ORDER
J. Sudhakar Reddy, A.M.
This appeal of the assesses is directed against the order of the CIT (Appeals) IV, Hyderabad, dated 24-1-2001, for asst. year 1997-98. Brief facts of the case are as follows.
2. The assessee is a public limited company carrying on business as an investment company. It also derived income from other sources. The assessee filed its return of income on 1-12-1997. The income declared for the current year was set off with carried forward business loss relating to asst. year 1996-97 and Nil income was declared under regular assessment proceedings. The assessee computed income under Section 115J of the Income-tax Act, 1961, at Rs. 32,960 and paid tax accordingly.
3. The assessee during the year traded in purchase and sale of shares. This trading was divided into speculative and non-speculative transactions. The assessee had a net loss of Rs. 9,61,168 from non-speculative transactions. It had a profit on speculative transactions to the tune of Rs. 6,61,337. The division of the transactions into speculative transactions and non-speculative transactions was done by applying the definition of “speculative transaction” in Section 43(5) of the Income-tax Act.
4. During the year, the assessee arranged for taking on lease the first floor of the building which is occupied by it and which is owned by the directors and their family members, and in the process the assessee earned a commission of Rs. 2,50,000. This commission earned by way of brokerage was offered to tax under the head “Income from business or profession”.
5. The Assessing Officer, relying on the judgment of the Hyderabad Bench of the Income-tax Appellate Tribunal in the case of M/s Prudential Construction Co. v. ACIT, and the decision of the Hon’ble Calcutta High Court in the case of Eastern Aviation and Industries Ltd. v. CIT, 208 ITR 1023, held that in view of the Explanation to Section 73, the entire business of trading in shares by the assessee company was speculative in nature. He determined in the loss in trading in shares at Rs. 3,19,831 and on the ground that this is a loss in speculation business, held that the same is not allowed to be set off against other heads of income and that this loss would be carried forward for set off against speculation profit in future years. Aggrieved of the same, the assessee carried the matter in appeal. The first appellate authority agreed with the AO and dismissed the appeal filed by the assessee. Further aggrieved, the assessee is in appeal before us.
6. The learned counsel for the assessee submitted that Section 73 of the Income-tax Act, 1961, does not apply to the facts of the assessee’s case as the undisputed fact is that the assessee had no losses in speculative business. He further argued that once Section 73 itself is not applicable, the Explanation cannot be invoked by the AO. Thus, he prayed for relief. Alternatively, he contended that the assessee had earned commission income by arranging a party for taking on lease certain commercial property, that the income therefrom was lawfully assessable under the head “other sources”, that if it is so assessed, the assessee would be having income mainly from dividend and commission and that this would result in the Explanation to Section 73 not being applicable to the case of the assessee company. He submitted that income from other sources would be Rs. 4.87 lakhs and loss in shares would be Rs. 2.99 lakhs and as income from other sources is more, the decision of the Hyderabad Bench of the Income-tax Appellate Tribunal in the case of Prudential Construction Co., reported in 75 ITD 338, and the judgments of Hon’ble Calcutta High Court in the cases reported in 192 ITR 365 [Arvind Investments Ltd.] and 208 ITR 1023 are distinguishable and not applicable to the facts of the case. Alternatively, he submitted that dividend income assessed under the head “other sources” arises directly from the business of trading in shares and, therefore, the dividend income of Rs. 1,87,016 ought to be set off against the loss in trading of shares.
7. The learned departmental representative, on the other hand, controverted the submissions of the learned counsel for the assessee and submitted that the Explanation to Section 73 clearly states that where any part of the business of a company consists of purchase and sale of shares of other companies, the same shall be deemed to be speculation business of the company. He vehemently contended that the Explanation is very clear and that Section 73 squarely applies to the facts of the case. On the issue of classification of commission as income from other sources, he submitted that the assessee had itself declared this income under the head “Profits and gains of business” and it has been assessed as such. He submitted that it is not open for the assessee to turn around and claim the same under the head “other sources”. He relied upon the order of the CIT (A) and submitted that the same should be upheld.
8. Rival contentions have been heard. We have read all the papers on record and the orders of the authorities below as well as the case law cited by both parties. The undisputed fact in this case is that the assessee had non-speculative transactions in shares as well as speculative transactions in shares. This segregation had been made keeping in view the definition of “speculative transaction” in Section 43(5). It is also not disputed that the assessee had earned a profit in the speculative transactions in shares and had incurred a loss in its non-speculative activity.
9. Now, the question is whether Section 73 applies to a case where the assessee earns profit in speculative transactions. Section 73 of the Income-tax Act, 1961, reads as follows:-
“Losses in speculation business.
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 is 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..”
The Marginal note of this section suggests that it is applicable only in cases where losses are incurred in speculation business. Sub-section (1) starts with the wording “Any loss, computed in respect of a speculation business’……”. Thus, a plain reading of this section suggests that the section does not apply to cases where there has been profit in the speculation business. Circular No. 204 dated 24-7-1976, which is extracted at page 3273 of Chaturvedi & Pithisaria’s Income Tax Law, fifth edition, Vol.2, which gives the scope and effect of the newly inserted Explanation, is as follows:-
“Treatment of losses in speculation business – Section 73. -19.1 Section 73 of the Income-tax Act provides that any loss computed in respect of speculation business carried on by an assessee will not be set off except against the profits and gains, if any, of another speculation business. Further, where any loss, computed in respect of a speculation business for an assessment year is not wholly set off in the above manner in the said year, the excess shall be allowed to the carried forward to the following assessment year and set off against the speculation profits, if any, in that year, and so on. The Amending Act has added an Explanation to Section 73 to provide 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 or advances will be treated on the same footing as a speculation business. Thus, in the case of aforesaid companies, the losses from share dealings will now be set off only against profits or gains of a speculation business. Where any such loss for an assessment year is not wholly set off against profits from a speculation business, the excess will be carried forward to the following assessment year and set off against profits, if any, from any speculation business.
19.2 The object of this provision is to curb the device sometimes resorted to by business houses controlling groups of companies to manipulate and reduce the taxable income of companies under their control.
19.3 This provision will come into force with effect from 1-4-1977 and will apply in relation to the assessment year 1977-78 and subsequent years.”
From this CBDT circular it is clear that the object of this provision is to curb the device being resorted to by some business houses to manipulate and reduce the taxable income by booking speculative losses. A plain reading of the section, as we have already stated, and a reading of the heading puts it beyond doubt that this section cannot be invoked in a case where there is a profit from a speculative transaction.
10. Coming to the Explanation to Section 73, the same should be so read as to harmonise with and clear up any ambiguity in the main section and should not be so construed as to widen the ambit of the section. [Reliance is placed on Bihta Co-operative Development and Cane Marketing Union Ltd. v. Bank of Bihar, AIR 1967 SC 389, p.393.] The Explanation is only for the purposes of Section 73 and when the section itself does not apply, the Explanation cannot be invoked, under the facts and circumstances of this case.
11. The argument of the learned departmental representative that the term “loss” includes profit, is not correct, as only under Explanation 2 to Proviso of Section 64(2) it is stated that for the purposes of that section “income” includes loss. There is no proposition that “profit” includes loss.
12. Thus, we allow the appeal of the assessee by holding that Section 73 is inapplicable to this case.
13. As the assessee has got relief on the aforesaid ground itself, we do not propose to go into the alternative argument of the assessee as it would be academic to do so.
14. In the result, the appeal of the assessee is allowed.