ITO 4(2)(4), MUMBAI vs. MARUDHAR MUDRA P.LTD, MUMBAI

Per Joginder Singh (Judicial Member) The Revenue is aggrieved by the impugned order dated 15/02/2012 of the ld. First Appellate Authority, Mumbai. The only ground raised in this appeal pertains to allowing

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share trading loss of Rs.5,65,99,543, by the ld. Commissioner of Income Tax (Appeals).

2.1 We have considered the rival submissions and perused the material available on record. Before coming to any conclusion, we are reproducing hereunder the relevant portion from the findings arrived at in the impugned order for ready reference:-

“5.1. I have carefully and dispassionately considered the facts and circumstances of the case. Briefly stated the facts are that the appellant company paid Rs.15 lacs by account payee cheque No.80308 dated 30/02/2006 to the builder M/s Sky Whisper Real Estate Pvt. Ltd. Having received the said initial payment of Rs.15

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lacs, the said builder MIs Sky Whisper Real Estate Pvt Ltd. allotted 12000 sq.ft builtup area to the present appellant company on the 9th and 10th floor of the proposed building vide allotment letter dated 07.02.06 issued in favour of the appellant. During the pendency of construction the previously mentioned builder approached the appellant with a request letter dated 09.06.06.The appellant filed their letter dated 15.06.06 and expressed willingness to surrender the previously mentioned allotment of 12000 sq.ft built up area. The builder then accepted the surrender of allotment rights made by the appellant and offered a sum of Rs.5,65,000/-(Rs.5.80 lacs - Rs.15 lacs) under the head "Income from Other Sources". The LAO taxed the said income as "Business Income". I do not agree with the view of the LAO that the cancellation of allotment right is an income chargeable to tax under the head "Income from Business/Profession". There is no finding that, at any point of time preceding to this, the appellant had entered into a similar agreement. It was impossible upon the given facts to hold that cancellation of allotment of 12000 sq.ft built up area was in the course of regular business. At the best, it was tantamount to termination or pre-matured determination of a capital asset and any amount received for such pre-matured determination cannot be assessed under the head “Income from Business or Profession”. Reliance is placed on the Hon’ble Bombay High Court in the case of CIT vs Kantilal Shah & Anr. (1979) 118 ITR 647 (Born). Therefore compensation received for pre-matured cancellation of allotment of a flat, which is not a usual feature of business cannot be assessed under the head "Income from Business or Profession".

5.2 received Secondly, the appellant compensation for surrendering the right of allotment in an immovable property. When a receipt is referable to fixed capital, it is not taxable. It is taxable as a revenue receipt when it is referable to circulating capital or stock-in-trade. The business of the present appellant is not of buying and selling of real estate. Therefore such compensation received by the appellant cannot be taxed under the head "Income from Business or profession". Strong reliance is placed on the decision of CIT vs Seshasayee Bros (P) Ltd (1996) 222 ITR 818 (Mad).

5.3 Thirdly, the LAO has not disputed that the SUM received by the appellant was a compensation for relinquishing all the rights the appellant had in the allotted property. It is not disputed that the compensation was a consideration received towards relinquishment or surrender of the tenancy rights and ownership rights and consequently it does not partake the character of income under the head

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"Income from Business Or Profession". Reliance is placed on the decision in the case of CIT vs Joy Ice-Creams(Bang.) Pvt. Ltd (1993) 201 ITR 894(Kar).

5.4 Fourthly, Hon'ble Gujarat High Court in the case of Rajabali Nazarali &Sons vs CIT (1987) 163 ITR 7 (Guj) has held that mere transfer of vacant profession of shop and compensation was nothing but premium received from transferring lease hold rights. Burden lies on the revenue to show that the right was liable to tax. Nomenclature of receipt was irrelevant and that such receipt was of capital nature. Hon’ble Bombay High Court in the case of Cadell Weaving Mill Co.(P) Ltd vs CIT (2001) 249 ITR 265 (Born) held that consideration for surrendering tenancy right is a capital receipt accruing on transfer of capital asset.

5.5 Similar views have been also given by various courts and such decisions may be cited as under:- � CIT vs Smt T P Sidhwa (1982) 133 ITR 840 (Boni) � CIT vs Bombay Burma Trading Corporation (1987) 161 ITR 386(5C) � CIT vs Manna Ramji & Co.(1972) 86 ITR 29(5C)

5.6 Having regard to the facts and circumstances of the case and in the light of the aforesaid decisions, it is held that the LAO has wrongly charged compensation received by the appellant from cancellation of allotment rights in the premises allotted to the appellant under the head 'Income from Business or Profession". The appellant has offered such income as "Income from Other Sources".

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of such shares. However, this fiction is specifically made inapplicable to companies 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 the business of banking or the granting of loans and advances.

6.1.1 A perusal of the Explanation to s. 73 would make it clear that where any part of the business of the company consists in the purchase and sale of shares of other companies, for the purpose of s. 73 such company shall be deemed to be carrying on speculation business. There can be no difference between the losses suffered in the course of trading by delivery and losses in terms of the book value. As long as the assessee is carrying on business of trading by way of purchase and sale of shares even if in respect of any financial year, there are no transactions and yet the company has stock-in-trade of shares, the book value will have to be considered for the purpose of considering the profit and loss in case of speculative business. There can be no doubt that the Explanation to s. 73 cannot be read to mean only when there is a purchase and sale of shares in the course of the financial year. The Explanation will cover both the shares which are stock-in-trade and shares which are traded in the course Of the financial year for the purpose of considering the loss and profit for that year. The loss of profit on account of valuation amounts to revenue losses or revenue receipt. Prasad Agents (P) Ltd. vs ITO (2009) 226 CTR (Bom) 13.

6.1.2 The words "income" or "profits arid gains" should be understood as including losses also, so that in one sense "profits and gains" represent "positive income" whereas "losses" represent "negative income". In other words, "loss" is "negative profit". Both positive arid negative profits are of revenue character. Both must enter into the computation, wherever it becomes material, in the same mode of the taxable income of the assessee. In Eastern Aviation Industries Ltd. Vs CIT (1994) 208 ITR 1023 (Cal): the loss of Rs.28,50,358 as per Profit and Loss Account comprised loss of s.7,95,447 from speculative share transactions, loss of 5.12,90,145 from regular share dealing business and interest payments of Rs.8,21,400 pertaining to the shares dealing business. The only income was by way of dividends amounting to Is.3,87,603. On these facts, Explanation to section 73 was held to be attracted as the business loss was more than the dividend income and as such the assessee company could not be said to be a company whose gross total income consisted mainly of income which was chargeable under the heads "Interest on securities", "Income from house property", Capital gains" and "Income from other sources".

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6.1.3. This decision was followed in Arijastiuin Corporation Ltd. Vs CIT (2002) 253 ITR 401 (Cal) in which it was held that when the assessee company had incurred loss, in shore dealings far in excess of income computed under the head "Income from other sources" during the relevant previous year, it could not be held to be an investment company within the meaning of s. 109(ii) and therefore, Explanation to s. 73 was clearly applicable and loss was speculative loss.

6.1.4. According to the Karnataka High Court in Mysore Rolling Mills (p) Ltd. vs CIT (1992) 195 ITR 404(Kar): TC46R 257 the part of the business of the assessee-company consisted of the purchase and sale of shares of other companies; it is only in such a situation that such dealing in shares is deemed to be carrying on a speculation business. The facts of each case will have to be examined to arrive at the conclusion as to whether the transaction in question is a speculative venture or business. The High Court observed that the nature of the assessee's business in general, the purpose behind the particular transaction, the effect of the transaction, are all to be considered and unless it is conclusively established that the assessee entered into the transaction clearly as a speculative venture, the Courts cannot infer that the transaction was a speculative venture only because the assessee derives subsequently the benefit of tax reduction. In the said case, the loss arising from the purchase and sale of shares in a sister concern was held be a a short term capital loss but not a speculation loss.

6.1.5 Assessee company having incurred loss in share dealing account far in excess of income from other sources and dividend income it has to be held that its main income consists of business of share trading and test of Explanation to s. 73 was not satisfied and, therefore, the loss incurred by assessee was a loss from speculative business. [CIT vs. Park View Properties (P) Ltd. (2003) 261 ITR 473 (Cal)].

6.1.6 In Williamson Financial Services Ltd. Vs CIT & Anr. (2007) 290 ITR 385 (Gau) Tribunal had not recorded a define finding based on materials on the Question whether assessee was covered by Explanation to s. 73 and hence High Court remanded the matter to the Tribunal.

6.1.7 The Honble ITAT, Special Bench, Mumbai in the case of ACIT Vs Concord Commercials P Ltd (2005) 2 SOT 276 (Mum) (5B) has held that Explanation to sec 73 is not applicable to a company falling under any of the following categories:-

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(I) A company whose gross total income consisted mainly of income which is chargeable under the heads "interest on securities", "income from house property", "capital gains" and "income from other sources".

(ii) A company, the principal business of which is the business of banking or the granting of loans and advances.

2.That, the tests necessary for determining whether a company falls under any of the above two exceptions are provided in the Explanation itself.

3.That, in the case of a company falling under the first category above the test is to examine whether gross total income of that 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". The composition of gross total income alone needs to be looked into.

4.That, in the case of a company falling under the second category above, the test is to examine the principal business carried on by the company to ascertain whether the principal business is that of banking or the granting of loans and advances. The nature of the principal business carried on by the company alone need to be looked into.

6.1.8. The Hon’ble Ahmedabad Tribunal in the case of Aayojan Investments P Ltd Vs ACIT (2009) 123 ITA (Ahd) 129 has held that if assessee having lossunder the head "capital gains" much more than the income under the head "Income from Business", then such case is covered by Exception as provided in Explanation to S. 73.

6.1.9. Honble ITAT Mumbai Bench in the case of Paramount Information also held that upon excluding the speculation loss of Rs.22,728/-, the gross total income became a positive figure of Rs.2,957/- and accordingly, income from other sources was more than business profits and therefore, assesses's loss on trading in shares was not attracted by provisions of section 73. The assessee's case was held to be covered by first exception in explanation to Section 73 of the Act.

6.1.10 The Honble Mumbai Tribunal followed the decisions in the case of IIT Investments Trusts Limited 107 ITI) 257 and held that the assessee's case was covered by exception in Explanation to section 73 of the Act.

6,1.11 Having regard to the facts and circumstances of the present case and in the light of the aforesaid judicial decisions, it is held that the present appellant's case is covered by the first

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exception in explanation to s. 73 of the Act and therefore, provisions of Explanation to s. 73 will not apply. The LAO is directed to allow the set off of losses incurred in the share trading against the assessed income. Therefore the aforesaid Ground of appeal is allowed. 7. In the result, the appeal is allowed.”

2.2 If the observation made in the assessment order, leading to addition made to the total income, conclusion drawn in the impugned order, material available on record, assertions made by the ld. respective counsels, if kept in juxtaposition and analyzed, we note that as per the Profit & Loss a/c for the year ended 31st March 2007, following receipts / income were disclosed by the assessee:-

Now, we shall analyse the Profit & Loss A/c for the year ending 31st March 2007, wherein following expenses / outgoings were debited by the assessee:-

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We note that in order giving effect to the order of the ld. first appellate authority, the computation of income would be as under:-

Income From Business & Profession Consultancy Rs.3,75,000 income Interest Rs.13,81,755 Less: expenses & Rs.(5,81,00,005) Rs.(5,63,43,250) outgoings as per Profit & Loss A/c

Income From Other Sources Compensation received Rs.5,65,00,000 Total Income Rs.1,56,750

If the aforesaid tables are analysed, one undisputed facts is oozing out that the total income assessed for the year was under the head “Income From Other Sources” because the ld. A.O. wrongly charged compensation from cancellation of allotment rights in the premises allotted to the assessee under the head “Income From Business or Profession”. It is also noted that the assessee also offered such income as “Income From Other Sources”. Now, question arises whether Explanation to section 73 of the Act is applicable to the facts and the circumstances available on record. We note that it is not in dispute that the assessee offered Rs.3,75,000 only as consultation fees under the head “Income From Business or

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Profession” and the remaining amount of Rs.13,81,755, was on account of interest received which was offered and assessed under the head “Income From Other Sources”. The compensation for surrendering the allotment of flats has not been held as income under the head “Income From Business and Profession” therefore, Explanation to section 73, in our view, is not applicable because as per section 73, where any part of the business of a company consist in purchase and sale of shares of other companies, such company is deemed to be carrying on a speculation business to the extent to which the business consist of purchase and sale of such shares. It is also observed that the fiction is specifically made inapplicable in the cases of the company whose gross total income consist mainly of income which is chargeable under the head “Interest on Securities”, “Income From House Property”, “Capital Gains” and “Income From Other Sources” or a company whose principal business is business of banking or granting loans and advances. Our view is fortified by the ratio laid down in Prasad Agents (P) Ltd. v/s ITO, [2009] 227 CTR (Bom.) 13. The word “Income” or “Profit & Gains” should be understood as including “Losses” also. In view of the fact, it can be concluded that profits and gains represent “Positive Income” whereas losses represents “Negative Income” or it can be said that “Loss is negative profit”. Both positive and negative profits are of revenue in character. The ratio laid down in Eastern Aviation Industries Ltd. v/s CIT, [1994] 208 ITR 1023 (Cal.) supports our view. This decision was followed in Aryasthan

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Corporation Ltd v/s CIT, [2002] 253 ITR 401 (Cal.) wherein it was held that where the assessee company had incurred loss, in share dealing far in excess of income computed under the head “Income From Other Sources”, during the relevant previous year, it could not be held to be an investment company within the meaning of section 109(ii), therefore, Explanation to section 73 was applicable and loss was speculative loss. In another case of Mysore Rolling Mills P. Ltd. v/s CIT, 195 ITR 404 (Kar.), the Hon’ble High Court held that Explanation is attracted only when part of business of the assessee company consisted of purchase and sale of shares of other companies. It is only in such a situation that such dealing in shares is deemed to be carrying on speculation business. Thus, the facts of each case have to be examined independently to arrive at a conclusion as to whether the transaction in question is a speculative venture or business. Thus, it can be concluded that having the assessee company incurred loss in share dealing account far in excess of income from other sources and dividend income, it has to be concluded that its main income consist of business of share trading thus, the test of Explanation to section 73 is not satisfied. The Special Bench of the Tribunal in Concord Commercials Pvt. Ltd., [2005] 2 SOT 276 (Mum.) (SB), held that Explanation to section 73 is not applicable to a company which is falling under any of the categories mentioned hereunder:-

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“(i) A company whose gross total income consisted mainly of income which is chargeable under the heads “income from house property”, “capital gains” and “income from other srouces”.

(ii) A company, the principal business of which is the business of banking or the granting of loans and advances.

We further note that the assessee finds support from the ratio laid down in Paramount Information systems Pvt. Ltd. and Aayojan Investments Pvt. Ltd. v/s ACIT, [2009] 123 TTA (Ahd.) 129 and IIT Investment Trust Ltd. 107 ITD 257. Thus, in totality of the facts and circumstances and the case laws clearly indicate that the present case is covered by the first

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exception in Explanation to section 73 of the Act, therefore, the provisions of Explanation to section 73 will not apply, consequently, we find no infirmity in the conclusion drawn by the ld. Commissioner of Income Tax (Appeals). The order of the first appellate authority, therefore, is affirmed.

Finally, the appeal of the Revenue is dismissed. This Order was pronounced in the open court in the presence of ld. representatives from both sides at the conclusion of the hearing on 13/10/2015.

Sd/- Sd/- (Rajesh Kumar) (Joginder Singh) लेखा सद�य / ACCOUNTANT MEMBER �या�यक सद�य / JUDICIAL MEMBER मुंबई Mumbai; �दनांक Dated : 20/11/2015 f{x~{tÜ? P.S/.�न.स. आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant 2. ��यथ� / The Respondent. 3. आयकर आयु�त(अपील) / The CIT, Mumbai. 4. आयकर आयु�त / CIT(A)- , Mumbai 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, मुंबई / DR, ITAT, Mumbai 6. गाड� फाईल / Guard file. आदेशानुसार/ BY ORDER, स�या�पत ��त //True Copy// उप/सहायक पंजीकार (Dy./Asstt. Registrar) आयकर अपील�य अ�धकरण, मुंबई / ITAT, Mumbai.