LOTUS CAPITAL FINANCIAL SERVICES PVT. LTD.,KOLKATA vs. ITO, WD-6(2), KOLKATA, KOLKATA

The only common issue in these two appeals of assessee is as regards to the orders of lower authorities treating the loss on account of trading in shares as speculation loss not allowable in view of Explanation to Sec. 73 of the Act. Facts and circumstances in both the years are common and hence, I will decide the issue after taking the facts from AY 2004-05 in ITA No. 410/K/2014.

3. Briefly stated facts are that the assessee had purchased and sold shares of various companies on which it has incurred loss at Rs.49,77,455/-. The assessee claimed speculation profit also amounting to Rs.40,02,193/- and thereby net loss was claimed at Rs.9,55,524/-. The AO applying the provisions of section 73 of the Act, disallowed the loss by observing that assessee was all along shown interest income under the head business income and it had during the year gave loans and advances of substantial amount. Therefore, according to him, the interest income was taxable under the head business income and not from income from other sources. According to him, the explanation to sec. 73 of the Act applies to assessee’s case and loss arising out of share dealing was disallowed to the extent of Rs.9,55,524/- out of which already addition made u/s. 94(7) of the Act at Rs.98,750/- thereby net speculation loss was disallowed at 2 & 411/K/2014 Lotus Capital Fin. Services P. ltd. AY 2004-05 & 2005-06 Rs.8,56,744/-. Aggrieved, assessee preferred appeal before CIT(A), who also confirmed the action of AO. Aggrieved, now assessee is in second appeal before Tribunal.

I have heard rival submissions and gone through facts and circumstances of the case. I find that the AO has treated the interest income as income from business on the ground that substantial portion of the fund of the assessee was deployed in loans to different parties throughout the year. The AO also viewed that the assessee has disclosed income from interest as income from business in earlier year as well as in current year while filing return of income but changed this stand afterward. From the Balance sheet, I find that the net own fund of the assessee were at Rs.727 lacs out of which Rs.618 lacs were lying invested in trading of stock of shares which constitute about 85% of the net own funds. Another Rs.33 lacs was lying with sundry debtors on account of sale of shares which constitute about 4.5% and total comes to 88.5% of the capital lying blocked in share business, whereas the amount invested in loan was only Rs.22 lacs which constitute 3% of the net own funds. The assessee has enclosed this copy of Balance Sheet in its paper book. The details of loan given from which it is clear that there are in all 11 parties to whom loans were given out of which four parties were brought forward from earlier years. The total transactions of the loan given during the year were only 16, where there are 100s of transactions in dealing in shares and speculations during the year. I find that the AO while assuming that even if interest income is accepted as income from other sources then even the share dealing loss has to be treated as speculation loss in view of explanation to section 73 of the Act. The AO viewed that the loss in purchase and sale of shares for the purpose of application of Explanation to section 73 of the Act to be restricted at Rs.49,77,945/- is totally wrong and income from interest was less than that. As rightly contended by the assessee before me that it is the entire business of purchase and sale of shares whether delivery was taken or not, there is otherwise not in dispute that the income from interest and income from dividend which was Rs.13,54,819/-, which was more than the loss in business of purchase and sale of shares. Ld. Counsel for the assessee before me, gave the details of income which is as under: “Loss in share dealing (-) Rs. 8,56,744/- Interest Income Rs.11,32,471/- Rs. 2,75,727/-

In view of the above, I also find that the issue is also covered by the decision of Calcutta High Court in the case of CIT vs Middleton Investment & Trading Co. Ltd in of 1999 dated 15.1.2014 which in turn relied on the decision of Bombay High Court in the case of CIT vs Darshan Securities (P) Ltd reported in 341 ITR 556 (Bom). I find that the intention behind provisions 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. Further in order to determine whether the exception that is carved out by the Explanation applies to the facts of this case, I hold that the legislature has first mandated the computation of gross total income of assessee. The words “consists mainly” in explanation to section 73 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. Hence 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 gross total income has to be computed by computing the income under the head profits and gains of business including the business income from commission of Rs. 9,48,852/- and loss from share trading of Rs. ITA No.1079/Kol/2012 M/s. Parrot Agencies & Credited Pvt.Ltd. A.Yr.1997-98 4 12,21,800/- for the simple reason that both being sources under the same head. The 4 & 411/K/2014 Lotus Capital Fin. Services P. ltd. AY 2004-05 & 2005-06 assessee also had reported income from other sources at Rs. 2,77,572/-. Hence I find lot of force in the arguments of the Learned AR that the comparison should be done head wise and not source wise. Accordingly I hold that the facts of the case of the assessee squarely falls within the purview of the exception carved out in the Explanation to section 73 of the Act and consequently I hold that the assessee would not be deemed to be carrying on speculative business. The case law relied upon by the revenue is distinguishable from the facts of the instant case. I also find that this issue is squarely covered by the decision of the coordinate bench of this tribunal in the case of M/s Thakorlal Hiralal Exports Pvt Ltd vs ITO in ITA No. 903 / Kol /2010 for Asst Year 2004-05 dated 19.12.2014. In view of the clear provisions of the Act and in view of the facts of the case and the judicial precedents relied upon including the jurisdictional high court decision and coordinate bench of tribunal decision, I reverse the orders of the lower authorities on this ground. Accordingly, the ground no.1 raised by the assessee is allowed.

Similar is the issue and facts are exactly identical in ITA No. 411/Kol/2014 for AY 2005-06, taking a consistent view in this year also, we allow this issue of assessee’s appeal.

In the result, appeals of assessee are allowed.

Order is pronounced in the open court on 16.12.2015. Sd/- (Mahavir Singh) Judicial Member Dated : 16th December, 2015 Jd.(Sr.P.S.) Copy of the order forwarded to: APPELLANT Lotus Capital Financial Services P. Ltd., Room No. 59, 4th 1. floor, 113, Netaji Subhas Road, Kolkata-700 001. 2 Respondent – ITO, Wd-6(2), Kolkata.