INCOME TAX OFFICER WARD-4(4), KOLKATA vs. M/S PAWAN INDUSTRIAL CORPORATION PVT. LTD., KOLKATA

Business Income Profit as per P/L a/c : Rs.7,01,661/- Add: Inadmissible expenses Misc exp. For authorised share capital : Rs. 6,000/- Depreciation on office space : Rs. 34,884/- Office maintenance expenses : Rs. 5,068/- Disallowance u/s 14A : Rs. 30,368/- Deemed speculation loss : Rs.45,03,270/- Rs.52,81,251/- Less: Income taxable separately Rent : Rs.4,03,200/- Rs.48,78,051/- Less : Exempt income Dividend - 2,82,125 Tax free interest -2,94,975 : Rs.5,77,100/- Income from business : Rs.43,00,951/- Income from House Property Gross annual value -4,03,200 Less:deduction u/s 24(a) -1,20,960 : Rs.2,82,240/- Total Income : Rs45,83,191/-

On appeal by the Assessee, the CIT(A) held that interest income and dividend income was to be assessed under the head “Income from other sources”. As a consequence the deeming provisions of Explanation to Sec.73 of the Act became inapplicable to the share trading loss incurred by the Assessee. Consequently the income of the Assessee was determined by setting off the loss from share trading against interest income and dividend income. The AO had disallowed Proportionate expenses of Rs.1,34,514/- attributable to trading in shares. This addition was also deleted by CIT(A) for the reason that share trading loss was considered as a normal loss and not speculative loss.

Aggrieved by the order of the CIT(A), the revenue has preferred the present appeal before the Tribunal. -M/s.Pawan Industrial Corporation Ltd.A.Y.2004-05

We have heard the submissions of the learned DR who relied on the order of the AO. The learned counsel for the Assessee relied on the order of the CIT(A) and further submitted that even assuming that the interest income and dividend income have to be considered as business income, the share trading loss and income from interest on loans and advances and dividend income have to be adjusted first to arrive at the income under the head income from business before applying the provisions of explanation to Sec.73 of the Act. If that is done then the income from business would be only Rs.2,02,289/-, as per the following computation: Income from business (interest on loans and advances & dividend income) Rs.43,00,951 Less: share trading loss Rs.45,03,270 Rs.2,02,289 The income under the head “Income from House Property” was Rs.2,80,240/- which is much higher than the income under the head “Income from business”. Therefore the Explanation to sec.73 of the Act will not be attracted and the relief given by the CIT(A) has to be sustained. In this regard he relied on the decision of the Hon’ble Calcutta High Court in the case of CIT Vs. Middleton Investments & Trading Co.Ltd. of 1999 dated 15.1.2014.

We have given a careful consideration to the rival submissions. The Hon’ble Calcutta High Court in the case of Middleton Investment & Trading Co. Ltd. (supra) had to deal with a case where the income of an Assessee from business of granting loans and advances was Rs.2,10,218/-, Short term capital gain on sale of shares Rs.6,425 and income from other sources of Rs.10,13,798. The Assessee incurred a loss of Rs.10,83,091 in share trading. The Assessee contended that its income from business was Rs.8,72,972 after adjusting loss of Rs.10,83,091 in share trading and income from business of Rs.2,10,218/- and since income from other sources was more than income under the head income from business, explanation to Sec.73 will not be -M/s.Pawan Industrial Corporation Ltd.A.Y.2004-05 attracted to treat the loss in share trading as speculative loss. The Hon’ble Calcutta High Court upheld the order of the Tribunal accepting the contention of the Assessee. The Hon’ble Calcutta High Court in coming to the above conclusion, followed the decision of the Hon’ble Bombay High Court in the case of CIT Vs. Darshan Securities 341 ITR 556 (Bom) wherein it was held that Explanation to s. 73 is designed to define a situation where a company is deemed to carry on speculation business. It is only thereafter that sub-s. (1) of s. 73 can apply. Applying the provisions of s. 73(1) to determine whether a company is carrying on speculation business would reverse the order of application. 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. The Hon’ble Bombay High Court found that on the facts before it the Assessee had 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, and observed that both would have to be taken into account in computing the income under the head of business, both being sources under the same head. Assessee had a dividend income of Rs. 4.7 lacs (income from other sources). The Hon’ble Bombay High Court held that the Tribunal was therefore justified in coming to the conclusion that the assessee fell within the purview of the exception carved out in the Explanation to s. 73 and that consequently the assessee would not be deemed to be carrying on a speculation business for the purpose of s. 73(1).

We are of the view that in the light of the aforesaid decision of the Hon’ble Bombay High Court, the order of the CIT(A) has to be upheld and even assuming the interest income and dividend income has to be held to be one from business, still the set off as done by the Assessee has to be allowed and it is only thereafter that the applicability of exception to Explantion to Section 73 of the Act, have to be explored. In the light of the above conclusion, we find no merit in the appeal by the Revenue.

In the result, appeal by the revenue is dismissed.