THE COMMISSIONER OF INCOME TAX, vs. HARRISONS MALAYALAM FINANCIAL SERVICES LTD.,

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ITA/1231/2009HC KeralaKLHC01025992200921 February 2019Author: HONOURABLE MR.JUSTICE K.VINOD CHANDRAN,HONOURABLE MR. JUSTICE ASHOK MENON13 pages
AI SummaryAllowed

What did the High Court hold?

The High Court held that the assessee's contention that it is a non-banking financial company and therefore excluded from Section 73 based on CBDT Circular No. 204/1976 was not tenable. The Court found that the Explanation to Section 73 clearly defines companies engaged in the purchase and sale of shares as carrying on speculation business, unless their gross total income mainly consists of specific heads like 'Interest on securities', 'Income from house property', 'Capital gains', and 'Income from other sources', or they are primarily in banking or loan granting businesses. The assessee did not fall under these exceptions. The Court rejected the assessee's argument that chargeability to income was the determining factor for the exception, stating that 'income', 'profits', and 'gains' represent positive income, while loss is negative income, and tax is not leviable on negative figures. Therefore, the exception under the Explanation to Section 73 did not apply. The Court also dismissed the argument regarding sub-section (2) of Section 73, clarifying that Section 73 deals with the prohibition of set-off, not the year of carry forward. Consequently, the Court set aside the orders of the first appellate authority and the Tribunal, restoring the AO's order. The questions of law were answered in favour of the Revenue.

What were the facts?

The Revenue appealed against an order of the Income Tax Appellate Tribunal (ITAT) which upheld the Commissioner of Income Tax (Appeals) decision. The assessee, Harrisons Malayalam Financial Services Ltd., a non-banking financial company, filed a return for AY 2003-04 showing a loss. A revised return was filed showing a loss of Rs. 3,11,43,326/-. The Assessing Officer (AO) treated a portion of this loss (Rs. 3,19,13,970/-) as speculation loss under the Explanation to Section 73 of the Income Tax Act, 1961, as the assessee was engaged in the purchase and sale of shares. The CIT(A) allowed the assessee's appeal, relying on a CBDT circular that excluded NBFCs from Section 73. The ITAT dismissed the Revenue's appeal, holding that the Explanation to Section 73 was not applicable as the assessee's gross total income mainly consisted of interest on securities, income from house property, capital gains, and other sources.

What were the issues?

1. Whether, on the facts and in the circumstances of the case, ought the Tribunal have restored the order of the assessing officer, in light of decisions in 253 ITR 403, 261 ITR 473, 208 ITR 1023? (Question of law and fact, concerning Section 73). 2. Whether, on the facts and in the circumstances of the case, is the Tribunal right in law and in fact in holding that the Assessee Company is covered in the first exception provided in the explanation to Section 73, as its gross total income mainly consists of income under the heads 'Interest on Securities', 'Income from House Property', 'Income from Capital Gain' and 'Income from Other Source'? (Question of law and fact, concerning Section 73). 3. Whether, on the facts and in the circumstances of the case, is the explanation to section 73 of Income tax Act applicable in this case? (Question of law, concerning Section 73). Assessee's contentions: The assessee argued that as a non-banking financial company, it is excluded from the scope of Section 73 as per CBDT Circular No. 204/1976. It also contended that the Explanation to Section 73 is significant regarding chargeability to income, and since the chargeable income for the year was from 'other sources', business losses, even if speculative, should be allowed as a deduction. The assessee also argued that sub-section (2) of Section 73 refers to the specific assessment year. Revenue's contentions: The Revenue argued that by virtue of the Explanation to Section 73, the loss from the business of buying and selling shares must be treated as speculation loss. It relied on the decisions in Eastern Aviation & Industries Ltd. v. C.I.T. [(1994) 208 ITR 1023 (Cal.)], Aryasthan Corporation Ltd. v. C.I.T. [(2002) 253 ITR 401 (Cal.] and C.I.T. v. Park View Properties P. Ltd. [(2003) 261 ITR 473 (Cal.)].

Which sections of the Income-tax Act were involved?

Section 73,Section 143(1),Section 143(2)

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, COCHIN BENCH, COCHIN

DATED 30.11.2004 ISSUED BY THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 1(1), ERNAKULAM FOR THE ASSESSMENT YEAR 2002-03. ANNEXURE R(1)(B) THEOF THE ORDER DATED 12.04.2006 ISSUED BY THE COMMISSIONER OF INCOME TAX (APPEALS)-II, KOCHI. ANNEXURE R(1)(C) THEOF THE CONSEQUENTIAL ORDER DATED 06.07.2006 ISSUED BY THE ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE 1(1), ERNAKULAM. ANNEXURE R(1)(D) THEOF THE PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31.03.2004. ANNEXURE R(1)(E) THEOF THE REVISED COMPUTATION OF INCOME FOR THE YEAR ENDED 31.03.2003.

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