 3,500 aggregating Rs. 42,404. Thus, the total income from other sources and capital gains during the year earned by the assessee was Rs. 7,03,169. It was contended by the learned authorised representative of the assessee during the year under consideration, the assessee was not engaged in any organised and systematic activity of advancing loans and, therefore, such interest income earned from advancing loan to one party alone cannot be considered a business income of the assessee merely because the assessee mistakenly classified it as its business income in the return of income. In our considered opinion, income are to be assessed under different heads enumerated in section 14 as per the true nature and character of the income and not merely on the basis of classification given to by the assessee either mistakenly or due to any other reason in the instant case we find that the lower authorities have not tried to analyse the facts and activities of the assessee properly to appreciate the true nature of the interest income so as to assess such income under the proper head of income. From the ledger accounts of the parties, as discussed above, we find that during both the year under consideration, the assessee has advanced loan to one party only during the year on which interest was earned by it. In our considered opinion, merely because of advancing of loan to one party alone during the whole year on which interest was earned, it cannot be held that the assessee was engaged in the business of advancing of loan for earning interest income. Thus, in our considered opinion, the interest income earned by the assessee in both the year under appeal are assessable under the head ''Income from other sources''. We further observe that income assessable under the heads ''Other sources'' and ''Capital gains'' earned by the assessee in both the years under consideration is more than the amount of share trading loss suffered in each of the year. Explanation to section 73 as is relevant for the present appeal does not apply in a case where the gross total income mainly consists of income which is chargeable under the heads ''Income from other sources'' and ''Capital gains''. Thus, we find that in both the years the gross total income mainly consists of income which is chargeable under the heads ''Income from other sources'' and ''Capital gains'', therefore, in our considered view, the provisions of Explanation to section 73 is not attracted in the case of the assessee in both the years under appeals. We, therefore, set aside the orders of the lower authorities for both the years under consideration and direct the learned Assessing Officer to recompute the income of the assessee in the light of the observations made hereinabove. Thus, the ground of appeal of the assessee is allowed for both the years under consideration.

Having heard learned counsel for the parties, we do not see any error in the view of the Tribunal. Section 73(1) of the Act provides as under:

Losses in speculation business.--(1) Any loss, computed in respect of a speculation business carried on by the assessee, shall not be set off except against the profits and gains, if any, of another speculation business.

The fact that the assessee is engaged in trading of shares from which the loss in question arose is not in dispute. The term "speculation business" has not been defined, however, the term "speculative transaction" is defined in section 43(5) of the Act which definition, of course, is for the purposes of sections 28 to 41 of the Act. As per the said provision, speculative business means the transaction in which the contract for the purchase and sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips.

For the purpose of our discussion, we are not concerned with the proviso to the said sub-section. In terms of the said provision, the business of the assessee in trading in shares would not be a speculative business. Even the Revenue does not contend that the case of the assessee falls under sub-section (1) of section 73 but for the Explanation which is added at the end of the section with effect from April 1, 1977 The Explanation reads as under:

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 purchase and sale of such shares.

From the plain reading of the Explanation it can be seen that the same provides for a deeming fiction under which the business of a company could be treated to be a speculation business. For the said Explanation to apply, however, it would be necessary that there is 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 granting of loans and advances. In such cases, where part of the business of such a company consists in the purchase and sale of shares of other companies, such company, for the purpose of section 73, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares.

The case of the assessee is that it falls within the exclusion clause of the Explanation since the gross total income consists mainly of income which is chargeable under the heads "Income from interest on securities" and "Income from other sources".

When the assessee pointed out that it earned interest income of Rs. 13.48 lakhs, the Revenue held that such income must be considered to be a business income of the assessee, and, therefore, the exclusion clause in the Explanation would not apply. The Tribunal, however, taking into account all the facts on record, held that giving loans and advances cannot be termed as the business of the assessee. The Tribunal noticed that the assessee had interest amount of Rs. 13,48,350 by making advance to an isolated party. The Tribunal thus held that no such income could be from the business income of the assessee.

In our view, the Tribunal correctly appreciated the facts. From one isolated instance, it could not be concluded that the assessee was in the business of advancing loans and earning interest. The Tribunal''s conclusion, therefore, that the gross total income of the assessee consisted mainly of income chargeable under the head "Interest on securities", "House property", "Capital gains" or "Income from other sources" calls for no interference. That being the position, the assessee would not be governed by the Explanation to section 73. In turn, the deeming fiction would not apply. Loss, therefore, could not be treated as speculative loss. No question of law, therefore, arises.

With respect to question (B) we notice that the amount involved is extremely small. Without commenting on the validity of the view expressed by the Tribunal, such question is not considered. In the result, the tax appeal is dismissed.