ORDER
R.P. Garg, Accountant Member
1. This is an appeal by the assessee against the order of the CIT (Appeals), for the assessment year 1985-86. The only dispute in this appeal is with regard to the provisions of Explanation to Section 73, of the Income-tax Act, 1961.
2. The assessee-company, as stated by the ITO, has been doing business in purchase and sale of cold rolled, ‘Stainless steel strips besides purchase and sale of shares. During the year under consideration, it had purchased shares of M/s. Dimple Overseas P. Ltd., M/s. Ravindra Holdings Ltd., Shankar Holdings and Harikishan Invest. & Industries Ltd. for a total price of Rs. 4,29,734. It had sold these shares immediately within three months of their purchase at a very low rate for an aggregate consideration of Rs. 1,21,167, and, thereby incurred a loss of Rs. 3,08,567. Besides the above, the assessee had made a profit on the sale of 25,250 shares of Reliance Textile Industries Limited amounting to Rs. 1,55,100. The profit on Reliance Textile Industry shares was on the sale for Rs. 29,34,050. The net loss on the sale of shares was thus Rs. 2,53,017. From the profit and loss account of the assessee, it is noticed that the sale in the year under consideration was Rs. 1,52,03,754 including the sale of shares of Rs. 30,55,217 aforesaid and the balance sale of Rs. 1,21,48,537 was for the sale of stainless steel strips. The purchase cost of the strips was Rs. 1,20,36,073 and, thus, the assessee had made profit of Rs. 1,12,464 in this trading. Besides the above, the assessee had income by way of dividend of Rs. 16,200; from interest of Rs. 1,88,093; and miscellaneous income of Rs. 904. On these facts, the ITO was of the opinion that Explanation to Section 73 was applicable to assessee’s case and asked the assessee to show cause as to why the share business should not be treated as speculation business. The assessee claimed that it was an investment company and also that it was having principal business on granting loans and advances and, therefore, the provisions of Explanation to Section 73 were not applicable. The ITO did not agree with this contention of the assessee and, after referring to the various objects in the Memorandum, he held that it is a clear case of trading company doing business in trading in stainless steel strips and shares, and that it was neither an investment company nor a banking company; nor was it doing loans and advances business with the money available from these two businesses. He, thus, held that the loss of Rs. 2,53,017 on sale of shares was speculation loss.
3. The CIT (Appeals) upheld the order of the ITO. He held that in the year under consideration, the assessee received gross dividend of Rs. 16,200 which formed an insignificant part of its gross total income and, therefore, it was not an investment company, as defined in Section 109(ii)of the Act. He also noticed that it was an admitted fact that the assessee was not engaged in the business of banking. Perusing the figures appearing in the accounts of the assessee, he observed that the sheer magnitude of the transaction in shares and stainless steel strips would indicate that the principal business of the assessee was not ‘granting of loans and advances’ but trading in shares and stainless steel strips wherein the major resources of the assessee were utilised.
4. Before dealing with the rival submissions of the Counsels, it would be better if we give a little background of the provisions of the Income-tax Act. Section 4 is the charging section. It provides for charge of income-tax on total income of an assessee. “Total income” is defined under Section 2(45) of the Act as the total amount of income referred to in Section 5, and computed in the manner laid down in the Act. Section 5 provides that total income of a person includes all income from whatever source derived which are received or deemed to have been received by him or on his behalf and also which accrues or arises or are deemed to accrue or arise to him in a previous year. Therefore, the first step is to ascertain the income of an assessee as per the respective sources under different heads provided under Section 14. If on such ascertainment, the net result of the computation is a loss from a particular source or under a head, the provisions of sections 70 to 79, providing for set off of such loss, have to be taken into consideration. Section 70 provides for set off of loss from one source against the profit from another source under the same head of income. Section 71 permits setting off of loss under one head of income against the income under any other head. Section 72, on the other hand, provides for the carry forward and set off of business losses if the net result of the computation under the head “Profits and gains of business or profession” is a loss to the assessee, not being a loss sustained in a speculation business, and such loss cannot be or is not wholly set off against income under any head of income in accordance with the provisions of Section 71. Such losses, under this section, can be carried forward from the previous year to be set off against the profits and gains of the business in the subsequent years. These sections specifically exclude the losses sustained from speculation business in its ambit for which the provisions are made in Section 73. Sub-section (1) of Section 73, provides that 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 business. Sub-section (2) thereof provides that 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 be carried forward to the following assessment year and so on. This section provides an Explanation, which is the core of controversy in this appeal. It reads as under :
Where any part of the business of a company (other than an investment company, as defined in Clause (ii) of Section 109, or a company the principal business of which is the business of banking or the granting of loans and advances) consists in the purchase and sale of shares of other companies, such company shall, for the purposes of this section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares.
The Explanation, thus, introduces a legal fiction. It applies only to a company and not to individuals, firms, or HUFs or association of persons. The Explanation also does not apply to an investment company or whose principal business is banking or money-lending. If the business of the company which does not fall within the excluded categories in the Explanation 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 purposes of Section 73 to the extent to which the business consists of purchase and sale of shares and the loss incurred in such purchase and sale of shares cannot be set off against the other income of the assessee and consequently, the assessee has to pay tax on the income unabated by the speculation loss.
5. Section 109(ii) defines an “investment company” to mean 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”. “Gross total income” has been defined in Clause (iv) of Section 109, to mean the total income computed in accordance with the provisions of this Act, before making any deduction under Chapter VIA.
6. The contention of the learned counsel for the assessee, Sri Girish Narayan Singh, is that the assessee is an investment company as its gross total income was Rs. 9,176 which was not only mainly, but wholly, consisted of dividend income chargeable under the head “income from other sources”. The dividend income was thus not an insignificant part of assessee’s gross total income as held by the CIT(Appeals). To determine whether the loss incurred by the assessee was speculative loss or not, one has to compute the gross total income, without looking to the provisions of Explanation to Section 73. In other words, as the assessee was dealing in shares, its loss was to be set off first under Section 70 against the other business income of the assessee and, thereafter under Section 71 against income under other heads. Proceedings on this basis, the gross total income, according to him, would be Rs. 9,176 which consisted wholly of dividend being income chargeable under the head “income from other sources” and, therefore, the assessee would be an investment company.
7. The learned Departmental Representative, Sri R.K. Aggarwal, on the other hand, submitted that the gross total income of an assessee has to be the total income before Chapter VIA deductions; computed as per the provisions of the Income-tax Act including the provisions of Explanation to Section 73. When one has to consider the treatment to be given to a transaction with reference to the gross total income of an assessee, that transaction, according to him, has to be ignored and kept out of consideration. The loss on purchase and sale of shares amounting to Rs. 2,53,017 was thus to be ignored and the gross total income of the assessee, in such a situation, would be Rs. 2,62,193 as determined in the assessment order and that would be mainly consisting of income under the head “business” being Rs. 2,45,993 out of the income of Rs. 2,62,193. The income under the head “income from other sources” was or under any other head mentioned in Section 109(ii) would be an insignificant part thereof. He, therefore, submitted that the assessee was not an investment company and pressed for the confirmation of the order of the CIT (Appeals).
8. To determine whether an assessee is an investment company or not, one has to determine what is its gross total income, i.e., total income of an assessee, as computed without allowing Chapter VIA deductions. In other words, the income computed as per the provisions of the Act before Chapter VIA deductions. There is no indication in the provisions of Section 73 or Section 109 as to whether the loss incurred by an assessee on the share dealings is to be deducted or kept out of consideration in computing the gross total income. We find some force in the department’s submission that when one has to consider the nature and the character of the transactions with reference to its gross total income then that the transactions should not and could not be taken into consideration as one would not know what treatment is to be given to it unless one computes the assessee’s gross total income. Equally, we find force in the submission of the assessee that the first stage is to compute the gross total income and after ascertaining that alone, one could judge whether the assessee is an investment company or not and, therefore, gross total income should be computed as per the provisions of the Income-tax Act, as if no special treatment is to be given to the loss incurred by an assessee on purchase and sale of the share transactions.
9. The assessee is doing share dealings as its business and, therefore, in determining its income, one has to set off the loss against the profits of the other sources under the same head under Section 70, and thereafter against the income from other heads, under Section 71. It is only then, one has to see whether the proviso to Section 73 was applicable or not as the provisions come into play when the gross total income is computed first. Both the situations are plausible. However, looking to the Scheme of the Act, we find that whenever such a situation arises, the Act has provided specific exclusion of that item from the gross total income. One of such cases, we find in Section 32A(3) in connection with the deduction of investment allowance. It provides that “where the total income of the assessee assessable for the assessment year relevant to the previous year in which the ship or aircraft was acquired or the machinery or plant was installed, or, as the case may be, the immediately succeeding previous year (the total income for this purpose being computed after deduction of the allowances under Section 33 and Section 33 A, but without making any deduction under Sub-section (1) of this section or any deduction under Chapter VIA) is nil or is less than the full amount of the investment allowance. The sum to be allowed by way of investment allowance for that assessment year under Sub-section (1) shall be only such amount as if sufficient to reduce the said total income to nil.. ..”. Similar is the position with regard to deduction of development rebate under Section 33(2) under the Explanation thereunder, and with regard to development allowance under Section 33A(2) and Explanation thereunder. Under Section 33AB(1)(b) dealing with deduction of tea development account, we find the mention of profits of such business computed under the head “profits and gains of business or profession” before making any deduction under that section. It reads :
A sum equal to twenty per cent of the profits of such business (computed under the head ‘Profits and gains of business or profession’ before making any deduction under this section.
Section 36(1)(viia) also provides such an example. It provides for deduction in respect of any provision for bad and doubtful debts made by certain banks, of “an amount not exceeding five per cent of the total income (computed before making any deduction under this clause and Chapter VIA)”. Similarly, we find that Section 36(1)(viiia) provides for a deduction in respect of any special reserve created by a scheduled bank (other than a bank incorporated by or under the laws of a country outside India) of “an amount not exceeding forty per cent of the total income computed before making any deduction under this clause and Chapter VIA carried to such reserve account”. Again Section 37(2A) dealing with the claim of entertainment expenditure provides for computing the allowance of entertainment expenditure on the profits and gains of a business or profession computed before making any allowance in respect of entertainment expenditure. We find one such other example in Section 44C providing for the deduction of head office expenditure in the case of a non-resident with regard to the adjusted total income which is defined in Explanation (1) to “mean the total income computed in accordance with the provisions of this Act, without giving effect to the allowance referred to in this section or in Sub-section (2) of Section 32. . . .”. Again, we find in Section 80J(3) providing for the deduction in respect of profits and gains from newly established industrial undertaking etc. It provides the carry forward and set off against the profits and gains referred to in Sub-section (1) as computed after allowing deductions, if any, admissible under sections 80HH, 80HHA and Sub-section (1) in respect of the previous year relevant to the next following assessment years….
10. As there is no specific exclusion of the loss incurred by the assessee on purchase and sale of share transaction from the gross total income, either under Section 73 or under Section 109, we accept the contention of the assessee in preference to the one canvassed by the revenue and hold that for determining the nature of the transaction of sale and purchase in the case of the assessee is to be determined with respect to the gross total income of the assessee without applying the provisions of the Explanation to Section 73. On that basis, the gross total income of the assessee would be Rs. 9,176 which consisted wholly of dividend income being income chargeable under the head “income from other sources” and, therefore, the assessee would be an investment company and the loss incurred by the assessee on purchase and sale of shares would not be speculative in nature within the meaning of the provisions of Explanation to Section 73 of the Act. We hold accordingly.
11. The appeal is allowed.