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Income Tax Appellate Tribunal, “B” BENCH: KOLKATA
Before: Shri N. V. Vasudevan, JM & Shri M. Balaganesh, AM]
ORDER
Per Shri M. Balaganesh, AM:
This appeal by revenue and Cross Objections by assessee are arising out of order of CIT(A)-I, Kolkata vide Appeal No. 428/CC-XI/CIT(A) C-1/12-13 dated 30.08.2013. Assessment was framed by DCIT, Central Circle-XI, Kolkata u/s. 143(1) of the Income tax Act, 1961 (hereinafter referred to as the “Act”) for AY 2010-11 vide his order dated 19.12.2012. Since both the appeal and the cross objection are arising out of the same order of CIT(A), we dispose them off by this common order.
The issue to be decided in this appeal of revenue is as to whether Explanation to Sec. 73 of the Act can be made applicable in the facts and circumstances of the case.
Brief facts of this issue are that the assessee is a Private Limited Company, engaged in the business of purchase and sale of shares, securities, commodities and derivatives. The Ld. AO observed that the assessee suffered loss of Rs.35,19,923/- from the business of purchase and sale of shares, futures and derivatives. The Ld. AO also observed that the assessee had earned interest income of Rs.49,26,724/- from fixed deposits kept with schedule banks which was offered by the assessee for taxation as income from business. The assessee explained before the AO that for the purpose of 2 & CO No.145/K/2013 M/s. Samridhi Stocks Pvt. Ltd. AY 2010-11 carrying out the business of the assessee, it has to deposit margin money, collateral security and give guarantees to stock exchange/clearing Member for which the fixed deposits are pledged with Banks. Interest earned on the fixed deposit is accordingly incidental for the purpose of dealing in shares and securities and hence, forms an integral part of the total trade of the company and hence, the same cannot be treated in isolation. The Ld. AO not convinced with the submissions of the assessee proceeded to complete the assessment in the following manner:
INCOME FROM BUSINESS (Speculative Explanation to Section 73): Net Profit as per P&L A/c Rs.7,45,834.00 Less: Dividend exempt u/s. 10(34) 4,39,029.00 Interest income 49,26,724.00 Amalgamation expenses 46,816.00 Depreciation as Income Tax 2,28,084.00 Rs.56,40,653.00 (-) Rs.48,94,819.00 Add: Depreciation as per Company Act 3,11,751.00 Amount inadmissible u/s. 14A 90,341.00 Inadmissible Expenses u/s. 37(1) 43,416.00 Rs.4,45,508.00 Speculative business loss to be carried forward (-) Rs.44,49,311.00 INCOME FROM OTHER SOURCES Interest income Rs.49,26,724.00 Total income: Rs.49,26,724.00 R/O Rs.49,26,720.00
On first appeal, the Ld. CIT(A) held that the interest income from the said deposits derived by the assessee was due to placing of margin money with the Stock Exchange so as to enable the assessee to get exposure to trade on the NSE platform in accordance with their risk management policy and so dealing in securities and interest on FDs were integral part of the securities business. Accordingly, he directed the Ld. AO to assess the loss arising from dealing in securities as well as interest income from FDs under profits from speculative business and allowed the appeal of assessee. Aggrieved, revenue is in appeal before us.
The assessee has also raised Cross Objection in respect of this issue as below: “2. For that the Ld. CIT(A) was perfectly justified in holding the view that explanation to section 73 was not applicable. Even otherwise the said explanation was not applicable, since as the income from other sources was more than the income under the head business as computed by the AO himself and therefore Explanation to sec. 73 was not applicable.”
From the perusal of the assessment order, we find that the income from other sources of Rs.49,26,724/- assessed by the Ld. AO is more than the speculative business loss assessed by the Ld. AO in the sum of Rs.44,49,311/-. In this regard, it would be appropriate to reproduce the provisions of Explanation to Sec. 73 of the Act, which is 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 13[the principal business of which is the business of trading in shares or 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.”
Hence, we find that in any case the provisions of Explanation to Sec. 73 of the Act could not be made applicable in the facts and circumstances. The Ld. AR also placed reliance on the decision of the jurisdictional High Court in the case of of 1999, CIT Vs. Middleton Investment & Trading dated 15.01.2014, wherein it has been held as under:
“The Court : The income of the assessee arising from different heads was as follows:
I. Loss in the purchase and sale of shares (-) Rs.10,83,091/- including interest liability attributable to it. II. Income from the business of granting (+) Rs.2,10,218/- loans, advances etc. III. Short term capital gains in sale of shares (+) Rs.6.425 (as per computation filed). IV. Income from other sources (as per (+) Rs. 10,13,798/- computation filed) The assessee was interested in contending and, in fact, contended as follows:
" ... the loss in purchase and sale of shares is to the tune of Rs.10.83,091/- and income from the business is Rs.2,10,119/-. The net loss under the head "income from business and profession" comes to Rs.8,72,972/- whereas, the income earned under the heads "Income from other sources" is greater i.e., to the tune of Rs.10,13,798/- and, therefore, the case of the assessee falls outside the purview of Explanation to Section 73." The learned Tribunal held as follows: " ... the net loss under the head "profits and gains of business or profession" would be Rs.8,72,972/- whereas, the income shown by the assessee under the head "income from other sources" is to the tune of Rs.10,13,798/-. We are, therefore, of the opinion that the assessee's gross total income consisted mainly of income assessable under the head "income from other sources". It therefore, follows that the loss in share trading has to be treated as business loss. We direct the A.O. accordingly."
Aggrieved by the order of the learned Tribunal, the revenue has come up in appeal. At the time of hearing, Mr. Saraf, learned advocate very fairly drew our attention to the 4 & CO No.145/K/2013 M/s. Samridhi Stocks Pvt. Ltd. AY 2010-11 judgment in the case ofCIT vs. Darshan Securities (P) Ltd. reported in 341 ITR 556 wherein the following view was taken:
"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 except 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 lakhs (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 section 73(1)." The judgment cited by Mr. Saraf is directly on the point sought to be agitated by the revenue. There is nothing to show that the view taken by the Bombay High Court is erroneous. We are, as such, of the opinion that the appeal must fail and is hereby dismissed.”
In view of the aforesaid findings and respectfully following the same, we dismiss the appeal of the revenue and allow the ground no. 2 of the assessee’s Cross Objection.
With regard to ground no.1 raised by the assessee in its Cross Objection on the issue of disallowance u/s. 14A of the Act in the sum of Rs. 28,093/-, the Ld. AR during the course of hearing stated that in view of the smallness of the amount he is withdrawing the said ground. The same is reckoned as stated from the Bar and accordingly, the ground no. 1 of the Cross Objection of assessee is dismissed as not pressed.
In the result, the appeal of revenue is dismissed and the Cross Objection of assessee is partly allowed.
Order is pronounced in the open court on 18.05.2016