Ita/1231/2009 Of The Commissioner Of Income Tax v. Harrisons Malayalam Financial Services Ltd

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT: THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN & THE HONOURABLE MR.JUSTICE ASHOK MENON THURSDAY, THE 21ST DAY OF FEBRUARY 2019 / 2ND PHALGUNA, 1940I.T.A.No.1231 of 2009 AGAINST THE ORDER IN ITA 7/COCH/2007 DATED 08-08-2007 OF INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH, COCHIN APPELLANT/S: THE COMMISSIONER OF INCOME TAX,COCHIN. BY ADVS.SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT/S: HARRISONS MALAYALAM FINANCIAL SERVICES LTD.,BRISTOW RD, WILLINGDON ISLAND, KOCHI. BY ADVS.SRI.P.BENNY THOMASSRI.E.K.NANDAKUMAR (SR.)SRI.K.JOHN MATHAISRI.P.GOPINATH (SR.) THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 21.02.2019, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: Vinod Chandran,J. JUDGMENT The Revenue is in appeal challenging the order ofthe Income Tax Appellate Tribunal, Cochin Bench inI.T.A.No.7/Coch/2007 for the assessment year 2003-04pertaining to the dismissal of the Revenue's appeal andconfirming order of the first appellate authority. 2. The assessee is a non-banking financial companyengaged in the business of sale and purchase of shares. Theassessee filed original return of income for the assessment year 2003-04 on 31.10.2003 declaring a loss ofRs.5,39,19,380/-. On the return being processed underSection 143(1) of the Income Tax Act, 1961 [for brevity“the Act”], the assessee's case was selected for scrutinyand notice under Section 143(2) was issued to the assesseeon 04.10.2004. A revised return was filed on 31.03.2005 bythe assessee re-computing the loss at Rs.3,11,43,326/- andclaiming a refund of Rs.1,72,011/-. 3. While completing the assessment, the A.O. resorting to the Explanation to Section 73 of the Act,treated the returned loss of Rs.3,19,13,970/- asspeculation loss, as the assessee is a non-banking companywhose income consists mainly of“income from business”. The assessee's business consists of trading in shares of othercompanies. The speculation loss, according to the A.O.,could be set off only as per the provisions ofsub-sections (1) to (4) of Section 73 of the Act.4.The assessee filed an appeal before theCommissioner of Income Tax (Appeals), who vide order dated19.10.2006 allowed the appeal and directed the A.O. not totreat the loss as speculation loss. The reasoning was that,as per CBDT circular No.204 dated 24.09.1976, non-bankingfinance companies have been taken out of the scope ofapplication of Section 73 and hence trading loss of suchcompanies shall not be treated as speculation loss. TheRevenue preferred an appeal before the I.T.A.T. and videthe impugned order dated 08.08.2004 the appeal wasdismissed, holding that Explanation to Section 73 is notapplicable to the case of the assessee. It was so held, onthe finding that the gross total income of the Companyconsists mainly of “interest on securities”, “income fromhouse property”, “income from capital gains” and “incomefrom other sources”. 5.The following substantial questions of law arise for consideration of this Court in appeal: “1. Whether, on the facts and in the circumstancesof the case and also in the light of theof the case and also in the light of the decisions in 253 ITR 403, 261 ITR 473, 208 ITR1023, ought not the Tribunal have restored theorder of the assessing officer ? 2.Whether, on the facts and in the circumstancesof the case, the Tribunal is right in law and infact in holding that “the Assessee Company iscovered in the first exception provided in theexplanation, as its gross total income mainlyconsists of income under the head Interest onSecurities, Income from House Property, Incomefrom Capital Gain and Income from OtherSource” ? 5.The following substantial questions of law arise for consideration of this Court in appeal: “1. Whether, on the facts and in the circumstancesof the case and also in the light of theof the case and also in the light of the decisions in 253 ITR 403, 261 ITR 473, 208 ITR1023, ought not the Tribunal have restored theorder of the assessing officer ? 2.Whether, on the facts and in the circumstancesof the case, the Tribunal is right in law and infact in holding that “the Assessee Company iscovered in the first exception provided in theexplanation, as its gross total income mainlyconsists of income under the head Interest onSecurities, Income from House Property, Incomefrom Capital Gain and Income from OtherSource” ? 3.Whether, on the facts and in the circumstancesof the case is the explanation to section 73 ofIncome tax Act applicable in this case ?”of the case is the explanation to section 73 ofIncome tax Act applicable in this case ?” 6.We heard the learned Standing Counsel, Government of India (Taxes) appearing for the Revenue andthe learned Counsel appearing for the assessee. 7.Section 73 with the Explanation, pertinent forthis appeal, reads thus: “73. Losses in speculation business.- (1) Anyloss, computed in respect of a speculationbusiness carried on by the assessee, shall not beset off except against profits and gains, if any,of another speculation business. xxx xxx xxx Explanation.—Where any part of the businessof a company (other than a company whose grosstotal income consists mainly of income which ischargeable under the heads “Interest onsecurities”, “Income from house property”,“Capital gains” and “Income from other sources”,or a company the principal business of which isthe business of banking or the granting of loansand advances) consists in the purchase and saleof shares of other companies, such company shall, for the purposes of this section, be deemed to becarrying on a speculation business to the extentto which the business consists of the purchaseand sale of such shares.” 8. The argument of the learned Counsel for the Revenue is that by virtue of the afore-cited Explanation,which is in the nature of a deeming provision, the loss ofthe assessee company having been occasioned in the businessof buying and selling shares of other companies, it has tobe treated as a speculation loss in view of the Explanationto Section 73. On the other hand, the argument of thelearned Counsel for the assessee is that theassessee-company is a non-banking financial company,engaged mainly in the trading of shares. The purpose of theExplanation was to curb the device resorted to by businesshouses controlling a group of companies to manipulate andreduce the taxable income of the companies under theircontrol, by involving in speculative investments; asclarified by the CBDT in Circular No.204 dated 24.07.1976. 9. The assessee for the subject year, being2003-04, had a loss of Rs.1,68,674/- from the sale ofshares. It also had a dividend income of Rs.31,93,299/-. Inaddition to this, the assessee had an expenditure from theearlier year; which, as per earlier orders of assessment, was spread over for the subsequent years. The expenditureas applicable to the present year, as is seen from theassessment order produced as Annexure R-1(a); having beenset off against the income from business for the year,there was a total loss of Rs.3,19,13,970/-. The assesseealso had income from other sources at Rs.7,98,850/-, whichwas completely by way of refund of income tax for theearlier years. The assessee's claim is that the businessloss which arose in this particular year could be set offagainst the income from other sources. was spread over for the subsequent years. The expenditureas applicable to the present year, as is seen from theassessment order produced as Annexure R-1(a); having beenset off against the income from business for the year,there was a total loss of Rs.3,19,13,970/-. The assesseealso had income from other sources at Rs.7,98,850/-, whichwas completely by way of refund of income tax for theearlier years. The assessee's claim is that the businessloss which arose in this particular year could be set offagainst the income from other sources. 10. The Revenue, however, contends that theassessee being a company engaged in speculative business,the business loss suffered by such a company could be setoff only as against speculative income as per Section 73.The learned Standing Counsel for Government of India(Taxes) also relies on the following three decisions -Eastern Aviation & Industries Ltd.v. C.I.T. [(1994) 208ITR 1023 (Cal.)], Aryasthan Corporation Ltd.v. C.I.T.[(2002) 253 ITR 401 (Cal.] and C.I.T.v. Park ViewProperties P. Ltd. [(2003) 261 ITR 473 (Cal.)]. 11. The facts in Aryasthan Corporation Ltd. werethat the gross total income as computed by the A.O.; for AY1982-83 comprised of speculation loss from share dealing of ITA.1231 of 2009 Rs.4,50,779/- and income from other sources was atRs.24,000/-. The Calcutta High Court with regard to theapplicability of Explanation to Section 73, took the viewthat the case is fully covered by the decision in the caseof Eastern Aviation and Industries Ltd. v. CIT[(1994) 208ITR 1023 (Cal)] and held that the assessee cannot be saidto be a company whose gross total income consists mainly ofincome chargeable under the heads “Interest on securities”,“Income from house property”, “capital gains” or “Incomefrom other sources”; since the business loss exceeds incomecomputed under the head “Income from other sources” and, assuch the Explanation to Section 73 is clearly applicable. 12. We find from the aforesaid decisions that insimilar instances where the assessees carried onspeculative business, like dealing in shares, when sufferedlosses, the claim of set off against the income fromsources other than the profits and gains of business orprofession, was found to be not permissible going bySection 73. 13. We specifically refer to the facts in ParkView Properties P. Ltd., one of the latest decisions citedby the learned Counsel for the Revenue. Therein, theassessee had income from other sources of Rs.5,73,701/- and business income of Rs.3,33,670/-. The Tribunal found thatsince the income from other sources was more, the exemptionas applicable under Explanation to Section 73 would apply.Hence, the business losses, though loss from speculativebusiness, the same could be set off against income fromother sources. However, the Division Bench of the CalcuttaHigh Court found that there was a loss in the share dealingaccount, of Rs.8,98,799/-, and this being negative income,the same has to be taken for the purposes of theExplanation to Section 73. The said finding was on the wellestablished proposition that the words "income", "profits"and "gains" represent a positive income, whereas the lossrepresents a negative income. All the three decisions citedby the Revenue took support from the decisions of theHon'ble Supreme Court in CITv. Harprasad and Co. P. Ltd.[(1975) 99 ITR 118 (SC)] and CITv. J.H.Gotla[(1985) 156ITR 232 (SC)]. 14. The learned Counsel for the assessee, however,contends that there is an alternate argument, which has notbeen considered by the Calcutta High Court in any of thedecisions. The Explanation specifically deals with acompany whose gross total income consists mainly of incomewhich is chargeable under other heads, ie: heads other than 14. The learned Counsel for the assessee, however,contends that there is an alternate argument, which has notbeen considered by the Calcutta High Court in any of thedecisions. The Explanation specifically deals with acompany whose gross total income consists mainly of incomewhich is chargeable under other heads, ie: heads other than “income from profits and gains of business or profession”.Hence, what assumes significance is the chargeability toincome. There is no charge created on the loss and therecould only be charge on the income from other sources inthe subject assessment year insofar as the assessee isconcerned. Hence, for the assessment year the chargeableincome being “income from other sources”, the businesslosses though speculative in nature have to be allowed adeduction, despite Section 73, since the company fallsunder the exception as per the Explanation. 15. We are unable to countenance such acontention. Section 73 speaks of any loss in a speculationbusiness being permitted set off only against the profitsand gains of another speculation business. The Explanationprovides that where any part of the business of a companyconsists in the purchase and sale of shares of othercompanies, such company shall, for the purpose of thissection, be deemed to be carrying on a speculation businessto the extent to which the business consists of thepurchase and sale of such shares. The exception as providedin the Explanation is only to those companies whose grosstotal income chargeable to tax consists mainly of incomearising under the heads 'interest on securities', 'income ITA.1231 of 2009 from house property', 'capital gains' and 'income fromother sources' or a company the principal business of whichis the business of banking or the granting of loans andadvances. Admittedly the assessee is not a banking companynor is it involved in granting loans and advances. Theassessee is an investment company, which carries onpurchase and sale of shares of other companies., on whichbusiness substantial loss accrued over the years. There isno doubt that the assessee-Company is engaged in aspeculative business. Hence its losses can only be set offagainst speculative business income unless the gross totalincome of the assessee is under heads of income, otherthan “income from profits and gains of business orprofession”. 16. In the present case for the subject assessmentyear the assessee had an income from other sources, whichwas a refund of income tax. It is against this refund ofincome tax that the assessee claims set off of businessloss. If we accept the contention raised by the learnedCounsel for the assessee, then the exception as provided inthe Explanation in Section 73 has to be understood as beingapplied to each of the assessment years where there is achange in the gross total income from any other sources ITA.1231 of 2009 other than the profits and gains arising from business orprofession. 16. In the present case for the subject assessmentyear the assessee had an income from other sources, whichwas a refund of income tax. It is against this refund ofincome tax that the assessee claims set off of businessloss. If we accept the contention raised by the learnedCounsel for the assessee, then the exception as provided inthe Explanation in Section 73 has to be understood as beingapplied to each of the assessment years where there is achange in the gross total income from any other sources ITA.1231 of 2009 other than the profits and gains arising from business orprofession. 17. The question of chargeability for the purposeof exemption as argued by the learned Counsel for theassessee even if found to be acceptable, it has to be heldthat though the negative income would be chargeable; forreason of it being negative there could be no tax leviablesince that would also be a negative figure. It could onlybe understood as, when there is a loss, then there would beno payability of tax at all. In such circumstances, we areof the opinion that there could be no set off of thespeculative business loss as against the income from othersources for the year, since the exception under theExplanation to Section 73 does not apply to the Company.18.ThelearnedCounselfortherespondent-assessee also has a contention that sub-section(2) refers to the specific assessment year in which it hasto be applied. We cannot accept the said contention also,since the prohibition is insofar as sub-section (1) ofSection 73, which provides that any loss in a speculationbusiness shall not be set off except against profits andgains, if any, of another speculation business. This doesnot provide for looking at the profits and gains arising in each year in which the assessee is carrying on thebusiness. Sub-section (2) of Section 73 is a provision forcarry forward as found in Sections 70 to 72 itself. Infact, Section 73 culls out a particular type of businessloss out of Section 72 and places it under Section 73,being one occasioned by a speculative business. Hence, thevery same carry forward under Section 72 has been permittedwith respect to speculation loss also, but subject to thecondition under Section 73. In the light of the findings above, we set asidethe orders of the first appellate authority and theTribunal, and restore that of the A.O. We answer thequestions of law in favour of the revenue and against theassessee. The appeal would stand allowed, leaving theparties to suffer their respective costs. Sd/-K.VINOD CHANDRANJUDGE Sd/-ASHOK MENONJUDGE ITA.1231 of 2009 APPENDIX APPELLANT'S ANNEXURES: ANNEXURE A COPY OF ORDER U/S.143(3) DATED 30.01.2006 FOR THE ASST.YEAR 2003-04.FOR THE ASST.YEAR 2003-04. ANNEXURE BCOPY OF THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) DATED 19.10.2006. ANNEXURE CCOPY OF THE ORDER DATED 08.08.2007 OF THE INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCHIN ITA NO.07/COCH/2007.INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCHIN ITA NO.07/COCH/2007. RESPONDENT'S ANNEXURES: ANNEXURE R(1)(A)THE TRUE COPY OF THE ASSESSMENT ORDER DATED 30.11.2004 ISSUED BY THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 1(1), ERNAKULAM FOR THE ASSESSMENT YEAR 2002-03.DATED 30.11.2004 ISSUED BY THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 1(1), ERNAKULAM FOR THE ASSESSMENT YEAR 2002-03. ANNEXURE R(1)(B)THE TRUE COPY OF THE ORDER DATED 12.04.2006ISSUED BY THE COMMISSIONER OF INCOME TAX (APPEALS)-II, KOCHI.ISSUED BY THE COMMISSIONER OF INCOME TAX (APPEALS)-II, KOCHI. ANNEXURE R(1)(C)THE TRUE COPY OF THE CONSEQUENTIAL ORDER DATED 06.07.2006 ISSUED BY THE ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE 1(1), ERNAKULAM.DATED 06.07.2006 ISSUED BY THE ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE 1(1), ERNAKULAM. ANNEXURE R(1)(D)THE TRUE COPY OF THE PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31.03.2004.ACCOUNT FOR THE YEAR ENDED 31.03.2004. ANNEXURE R(1)(B)THE TRUE COPY OF THE ORDER DATED 12.04.2006ISSUED BY THE COMMISSIONER OF INCOME TAX (APPEALS)-II, KOCHI.ISSUED BY THE COMMISSIONER OF INCOME TAX (APPEALS)-II, KOCHI. ANNEXURE R(1)(C)THE TRUE COPY OF THE CONSEQUENTIAL ORDER DATED 06.07.2006 ISSUED BY THE ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE 1(1), ERNAKULAM.DATED 06.07.2006 ISSUED BY THE ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE 1(1), ERNAKULAM. ANNEXURE R(1)(D)THE TRUE COPY OF THE PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31.03.2004.ACCOUNT FOR THE YEAR ENDED 31.03.2004. ANNEXURE R(1)(E)THE TRUE COPY OF THE REVISED COMPUTATION OFINCOME FOR THE YEAR ENDED 31.03.2003.INCOME FOR THE YEAR ENDED 31.03.2003. Vku/- [ true copy ]