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Income Tax Appellate Tribunal, MUMBAI BENCH “E” MUMBAI
Before: SHRI MAHAVIR SINGH & SHRI N.K. PRADHAN
ORDER PER N.K. PRADHAN, A.M. The captioned appeals and cross objections filed by the assessee and the Revenue for the assessment year 2003-04 and 2004-05 are directed against the order of the Commissioner of Income Tax (Appeals)-XXXII, Mumbai and arise out of the assessment completed u/s 143(3) of the Income Tax Act 1961, (the ‘Act’). As some common issues are involved we are proceeding to dispose them off by this consolidated order for the sake of convenience. Assessment Year: 2003-04 2. The grounds of appeal filed by the assessee read as under:-
1. (a) On the facts and circumstances of the case and in law the learned Commissioner of Income Tax (Appeals) erred in upholding that loss in share trading activities as a speculation loss despite Several Judicial Income Tax Tribunal decisions holding that loss in share trading activities in the case of companies not involving trading in shares of group companies the explanation to section 73(4) of the I.T. Act 1961 is not attracted.
1. (b) On the facts and circumstances of the case and in law the learned CIT (A) erred in rejecting the appellant's plea that since Gross Total Income of the Appellant consisted mainly of income which is chargeable under the head "Income from Other Sources' explanation to section 73(4) of the I.T. Act 1961 deeming the company to be carrying on a speculation business is not attracted.
1. (c) On the facts and circumstances of the case the learned CIT (A) erred in not appreciating C B D T circular for treatment of losses in speculation business under explanation to section 73 of the I.T. Act 1961 and directing the Assessing Officer that as per section 119 (1) of the I.T. Act 1961, C B D T orders, instructions and directions shall be observed by all persons employed in the execution of the Act. 2. The learned CIT (A) erred in upholding expenditure of Rs.19,29,561/- related to speculation business on account of trading in shares.
We begin with the 1st ground of appeal. Briefly stated, the facts of the case are that the assessee filed its return of income for the AY 2003- 04 on 28.11.2003 declaring loss of Rs.1,24,98,730/-. As per Form 3CD the nature of business of the assessee is trading in shares, securities and debentures. During the course of assessment proceedings, the Assessing Officer (AO) analysed the trading and profit and loss account and found that the assessee who was engaged in purchase and sale of shares had incurred loss in the business activity. Therefore, the AO invoked Explanation to section 73 and held that loss on share trading of Rs.1,06,60,463/- was liable to be treated speculation loss, because loss from the business activity of share trading was more than the income under the head ‘other sources’. Hence the speculation loss was not allowed to be set off against other income. Then the AO disallowed expenses of Rs.19,29,561/- as related to speculation business. In the computation of income, the AO thus inter alia made a disallowance of Rs.1,06,60,463/- as speculation loss and made an addition of Rs.19,29,561/- as income from other sources.
4. Aggrieved by the order of the AO, the assessee filed an appeal before the Ld. CIT(A). The Ld. CIT(A) has observed that in the current year as well as in the recent past, volume of share trading business carried out by the assessee was much higher and the income received in the nature of ‘other sources’ was from a minor activity which was also incidental to the share trading activities. The details are as under:-
AY 2003-04 AY 2002-03 AY 2001-02 AY 2000-01 AY 1999-00 Income from (-) 1,33,00,971 28,07,122 (-)8,55,17,258 1,23,08,378 30,86,157 sale/ purchase of shares Income from 14,77,188 3,04,837 7,41,811 2,79,661 36,798 other sources
During the current year, share trading loss was Rs.1,33,00,971/- as against the income under the head ‘other sources’ of Rs.14,77,188/-. In the preceding year, there was gross profit in share trading of Rs.28,07,122/- as against the ‘income from other sources’ of Rs.3,04,837/-. In earlier year also, the situation was same and consistently the share trading profit/loss as well as volume of share trading activity was much higher than ‘income from other sources’. The Ld. CIT(A) observed that the nature of business of the assessee from year to year has remained the same. Therefore, in AY 2002-03, when there is a share profit of Rs.28 lakhs as against the ‘income from other sources’ of only Rs.3.05 lakhs, the assessee cannot have any justifiable argument as to why the share trading business may not be treated as speculation business in view of Explanation to section 73. Hence the nature of share trading business as well as other activities for earning income remaining the same, the share trading activity has to be categorized as speculation business in the subsequent year also i.e. AY 2003-04. The Ld. CIT(A) has further observed that during the impugned assessment year, the main activity of the assessee was in respect of purchase and sale of shares. The turnover in this regard was around Rs.6.5 crores. As against this, some minor income from dividend and interest has been received during the current as well as earlier years which is in the nature of ‘income from other sources’. This income from other sources is incidental to the main business of purchase and sale of shares which has been admitted by the assessee. Some source of income, which is incidental to the business income cannot be said to be main source of income. Thus the Ld. CIT(A) held that section 73 applies to the case of the assessee. He confirmed the action of the AO in treating the loss incurred in share trading business as speculation loss.
Before us, the Ld. counsel of the assessee makes a reference to the Paper Book (P/B) filed, which contains inter alia (i) extracts from ‘Memorandum of Association’ giving main object clause, (ii) audited annual accounts for the year Ended on 31.03.2003 with tax audit report, (iii) computation of total income, (iv) statement giving purchase & sale of shares & securities during the year. The Ld. counsel relies heavily on the judgment of the Hon’ble Bombay High Court in the case of CIT vs. HSBC Securities and Capital Market India (P) Ltd. (2012) 23 taxmann.com 377(Bom).
Per contra the Ld. DR submits that in the impugned assessment year, share trading loss was Rs.1,33,00,971/- as against the income under the head ‘other sources’ of Rs.14,77,188/-. The main activity of the assessee was in respect of purchase and sale of shares. The turnover in this regard was around Rs.6.5 crores. As against this, some minor income from dividend and interest was received by the assessee. In view of this, it cannot be held that the gross total income of the assessee mainly consists of ‘income from other sources’ and therefore, section 73 applies to the case of the assessee. The Ld. DR thus supports the order passed by the Ld. CIT(A).
We have heard the rival submissions and perused the relevant materials on record. The reasons for our decision are given below. The Gross Total Income (GTI) as per the computation of total income filed by the assessee along with the return of income for the impugned assessment year is as under: Computation of Total Income Amount Amount (Rs.) (Rs.) Business Income Loss as per Profit & Loss (12455036) A/C Less Disallowance/Considered Separately Provision for Gratuity 39289 Depreciation as per 220022 Companies 259311
-12195725 Add Allowable/Considered Separately Bonus Paid for during the 25182 year Depreciation as per IT Act 277827 Dividend Exempt u/s 1132510 10(34) 1435519 -13631244 Income from Other Sources Dividend u/s 10(34) 1132510 Gross Total Income -12498734
A perusal of the above computation of income shows that the assessee had loss from business of Rs.1,24,55,036/-. It had dividend income of Rs.11,32,510/-. We find that the decision in the case of HSBC Securities and Capital Markets India (P) Ltd. (supra) addresses the present issue. In that case the AO by an order u/s 143(3) dated 29.03.2000 inter alia recorded the following :
The assessee’s gross total income as per the second revised return was loss of Rs.1,65,29,711/-. The composition of the same is as under Business Profit (-) Rs.1,72,31,711/- Income from other sources Rs.7,02,000/- (-) Rs.1,65,29,711/-
On the above facts, the Hon’ble High Court held that section 73 would not apply in respect of a company whose gross total income consists mainly of income which is chargeable under the heads of ‘interest on securities’, income from house property’, ‘capital gains’ and ‘income from other sources’. While deciding the case, the Hon’ble High Court relied on the judgment of its Division Bench in the case of CIT vs. Darshan Securities (P) Ltd. (2012) 18 taxmann.com 142 (Bom) wherein the assessee had a loss of about Rs.2.33 crores in the share trading and had dividend income of about Rs.4.80 lakhs. The Hon’ble High Court quoted at length judgment of its Division Bench in the case of Darshan Securities (P) Ltd. (supra) which we mention below: "6. The explanation to Section 73 introduces a deeming fiction. The deeming fiction stipulates that where any part of the business of a company consists in the purchase and sale of shares of other companies, such company shall, for the purposes of the section be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sales of such shares. The deeming fiction applies only to a company and the provision makes it clear that the deeming fixation (sic) extends only for the purposes of the section. The bracketed portion of the explanation, however carves out an exception. The exception is that the provision of the explanation shall not apply to 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 whose principal business is of banking or the granting of loans and advances.
7. The submission which has been urged on behalf of the Revenue is that in computing the gross total income for the purpose of the explanation to Section 73, income under the heads of profits and gains of business or profession must be ignored. Alternatively, it has been urged that where the income from business includes a loss in the trading of shares, such a loss should not be allowed to be set off against the income from any other source under the head of profits and gains of business or profession.
In our view, the submission which has been urged on behalf of the Revenue cannot be accepted. Leaving aside for a moment, the exception, which is carved out by the explanation to Section 73, the explanation creates a deeming fiction by which a company is deemed to be carrying on a speculation business where any part of its business consists in the purchase and sale of shares of other companies. Now, the exception which is carved out applies to a situation where the gross total income of a company consists mainly of income which is chargeable under the heads "Interest on securities", "Income from house property", "Capital gains" and "Income from other sources". Now, ordinarily income which arises from one source which falls under the head of profits and gains of business or profession can be set off against the loss which arises from another source under the same head. Sub Section (1) of Section 73 however sets up a bar to the setting off of a loss which arises in respect of speculation business against the profits and gains of any other business. Consequently, a loss which has arisen on account of speculation business can be set off only against the profits and gains of another speculation business. However, for Sub Section (1) of Section 73 to apply the loss must arise in relation to a speculation business. The explanation provides a deeming definition of when a company is deemed to be carrying on a speculation business. If, the submission of the Revenue is accepted, it would lead to an incongruous situation, where in determining as to whether a company is carrying on a speculation business within the meaning of the explanation, sub section (1) of Section 73 is applied in the first instance. This would in our view not be permissible as a matter of statutory interpretation, because the explanation is designed to define a situation where a company is deemed to carry on speculation business. It is only thereafter that sub section (1) of section 73 can apply. Applying the provisions of Section 73(1) to determine whether a company is carrying on speculation business would reverse the order of application. That would be impermissible, nor, is it contemplated by Parliament. For, the ambit of Sub Section (1) of Section 73 is only to prohibit the setting off of a loss which has resulted from a speculation business, save and accept against the profits and gains of another speculation business. In order to determine whether the exception that is carved out by the explanation applies, the legislature has first mandated a computation of the gross total income of the Company. The words "consists mainly" are indicative of the fact that the legislature had in its contemplation that the gross total income consists predominantly of income from the four heads that are referred to therein. Obviously, in computing the gross total income the normal provisions of the Act must be applied and it is only thereafter, that it has to be determined as to whether the gross total income so computed consists mainly of income which is chargeable under the heads referred to in the explanation.
Consequently, in the present case the gross total income of the assessee was required to be computed inter alia by computing the income under the head of profits and gains of business or profession as well. Both the income from service charges in the amount of Rs.2.25 crores and the loss in share trading of Rs.2.23 crores, would have to be taken into account in computing the income under that head, both being sources under the same head. The assessee had a dividend income of Rs.4.7 lacs (income from other sources). The Tribunal was justified, in coming to the conclusion that the assessee fell within the purview of the exception carved out in the explanation to Section 73 and that consequently the assessee would not be deemed to be carrying on a speculation business for the purpose of Sec. 73(1)." Facts being similar, we follow the order of the Hon’ble Bombay High Court in the case of Darshan Securities (P) Ltd. (supra) and HSBC Securities and Capital Markets India (P) Ltd. (supra) and allow the 1st ground of appeal
8. Now we move to the 2nd ground of appeal. The AO considered the disallowance of proportionate expenses attributable to speculation business. The assessee had claimed expenses of Rs.19,84,116/- on account of administrative, general expenses, bank charges and depreciation in the P/L account. The assessee had shown sales of shares at Rs.6,51,40,627/- and other income in the form of dividend, interest amounting to Rs.17,94,573/-. The AO came to a finding that since the expenses incurred are in composite form, the expenses of Rs.19,84,116/- are to be apportioned to speculation transaction on account of sale of shares and other income in the ratio of other income to the share transaction. The ratio worked out by the AO comes to 3.04%. The AO thus made a disallowance of Rs.19,29,561/-.
9. In appeal, the Ld. CIT(A) held that the AO has rightly allocated expenditure of Rs.19,29,561/- out of total expenditure of Rs.19,84,116/- towards speculation business and disallowed the same. He held that expenses attributable to speculation business should be allowed only against speculation profits. Thus the Ld. CIT(A) upheld the disallowance of Rs.19,29,561/- made by the AO.
We have heard the rival submissions and perused the relevant materials on record. As we have held earlier that Explanation to section 73 would not apply to the instant case, the disallowance of expenditure of Rs.19,29,561/- to speculation business on account of trading in shares would not arise. Accordingly, we allow the 2nd ground of appeal
11. In the result, the appeal filed by the assessee for the AY 2003-04 is allowed. Assessment Year: 2003-04
12. The cross appeal filed by the Revenue reads as under:
1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of Rs.19,09,550/- claimed in profit and loss account against devaluation of shares of M/s Nimbus Communication Ltd.
2. On the facts and in the circumstances of the case and in law, the CIT(A) erred in not considering that addition on similar issue made in A.Y. 2004-05 for which the valuation of shares was done as per Rule 1D of Wealth-tax Rules, 1957, but the said provisions having been omitted by the Wealth-tax Rules, 1989, w.e.f. 01-04-1989, the assessee had valued the shares in the past in an arbitrary way and thus, no consistent method of valuation was adopted by it and the assessee had reduced the value of shares of M/s. Nimbus Communication Ltd. by 10 % from Rs.1,90,75,500/- to Rs.1,71,67,950/- and again for A.Y. 2004-05, it had reduced it by more than 10% i.e. from Rs.1,71,67,950/- to Rs.13,00,000/-, thereby showing that there is no consistent method of valuation of stock being done by the assessee.
3. On the facts and in the circumstances of the case and in law, the CIT(A) erred in including the shares purchased from the promoters as stock in trade instead of considering it as investment. 13. In a nutshell, the facts are that during the relevant period the assessee had reduced the value of closing stock of 50,000 unquoted equity shares of Nimbus Communication Ltd. The value as on 01.04.2003 was indicated at Rs.1,90,75,500/-. The value as on 31.03.2003 was taken at Rs.1,71,67,950/-. In response to a query raised by the AO to explain the above devaluation of shares, the assessee filed the following reply:- “Nimbus Communication Ltd.: - Digital Media/Entertainment Industrial Activities. 50,000 Equity shares were purchased @ Rs.525/- plus transfer charges. Total cost Rs.2,66,25,000/- in FY 1999-2000. The promoters assured that application will be made to National and Bombay Stock Exchanges on shares being issued to the public by 100% Book Building issue at the price offered to us. However, on account of market scam and unfavourable market conditions the book building issue was postponed from time to time. It is now gathered that some foreign group is interested in participation with the promoters. In view of this it was decided that every year the valuation be reduced by 10% till book building issue is made by the company. It is expected that price determined for book building issue would be around the value purchased.” 13.1 However, the AO was not convinced with the above reply of the assessee as the purchase was in the nature of an investment and it was purchased from the promoter. Therefore, he disallowed the difference in revaluation of Rs.19,09,550/- debited by the assessee to the P/L account as capital expenses. 14 In appeal, the Ld. CIT(A) agreed with the contention of the assessee that shares were stock-in-trade right from the date of their purchase, even though they were purchased from the promoters. In support of this contention, the assessee filed before the Ld. CIT(A) copies of accounts including list of shares reflected as stock-in-trade. It was stated that the valuation was done at lower of cost or market value and the said method was followed consistently. The assessee had devalued the cost of shares @ 10% because it was expected that price determined for book building issue would be around the valuation as per accounts. The assessee also cited the decision in the case of Ayesha Ashok Sony 287 ITR 50 (Bom) and Bharat Hari Singhania 207 ITR 1 where it has been held that the valuation of shares of unquoted companies should be done by following the breakup method as per Rule 1D of the Wealth Tax Rules. The assessee submitted before the Ld. CIT(A) that it had carried out valuation as per the said method and the value of shares determined as a result of it was much less then the value adopted by the assessee in the accounts. The Ld. CIT(A) agreed with the above submission of the assessee and deleted the disallowance of Rs.19,09,550/- made by the AO.
Before us, the Ld. DR supports the order passed by the AO.
On the other hand, the Ld. counsel of the assessee reiterates the submission the assessee had made before the Ld. CIT(A). He also supports the order passed by the Ld. CIT(A).
We have heard the rival submissions and perused the relevant materials on record. We have mentioned earlier that the assessee trades in shares, securities and debentures. This is as per Form 3CD. Having regard to the decision in the case of Ayesha Ashok Sony (supra) and Bharat Hari Singhania (supra), we uphold the order of the Ld. CIT(A). 18. In the result, the appeal filed by the Revenue is dismissed. Accordingly, the cross objection filed by the assessee is allowed. Assessment Year: 2004-05 19. The grounds of appeal
filed by the assessee read as under:
1. On the facts and circumstances of the case, the learned Commissioner of Income Tax (Appeals) XXXII erred in holding that the expenditure of Rs.44,900/- on purchase of two mobile phones & two key phones is in the nature of capital expenditure.
2. On the facts and circumstances of the case, the learned Commissioner of Income Tax (Appeals) XXXII erred in holding that hospitalization expenditure of Rs.10,62,071/- incurred by the appellant on medical treatment -in respect of Ischaemic Heart Disease and Coronary Angioplasty of Promoter Director is not incurred out of business expediency & for the purpose of the business of the appellant.
20. The Ld. counsel of the assessee submits before us, that the assessee would not like to press the 1st ground of appeal. Also he fairly concedes that in view of the decision of the Hon’ble Bombay High Court in the case of Dhimant Hiralal Thakar vs. CIT (2016) 380 ITR 275 (Bom), the assessee would not like to press the 2nd ground of appeal.
21. In view of the above, the appeal filed by the assessee for the AY 2004-05 is dismissed as not pressed. Assessment Year: 2004-05
22. The cross appeal filed by the Revenue reads as under:-
1. On the facts and the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of Rs.3,07,47,9501- claimed in the profit and loss account against devaluation of shares of M/s. 121 Media and M/s. Nimbus Communication Ltd.
2. On the facts and the circumstances of the case and in law, the Ld. CIT(A) erred in not considering that assessee had calculated the value of two unquoted shares as per Part C of Schedule III of Wealth Tax Act, 1957, which has been omitted by the Finance Act, 1992. The assessee had valued the shares in the past in an arbitrary way and thus, no consistent method of valuation was adopted by it and the assessee had reduced the value of shares of M/s. Nimbus Communication Ltd by 10% from Rs.1,90,75,500/- to Rs1,71,67,950/- and again for A.Y. 2004-05, it had reduced it by more than 10% i.e. from Rs.1,71,67,950/- to Rs.13,00,000/- thereby showing that there is no consistent method of valuation of stock being done by the assessee."
3. The appellant prays that the order of CIT(A) on the above grounds be set aside and that of the Assessing Officer be restored.