Itta/47/2004 Of Km/S. Melville Finest Ltd v. Joint Commissioner Of Income Tax

*THE HON’BLE SRI JUSTICE L.NARASIMHA REDDYAND *THE HON’BLE SRI JUSTICE CHALLA KODANDA RAM+I.T.T.A.No.47 of 2004 % Dated 03.12.2014 M/s. Melville Finvest Ltd. ….Appellant $ Joint Commissioner of Income Tax (Assts.). ….Respondent ! Counsel for the appellant : Sri A.V.Krishna Kaundinya^ Counsel for respondent : Sri J.V.Prasad < GIST: > HEAD NOTE: ? Cases referred: THE HON’BLE SRI JUSTICE L.NARASIMHA REDDYAND THE HON’BLE SRI JUSTICE CHALLA KODANDA RAMI.T.T.A.No.47 of 2004 JUDGMENT: (Per LNR,J) This appeal presents an occasion to address certaintypical situations covered by Section 73 of the Income Tax Act,1961 (for short ‘the Act’). The appellant is a company, undertaking various activitiesincluding the trade in yarn, making investments, such aspurchase and sale of shares of other companies. For the assessment year 1997-98, the appellant filed returns showingloss of Rs.29,71,990/-. The Assessing Officer gave an intimationmaking prima facie adjustment under Section 143(1)(a) of theAct. On the one hand, the loss of Rs.29,71,990/- was ignoredand on the other hand, the assessee was shown to be havingincome of Rs.53,37,168/-. Aggrieved thereby, the appellant filedan appeal before the Commissioner of Income Tax. The appealwas allowed and the matter was remanded to the Assessingofficer to undertake an exercise under Sub-Sections (2) and (3)of Section 143 of the Act. After remand, the appellant filedrevised returns, posting the same loss but with certain differentcalculations. The Assessing Officer passed an orderdetermining the income of the appellant at Rs.54,49,940/-. Anappeal was filed against the order of Assessment before theCommissioner (Appeals). The appeal was dismissed on21.03.2002. Thereafter, the appellant filed I.T.A.No.565/Hyd/02before the Hyderabad Bench of the Income Tax AppellateTribunal. The appeal was dismissed on 28.02.2003. Hence, thisfurther appeal under Section 260-A of the Act. Sri A.V.Krihsna Kaundinya, learned counsel for theappellant submits that there was no basis for the AssessingOfficer or the Commissioner or the Tribunal in treating theappellant as the one carrying on speculation business. Hesubmits that the principal activity of the appellant was makinginvestments and purchase and sale of shares and in that view ofthe matter, it cannot be treated as a company falling within theambit of explanation to Section 73 of the Act. Learned counselfurther submits that one of the items disallowed by the AssessingOfficer viz., Rs.1,40,47,723/- on account of fall in the value of theshares is in fact an actual loss and the same ought to have beenadjusted from the income of the appellant. It is also urged thatthe even if a company falls under explanation to Section 73 ofthe Act, the occasion to disallow any loss would arise, only whenthe activity of purchase and sale of shares takes place and notwhen it is on account of the depletion in the value of the shareswhich are very much in the possession of the assessee. Sri J.V.Prasad, learned counsel for the respondent submitsthat the circumstances, under which a company can be treatedas carrying on speculation business are furnished in detail in theexplanation to Section 73 of the Act and on the undisputed facts,the appellant falls into that category. He submits that it makeslittle difference, whether the so called loss posted by thecompany attracted by Section 73 of the Act on account of sale ofshares or the fall in value thereof. According to the learnedcounsel, no amount representing the loss of a company througha business of such activity would qualify for set off against theother non-speculative income. Sri J.V.Prasad, learned counsel for the respondent submitsthat the circumstances, under which a company can be treatedas carrying on speculation business are furnished in detail in theexplanation to Section 73 of the Act and on the undisputed facts,the appellant falls into that category. He submits that it makeslittle difference, whether the so called loss posted by thecompany attracted by Section 73 of the Act on account of sale ofshares or the fall in value thereof. According to the learnedcounsel, no amount representing the loss of a company througha business of such activity would qualify for set off against theother non-speculative income. The Act creates several facilities for deduction mostly in theform of losses from the income earned by that very assessee. Itis not uncommon that an assessee who otherwise earnsconsiderable profit would be tempted to post loss, speculative orotherwise, so that the liability to pay income tax on the profitsearned is obviated or minimised. In the process, non-existent orspeculative activities are also taken up. Obviously to curb suchtendencies, the Parliament introduced Section 73 of the Act,which reads: 73. Losses in speculation business:- (1) Any loss, computedin respect of a speculation business carried on by theassessee, shall not be set off except against profits and gains,if any, of another speculation business. (2) Where for any assessment year any losscomputed in respect of a speculation business has not beenwholly set off under sub-section (1), so much of the loss as isnot so set off or the whole loss where the assessee had noincome from any other speculation business, shall, subject tothe other provisions of the Chapter, be carried forward to thefollowing assessment year, and- (i)it shall be set off against the profits and gains, if any, of nay speculation business carried on byhim assessable for that assessment year; and (ii)if the loss cannot be wholly so set off, theamount of loss not so set off shall be carriedforward to the following assessment year and soon. (3) In respect of allowance on account of depreciation orcapital expenditure on scientific research, the provisions ofsub-section (2) of section 72 shall apply in relation tospeculation business as they apply in relation to any other business. (4) No loss shall be carried forward under this section formore than four assessment years immediately succeeding theassessment year for which the loss was first computed. From this, it becomes clear that any loss, which anassessee is said to have incurred in respect of a speculationbusiness, cannot be set off against the profits and gains fromother activities. The only exception is that the loss of suchnature can be posted against the income earned from anotherspeculative activity. The circumstances, under which a company can betreated as the one carrying on speculation business, areenumerated in the Explanation. In a way, it can be said that anycompany, which undertakes the activity of purchase or sale ofshares of other companies, but not being the one in thecategory, enlisted within the brackets is liable to be treated as theone carrying on speculation business. It is not the case of theappellant that it falls into any of the categories, mentioned in thebracketed portion of the Explanation. It is also admitted fact thatit undertakes the activity of sale and purchase of shares of othercompanies. That brings within the fold of the Explanation. Oncea company is categorized as the one carrying on speculationbusiness, an act of segregation needs to be undertaken. Theentire loss incurred by the company does not disqualify for set offagainst profits from other activities. It is only such portion of theloss which is incurred in the speculative activity that getsdisqualified. Learned counsel for the appellant strongly relied upon theexpression “to the extent to which business consists of purchaseand sale of shares” occurring at the end of the Explanation andsubmitted that the loss that can be refused for adjustment can beonly when it occurs in the event of purchase of shares. In ourview, the expression referred to above is intended only tosegregate the losses, which an assessee may incur from thespeculative business on the one hand and non-speculativebusiness on the other hand. It cannot be treated as a provision,directing that only such portion of the loss, which occurs on account of the sale or purchase of shares can be taken intoaccount for the purpose of Section 73. Even the appellant doesnot dispute that. If it incurs loss on sale of shares, such lossdoes not qualify for set off against its profits from other activity. That being the case, it is just un-understandable as to how theloss which is said to have occurred on account of the fall in valueof the shares which are very much in its possession deserves tobe treated on a higher or better footing. If the contention isaccepted, it would lead to absurdity. We do not find any merits in the appeal and it isaccordingly dismissed. The miscellaneous petition filed in this appeal shall alsostand disposed of. There shall be no order as to costs. ____________________ L.NARASIMHA REDDY, J ______________________ CHALLA KODANDA RAM, J Date: 03.12.2014Note: L.R.Copy to be marked.JSU THE HON’BLE SRI JUSTICE L.NARASIMHA REDDYAND THE HON’BLE SRI JUSTICE CHALLA KODANDA RAM JSU I.T.T.A.No.47 of 2004 Date: 03.12.2014