Reliance Is Also Placed On The Decision Of The M.p. High Court In Thematter Of C.i.t v. Intermetal Trade Ltd

^ /^:^^^[];;^tNIP?^^^^^^^^^^ QSWSISX :%?:.1& BEFORETHEHQN'BI..BHl©Hg<auRTOFCHHATTISG»R ATBn-ASPUR ^^^^^^^^^^^ Tax.CweMconwJm/Wmantto. ADDellantAssistant-Cortimissionerof•.-•....-^."'^s^-"lncomeTax,Circle-1,Bhilai(©;G.)s«^»^yVERSUS.%'ResbondentUnivebSleepers <P)l-td.,MIG-11,Padmanabhpur,Dyrg:(C.G.)':;;..-:1;.:,::,,;;•,:•.::::-.'^INCOME TAXAPPEALU/S. 2150 AOFINGOMETAXAGT. 1961. '.^'^^M^fe^^ W9w!SttSM Present:Mr. Rajeev Shrivastava, counsel for the appellant/revenue.Mr.Ashok Patil, counsel forthe respondenVassessee. ORAL JUDGWIENT(6'"0ctober,2010) PerDhirendra Mishra, J Revenue's appeal under Section 260A of the Income Tax Act, 1961 (inshort "the Act") against the impugned order of the Income Tax AppellateTribunal,Bilaspur Bench,Bilaspur (for brevity "the Tribunal") hasbeenadmitted for hearing on the following substantial question of law: "Whether the Tribunal was right in law holding that the speculationloss couldbe set-off against the regular business income asbusiness loss while overlooking the explanation to Section 73 of theIncome Tax Act, which specifically bars such set-off in a case suchas that of the assessee?" 2.Briefly stated, facts of the case are that the assessee-company isengaged in the business of manufacturing concrete sleepers.The assesseefiled its return of income for the assessment year 2004-05 declaring totalincomeofRs.50,26,220/-,whichincludedincomefrombusinessofmanufacturing of concrete sleepers and loss on account of share trading. Thematter was taken up for scrutiny and the Assessing Officer (in short["AO"),]referring to Section 73 of the Act, made an addition of Rs.22,70,267/- inassessee's income by disallowing speculation loss and assessed the totalincome at Rs.74,30,815/-. The appeal preferred by the assessee was furtherdismissed and the Commissioner, Income Tax (Appeals) {in short "CIT(A)"}confirmed the order ofthe AO.However, learned Tribunal allowed appealofthe assessee by the impugned order.engaged in the business of manufacturing concrete sleepers.The assesseefiled its return of income for the assessment year 2004-05 declaring totalincomeofRs.50,26,220/-,whichincludedincomefrombusinessofmanufacturing of concrete sleepers and loss on account of share trading. Thematter was taken up for scrutiny and the Assessing Officer (in short["AO"),]referring to Section 73 of the Act, made an addition of Rs.22,70,267/- inassessee's income by disallowing speculation loss and assessed the totalincome at Rs.74,30,815/-. The appeal preferred by the assessee was furtherdismissed and the Commissioner, Income Tax (Appeals) {in short "CIT(A)"}confirmed the order ofthe AO.However, learned Tribunal allowed appealofthe assessee by the impugned order. 3.Shri Rajeev Shrivastava, leaned counsel for the appellant/revenue,would argue that there is no dispute that principal business of the assessee-company is manufacture of concrete sleepers.AO as also CIT(A), on closescrutiny of the record, arrived at a finding of fact that gross total income of theassessee consists mainly of income derived frommanufacture of concretesleepers and its principal business is not that of banking or granting of loans oradvances. Its GTI did not consist mainly of income chargeable under theheads "Interest on securities", "Income from house property", "Capital gains",and "Income from other sources", and its case falls within the ambit ofExplanation to Section 73 of the Act. Accbrdingly, both the forums treated theloss from share trading activity of the assessee as speculation losses as perprovisions of Explanation to Section 73 of the Act.However, the Tribunal setaside the orders passed by the AO and affirmed by CIT (A), by relying uponthe decision of Mumbai Special Bench of the Tribunal in the case of ACIT Vs.Concord Commercials (P) Ltd.and held that the revenue has failed toestablish that the assessee has adopted a device to reduce the taxableincome by indulging in trading in shares of group of companies. Reliance is also placed on the decision of the M.P. High Court in thematter of C.I.T. Vs. Intermetal Trade Ltd. 4.On the other hand, Shri Ashok Patil, learned counse] for the assessee,supporting the impugned order, argued that Section 73 of the Act is to beinterpreted in such a manner, which furthers the object of the provision, whichis to curb the device sometimes resorted to by the business houses controllinggroup[of][ companies][ to]manipulateandreduce the taxableincomeofcompanies under their control, as clarified in para 19.2 ofthe Circular No.204dated 24.7.1976 issued by the Central Board of Direct Taxes. Since therevenue has not come up with a case that the assessee has adopted a deviceto reduce the taxable income by indulging in trading in shares of group ofcompanies, the Tribunal has rightly allowed the set off to the assessee and thesame does not call for interference.supporting the impugned order, argued that Section 73 of the Act is to beinterpreted in such a manner, which furthers the object of the provision, whichis to curb the device sometimes resorted to by the business houses controllinggroup[of][ companies][ to]manipulateandreduce the taxableincomeofcompanies under their control, as clarified in para 19.2 ofthe Circular No.204dated 24.7.1976 issued by the Central Board of Direct Taxes. Since therevenue has not come up with a case that the assessee has adopted a deviceto reduce the taxable income by indulging in trading in shares of group ofcompanies, the Tribunal has rightly allowed the set off to the assessee and thesame does not call for interference. 5.We have heard learned counsel for the parties and perused theassessment order, order passed by CIT(A) as also the impugned order.assessment order, order passed by CIT(A) as also the impugned order. 6.AO repelling the arguments advanced by the assessee held thatCircular No.204 of CBDT is only a continuation of explanations to the Taxation 2 (2006) 204 CTR (MP) 567 : (2006) 285 ITR 536 (MP) (2006) 204 CTR (MP) 567 : (2006) 285 ITR 536 (MP) '^i^."•'vsss&'"^! ^ Laws (Amendment) Act, 1975. Para19.2 does not define the scope of theamended Section 73 and the same is neither restrietive nor exclusive. Thedeeming provision of Section 73 has an ovemding effect on Section 43(5) andSection 28(Explanation 2).It has been further held that the assessee doesnot fall in the category of company specified in Explanation to Section 73 ofthe Act. Challenge to the provision under Section 73 of the Act on the groundof the same being violative of the Constitution for being discriminatory innature, can be considered only by an appropriate forum. 7.CIT(A) affirming the order of the AO, observed as under:"Aclosescrutiny of therecordreveals that theappellant is not such a company whose gross totalincome consists mainly of income which is chargeableunder the head interest on securities, income fromhouse property, capital gain and income from othersources.It is further revealed that the appellant is acompany whoseprinciplebusinessisnot thatabanking or granting of loans and advances, yet in theinstantcase,theappellanthasdebitedlossonaccountofsharetradingtotheextentofRs.22,70.267/-andset off the same against thebusiness of manufacturing of concrete sleeper. Byevery argument, the case of the appellant squarelyfalls under the provisions as laid down Explanation toSection 73 of the Act. There is no material to showthat the principle business of the assessee is ofbanking or granting of loans and advances. Also theappellant's GTI did not consist of mainly of interest onsecurities, income from house property, capital gain orincome from other sources. This being the fact, theonly inescapable conclusion can be derived that thecase of the appellant will be under the ambit ofExplanation to Section 73 and thereby the AO hasrightlyinvokedtheprovisionsofExplanationtoSection 73 and treated the loss from share tradingactivity as speculation loss." 8.Relevant portion of Section 73 of the Act is reproduced hereinunder: 8.Relevant portion of Section 73 of the Act is reproduced hereinunder: "73. Losses in speculation business. - (1) Any loss,computed in respect of a speculation business carried 1 on by the assessee, shall not be set off except againstprofitsandgains,ifany,ofanotherspeculationbusiness.(2)xxxxxxxxxxxx(3)xxxxxxxxxxxx(4)xxxxxxxxxxxx[Explanation. - Where any part of the business of acompany [(other than a company whose gross totalincome consists mainly of income which is chargeableunder the heads "Interest on securities", "Income from"Capitalhouse property", gains",and "Income fromother sources"], or a company the principal business ofwhich is the business of banking or the granting of loansand advances) consists in the purchase and sale ofshares of other companies, such company shall, for thepurposes of this section, be deemed to be carrying on aspeculation business to the extent to which the businessconsists of the purchase and sale of such shares.] 9.Learned Tribunal has allowed the appeal of the assessee with thefollowing observations in para 9.1 ofthe order: "9.1 If the plain meaning of the Explanation is appliedwithout looking at the object stated in the Circular, it istantamount to denying the set off of genuine loss incurredin share trading against other business income. Theprovision devoid of a condition commensurate with theobjectstated in the circular is vulnerable to being struckdown as unconstitutional being offensive to Article 14.Thus, in our considered opinion, the onus is upon therevenue to prove that the assessee has adopted a deviceto reduce the taxable income by indulging in trading insharesof groupof companies whichhasnot beendischarged in the instant case. 10.In the matter of Concord Commercials Pvt. Ltd.\ the assessee wasdoing the business of trading in purchase and sale of shares. After necessaryadjustment, the gross total income of assessee was worked out at a particularsum, which entirely consisted of dividend chargeable under the head of"Income from other sources".Considering the above fact, the Tribunal held i ^?^.- ;^::^;s^^^^^^^^^^"SS!wyis59SS& that the provisionof Explanation to Section 73 will not be appliGable and setoffof losses incurred in sale and purchase ofshares against other incomewasheld to be justified. 11.tn the case of Intermetal TradeLtd. , the main business of theassessee-company was trading in metal and shares. Considering that themain source of income of the assessee company was not from "Interest onsecurities", "Income from house property", "Capital gains", and "Income fromother sources" and also considering that loans and advances were given bythe assessee only to the persons, who were either closely related to theDirector or who had trading activities with the assessee, it was held that theassessee does not fall within any of the excepted categories of companiesspecified in Explanation to Section 73 of the Act and it was held that the losssuffered by the assessee in share business was in the nature of speculationloss and it could not be set off against the profit earnedfrom non-speculativebusiness. 12.In the instant case also, the AO as well as CIT(A) have recorded afinding of fact that the business of the assessee company does not fall withinthe category of company as mentioned in Explanation to Section 73. It hasbeen categorically held that it is not a company whose gross total incomeconsists mainly of income which is chargeable under the head of "Interest onsecurities", "Income from house property", "Capital gains", and "Income fromother sources". The assessee company's principal business is also notthat ofbanking or granting of loans and advances. 12.In the instant case also, the AO as well as CIT(A) have recorded afinding of fact that the business of the assessee company does not fall withinthe category of company as mentioned in Explanation to Section 73. It hasbeen categorically held that it is not a company whose gross total incomeconsists mainly of income which is chargeable under the head of "Interest onsecurities", "Income from house property", "Capital gains", and "Income fromother sources". The assessee company's principal business is also notthat ofbanking or granting of loans and advances. 13.For the aforesaid reasons, we are of the considered opinion that caseof the assessee squarely falls within the four corners of Explanation to Section73 ofthe Act. In these circumstances, the loss suffered by the assessee in thebusiness of share trading cannot be set off against the income derived from itsmain business - construction of sleepers - as the assessee was carrying onthe business of trading in shares and the same can be deemed to be aspeculation business by virtue of deeming provisions as per Explanation toSection 73 of the Act.