M/s. MADHUSUDAN ENTERPRISES P. LTD., MUMBAI v. ACIT - 9(2), MUMBAI

ITA 2199/MUM/2007 | 2003-2004
Pronouncement Date: 23-09-2011 | Result: Partly Allowed

Appeal Details

RSA Number 219919914 RSA 2007
Assessee PAN AADCM0541Q
Bench Mumbai
Appeal Number ITA 2199/MUM/2007
Duration Of Justice 4 year(s) 6 month(s) 7 day(s)
Appellant M/s. MADHUSUDAN ENTERPRISES P. LTD., MUMBAI
Respondent ACIT - 9(2), MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 23-09-2011
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted B
Tribunal Order Date 23-09-2011
Date Of Final Hearing 06-09-2011
Next Hearing Date 06-09-2011
Assessment Year 2003-2004
Appeal Filed On 16-03-2007
Judgment Text
1 ITA NO. 2199/MUM/2007 (ASST YEAR 2003-04) IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI B BENCH MUMBAI BENCHES MUMBAI BEFORE SHRI R S SYAL AM & SHRI VIJAY PAL RAO JM ITA NO. 2199/MUM/2007 (ASST YEAR 2003-04) M/S MADHUSUDAN ENTERPRISES P LTD 34 NAKHODA ST 1 ST FLOOR OPP JAI BHAWANI TEA HOTEL TAMBAKANTA MUMBAI 400 003 VS THE ASST COMMR OF INCOME TAX 9(2) MUMBAI (APPELLANT) (RESPONDENT) PAN NO. AADCM0541Q ASSESSEE BY SH PARAS S SALVA REVENUE BY SH P C MAURYA DT.OF HEARING 6 TH SEPT 211 DT OF PRONOUNCEMENT 23 SEPT 2011 PER VIJAY PAL RAO JM THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER DATED 4.12.2006 OF THE CIT(A) FOR THE ASSESSMENT YEAR 2003-04. 2 THE ASSESSEE HAS RAISED THE FOLLOWING EFFECTIVE G ROUNDS IN THIS APPEAL: I) THE CIT(A) HAS ERRED IN NOT TREATING THE ASSESSE E COMPANY AS INVESTMENT COMPANY. HE AGAIN ERRED IN APPLYING THE PROVISION OF EXPLANATION TO SEC. 73 OF IT ACT TO THE APPELLANT COMPANY WRONGLY. II) THE CIT(A) HAS AGAIN ERRED IN TREATING THE INVEST MENTS LOSS/BUSINESS LOSS/NOTIONAL LOSS AS SPECULATION LOSS. HE FURTHER ER RED BY DISALLOWING THE LEGITIMATE LOSS TO BE SET OFF AGAINST INVESTMENT IN COME OR DIVIDEND INCOME. 3 THE BRIEF RELEVANT FACTS OF THE CASE ARE THAT DUR ING THE YEAR UNDER CONSIDERATION THE ASSESSEE HAS DEALT IN THE BUSINE SS OF PURCHASE AND SALE OF SHARES AND SUFFERED LOSS. THE ASSESSEE HAS ALSO EARNED DIV IDEND INCOME OF RS. 16 97 721/-. 2 ITA NO. 2199/MUM/2007 (ASST YEAR 2003-04) THE ASSESSING OFFICER NOTICED THAT THE ASSESSEES G ROSS TOTAL INCOME DOES NOT CONSISTS MAINLY OF INCOME WHICH IS CHARGEABLE UNDER THE HE AD INCOME ON SECURITIES INCOME FROM HOUSE PROPERTY CAPITAL GAINS AND INCOME FROM OTHER SOURCES AND BECAUSE OF THE LOSS SUFFERED FROM SHARE TRADING I S MUCH MORE THAN THE DIVIDEND INCOME; THEREFORE THE ASSESSEE COMPANY SHALL FOR T HE PURPOSE OF SEC. 73 DEEMED TO CARRY ON SPECULATION BUSINESS TO THE EXTENT TO W HICH THE BUSINESS CONSISTS OF PURCHASE AND SALE OF SHARES. THE LOSS FROM THE SHA RE TRADING IS MUCH MORE THAN THE OTHER INCOME; THEREFORE IN VIEW OF THE ASSESSING O FFICER THE ASSESSEE CANNOT ESCAPE FROM THE MISCHIEF OF EXPLANATION TO SEC. 73 OF THE I T ACT. ACCORDINGLY THE ASSESSING OFFICER TREATED THE LOSS IN SHARE TRADING AS SPECULATION AND HAS NOT ALLOWED TO BE ADJUSTED TO BE SET OFF AGAINST THE DI VIDEND INCOME. 3.1 ON APPEAL THE CIT(A) CONCURRED WITH THE VIEW T AKEN BY THE ASSESSING OFFICER. HENCE THE ASSESSEE FILED THIS PRESENT APPEAL BEFOR E US. 4 GROUND NO 1 IS REGARDING APPLICATION OF EXPLANAT ION TO SEC. 73. 5 WE HAVE HEARD THE LD AR OF THE ASSESSEE AND THE L D DR AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. AT THE OUTSET WE NOT E THAT THIS ISSUE IS COVERED AGAINST THE ASSESSEE BY THE DECISION OF THE HONBLE JURISD ICTIONAL HIGH COURT IN THE CASE OF CIT VS LOKMAT NEWSPAPERS P LTD REPORTED IN 322 ITR 43 (BOM) WHEREIN THE HONBLE JURISDICTIONAL HIGH COURT HAS OBSERVED IN PARA 7 AS UNDER: THE EXPLANATION TO SECTION 73 CREATES A DEEMING FIC TION. THE EXPLANATION POSTULATES A SITUATION WHERE THE ASSESSEE IS A COMPA NY AND WHERE ANY PART OF THE BUSINESS OF THE COMPANY CONSISTS OF THE PURCH ASE AND SALE OF SHARES OF OTHER COMPANIES. IN SUCH A CASE THE ASSESSEE IS FOR THE PURPOSES OF SECTION 73 DEEMED TO BE CARRYING ON A SPECULATION BUSINESS TO THE EXTENT TO WHICH THE BUSINESS CONSISTS OF THE PURCHASE AND SALE OF SH ARES. THE EXPLANATION CARVES OUT AN EXCEPTION IN THE CASE OF A COMPANY WH OSE GROSS TOTAL INCOME CONSISTS MAINLY OF INCOME UNDER THE HEADS OF 'INTERES T ON SECURITIES' 'INCOME 3 ITA NO. 2199/MUM/2007 (ASST YEAR 2003-04) FROM HOUSE PROPERTY' 'CAPITAL GAINS' AND 'INCOME FR OM OTHER SOURCES' OR A COMPANY THE PRINCIPAL BUSINESS OF WHICH IS THE BUS INESS OF BANKING OR THE GRANTING OF LOANS AND ADVANCES. THE EXCEPTION CARV ED OUT BY THE EXPLANATION HOWEVER IS NOT ATTRACTED TO THE FACTS OF THIS CASE AND ITS INTERPRETATION THEREFORE DOES NOT CALL FOR CONSIDERA TION HERE. WHAT IS MATERIAL FOR THE PURPOSES OF THIS CASE IS THAT THE EXPLANATION POSTULATES A SITUATION WHERE ANY PART OF THE BUSINESS OF A COMPA NY CONSISTS OF THE PURCHASE AND SALE OF SHARES OF OTHER COMPANIES. THEREFO RE THE EXPLANATION IS ATTRACTED IN A SITUATION WHERE SOMETHING MORE THAN A N ISOLATED TRANSACTION INVOLVING SALE AND PURCHASE OF SHARES IS INVOLVED. A BUSINESS POSTULATES A SYSTEMATIC COURSE OF ACTIVITY OR DEALING. UNLESS TH E BUSINESS OF A COMPANY CONSISTS OF THE SALE AND PURCHASE OF SHARES THE D EEMING FICTION WOULD NOT APPLY. HOWEVER ONCE THE REQUIREMENTS OF THE EXPLAN ATION ARE SATISFIED NAMELY IN A SITUATION WHERE : (I) THE ASSESSEE IS A COMPANY ; AND (II) ANY PART OF THE BUSINESS OF THE COMPANY CONSISTS IN THE PUR CHASE AND SALE OF SHARES OF OTHER COMPANIES THE CONSEQUENCE WHICH IS ENVISAGED IN THE EXPLANATION AS A FICTION OF LAW IS BROUGHT INTO EXISTENCE. THE L EGAL FICTION IS THAT THE ASSESSEE IS DEEMED TO BE CARRYING ON A SPECULATION BUSINESS TO THE EXTENT TO WHICH THE BUSINESS CONSISTS OF THE PURCHASE AND SALE OF SUCH SHARES. 6 THEREFORE RESPECTFULLY FOLLOWING THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT (SUPRA) WE DECIDE THE GROUND NO.1 AGAINST TH E ASSESSEE. 7 GROUND NO.2 IS REGARDING SETTING OFF OF DIVIDEND INCOME AGAINST LOSS FROM DEEMED SPECULATION BUSINESS. 8 THE LD AR OF THE ASSESSEE HAS SUBMITTED THAT THE DIVIDEND HAS BEEN EARNED ON THE SHARES WHICH ARE KEPT BY THE ASSESSEE AS STO CK-IN-TRADE AND BY VIRTUE OF EXPLANATION TO SEC. 73 THE TRADING IN SHARE HAS BE EN TREATED AS SPECULATION BUSINESS; THEREFORE THE DIVIDEND EARNED ON SUCH SH ARES SHALL ALSO BE TREATED AS PROFIT OF SPECULATION BUSINESS. HE HAS RELIED UPON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF WESTERN STATES TRADING CO P LTD VS CIT REPORTED IN 80 ITR 21 AND SUBMITTED THAT IN A SIMILAR SITUATION T HE HONBLE SUPREME COURT HAS HELD THAT THE DIVIDEND ON SHARES HELD AS STOCK-IN-TRADE SHALL BE TREATED AS BUSINESS INCOME FOR THE PURPOSE OF SETTING OFF OF BUSINESS L OSS. HE HAS ALSO RELIED UPON THE 4 ITA NO. 2199/MUM/2007 (ASST YEAR 2003-04) DECISION OF THE HONBLE DELHI HIGH COURT IN THE CAS E OF COMMISSIONER OF INCOME-TAX V. EXCELLENT COMMERCIAL ENTERPRISES AND INVESTMENTS LTD. REPORTED IN 282 ITR 423 AND SUBMITTED THAT A SIMILAR VIEW HAS BEEN TAKEN BY THE HONBLE DELHI HIGH COURT AND HELD THAT THE DIVIDEND EARNED ON THE SHARES HELD AS STOCK-IN-TRADE WAS RIGHTLY TREATED AS INCOME FROM BUSINESS AND SETTING OFF OF BROUGHT FORWARD LOSS U/S 72. THE LD AR OF THE ASSESSEE HAS SUBMITTED THAT FOLLOWING THE DECISION OF THE HONBLE SUPREME COURT THE MUMBAI I BENCH OF THE TRIBU NAL IN CASE OF STARLINE ISPAT & ALLOYS LTD VS DCIT REPORTED IN 14 SOT 140MUM) ALSO TAKEN A SIMILAR VIEW. 8.1 THE LD DR ON THE OTHER HAND HAS SUBMITTED THAT THE DIVIDEND INCOME IS ASSESSABLE UNDER THE HEAD INCOME FROM OTHER SOURCE S; THEREFORE THE LOSS ON SHARES TREATED AS SPECULATION BUSINESS CANNOT BE SET OFF AGAINST THE DIVIDEND INCOME. HE HAS FURTHER SUBMITTED THAT THE DECISION RELIED UPON BY THE LD AR OF THE ASSESSEE ARE NOT ON THE POINT OF LOSS ON SPECULATION BUSINESS U/ S 73; THEREFORE THE SAME CANNOT BE APPLIED IN THE CASE OF THE ASSESSEE. HE HAS REL IED UPON THE DECISION OF THE AHMEDABAD BENCH OF THE TRIBUNAL IN THE CASE OF TORR ENT FINANCE (P)LTD VS JCIT REPORTED IN 110 ITD 315 (AHD). 9 WE HAVE CONSIDERED THE RIVAL CONTENTION AND CAREF ULLY PERUSED THE RELEVANT MATERIAL ON RECORD AS WELL AS THE DECISIONS RELIED UPON BY BOTH THE PARTIES. THE CORE ISSUE RAISED BEFORE US IS WHETHER THE DIVIDEND EAR NED OR RECEIVED BY THE ASSESSEE ON THE SHARES HELD AS STOCK-IN-TRADE WOULD BE AVAIL ABLE FOR SETTING OFF AGAINST THE LOSS FROM THE BUSINESS OF PURCHASE AND SALE OF SHAR ERS DEEMED AS SPECULATION BUSINESS AS PER EXPLANATION TO SEC. 73 OF THE I T A CT. THERE IS NO DOUBT THAT SEC. 14 OF THE I T ACT CLASSIFIES THE INCOME UNDER SIX DIFFERE NT HEADS AND THE INCOME WHICH IS SPECIFICALLY CHARGEABLE UNDER DISTINCT HEAD CANNOT BE BROUGHT TO CHARGEABLE UNDER A DIFFERENT HEAD BECAUSE THE RULE FOR COMPUTI NG INCOME AND DEDUCTION 5 ITA NO. 2199/MUM/2007 (ASST YEAR 2003-04) WHICH ARE PERMISSIBLE UNDER THE ACT VARY WITH EACH OF THE SIX DIFFERENT HEADS. AS PER THE SCHEME OF THE ACT FIRSTLY THE INCOME HAS TO BE CLASSIFIED UNDER DIFFERENT HEADS AND THEN TO WORK OUT THE COMPUTATION UNDER EACH OF THE HEAD BY APPLYING THE RELEVANT PROVISIONS OF SUCH HEADS. ONLY THEREAFTER THE COMPUTATION SO MADE WOULD GIVE A FINAL FIGURE OF THE TOTAL INCOME LIABLE TO T AX. THIS PRINCIPLE HAS BEEN RECOGNISED IN A NUMBER OF CASES INCLUDING THE DECIS ION OF THE HONBLE SUPREME COURT IN THE CASE OF UNITED COMMERCIAL BANK LTD. V. CIT REPORTED IN 32 T TR 688 AND IN THE CASE OF CIT V. EXPRESS NEWSPAPERS LTD. REPORTED IN 53 ITR 250. HOWEVER THE HONBLE SUPREME COURT HAS HELD IN THE CASE OF CIT V . COCANADA RADHASWAMI BANK LTD. REPORTED IN 57 ITR 306 AND IN THE CASE OF WEST ERN STATES TRADING CO P LTD (SUPRA) THAT THE CLASSIFICATION UNDER DIFFERENT HEAD IS ONL Y FOR DIFFERENT PURPOSE TO ASCERTAIN THE TOTAL INCOME OF THE ASSESSEE AND THAT ONCE THAT IS DONE THE QUESTION WHETHER THE DIVIDEND INCOME EARNED FOR BUSINESS PURPOSE AND IF SO HOW IT SHOULD BE TREATED THE PURPOSE OTHER THAN COMPUTATION OF INCOME SHOULD BE DETERMINED ON BROAD COMMERCIAL PRINCIPLES. 10 IN THE CASE OF WESTERN STATES TRADING CO P LTD ( SUPRA) THE HONBLE SUPREME COURT HAD AN OCCASION TO ADJUDICATE A SIMILAR ISSUE AS TO WHETHER THE DIVIDEND INCOME SHALL BE TAKEN AS INCOME PROFIT AND GAIN O F BUSINESS OF ASSESSEE AND SETTING OFF AGAINST LOSS BROUGHT FORWARD FROM EARLIER YEAR AND HELD AT PAGE 25 & 26 ASUNDER: ON THE SECOND QUESTION ONCE IT IS ACCEPTED THAT TH E COLLIERY BUSINESS WAS CARRIED ON FOR A PART OF THE RELEVANT ASSESSMENT YEAR THE ASSESSEE WOULD BE ENTITLED TO GET A SET-OFF UNDER SECTION 24(2) OF THE ACT IF THE SHARES ON ACCOUNT OF WHICH THE DIVIDENDS WERE RECEIVED FORMED PART OF THE ASSESSEES TRADING ASSETS. IT IS WELL SETTLED BY THE DECISIONS OF THIS COURT (SEE COMMISSIONER OF INCOME-TAX V. COCANADA RADHASWAMI BANK (2)) THAT SECTION 6 OF THE ACT CLASSIFIES THE TAXABLE INCOME UNDER THE SEVERAL HEADS BUT THE SCHEME IS THAT INCOME-TAX IS ONE TAX AND SECTION 6 ONLY CLASSIFIES THE TAXABLE INCOME UNDER DIFFERENT HEADS FOR THE PURPOSE OF COMPUTATION OF THE NET INCOME OF THE ASSESSEE. WHILE SUB-SECTION (1) OF SECTION 24 PROVID ES FOR SETTING OFF THE LOSS 6 ITA NO. 2199/MUM/2007 (ASST YEAR 2003-04) UNDER ONE OF THE HEADS MENTIONED IN SECTION 6 AGAINS T THE PROFITS UNDER A DIFFERENT HEAD IN THE SAME YEAR SUB-SECTION (2) PRO VIDES FOR THE CARRYING FORWARD OF THE LOSS FOR ONE YEAR AND SETTING OFF THE SA ME AGAINST THE PROFITS OR GAINS OF THE ASSESSEE FROM THE BUSINESS IN THE SUBSE QUENT YEAR OR YEARS. IT WAS EMPHASISED IN THE AFORESAID DECISION THAT SUB-SECTIO N (2) OF SECTION 24 IN CONTRADISTINCTION TO SUB-SECTION (1) IS CONCERNED ONL Y WITH THE BUSINESS AND NOT WITH ITS HEADS UNDER SECTION 6 OF THE ACT. DIVID ENDS ARE INCLUDED IN THE MEANING OF INCOME UNDER SUB-SECTION (1A) OF SECTION 12 WHICH IS THE RESIDUARY HEAD. APPLYING THE PRINCIPLES ADVERTED TO BEFORE T HE AMOUNT OF DIVIDENDS WOULD FORM A PART OF THE INCOME FROM THE BUSINESS OF THE ASSESSEE IF THE SHARES WERE A PART OF THE ASSESSEE'S TRADING ASSETS AN D THE ASSESSEE WOULD BE ENTITLED TO A SET-OFF AS CLAIMED AGAINST THE LOSS F ROM ITS BUSINESS INCURRED DURING THE PREVIOUS YEARS. IT DOES NOT APPEAR TO HAVE BEEN DISPUTED AT ANY STAGE THAT THE SHARES FORMED PART OF THE STOCK-IN-TRA DE OF THE SHARE DEALING BUSINESS OF THE ASSESSEE. THERE COULD BE NO REASON THEREFORE FOR THE ASSESSEE NOT BEING ENTITLED TO THE SETOFF CLAIMED. THE HIGH COURTS HAVE CONSISTENTLY TAKEN THE VIEW THAT BUSINESS LOSS CARRIED FORWARD FR OM EARLIER YEARS CAN BE SET OFF AGAINST DIVIDEND INCOME DERIVED FROM SHARES HELD AS STOCK-IN-TRADE (VIDE COMMISSIONER OF INCOME-TAX V. SHRIKISHAN CHANDMAL (1 ) AND COMMISSIONER OF INCOME-TAX V. BHAVNAGAR TRUST CORPORATION (P.) LTD. (2)). THE SECOND QUESTION THEREFORE SHOULD HAVE BEEN ANSWERED IN FAVOUR OF TH E ASSESSEE. 11 THOUGH THE DECISION OF THE TRIBUNAL IN THE CASE OF STARLINE ISPAT & ALLOYS LTD (SUPRA) IS IN FAVOUR OF THE ASSESSEE WHEREAS THE DE CISION OF THE AHMEDABAD BENCH OF THE TRIBUNAL IN THE CASE OF TORRENT FINANCE (P)L TD (SUPRA) IS AGAINST THE ASSESSEE. HOWEVER WHEN THE ISSUE IS DECIDED BY THE HONBLE S UPREME COURT (SUPRA) THEREFORE RESPECTFULLY FOLLOWING THE DECISION OF T HE HONBLE SUPREME COURT WE DECIDE THE ISSUE PRINCIPALLY IN FAVOUR OF THE ASSES SEE AND AGAINST THE REVENUE. 12 WE CLARIFY THAT TO THE EXTENT OF DIVIDEND WHICH IS EARNED BY THE ASSESSEE ON THE SHARES HELD AS STOCK-IN-TRADE IS AVAILABLE FOR SETTING OFF THE LOSS ON PURCHASE AND SALE OF SHARES TREATED AS SPECULATION BUSINESS. THE REFORE THE ASSESSING OFFICER IS DIRECTED TO VERIFY THIS FACT AND ALLOW THE CLAIM AC CORDINGLY. 7 ITA NO. 2199/MUM/2007 (ASST YEAR 2003-04) 13 IN THE RESULT THE APPEAL OF THE ASSESSEE IS PAR TLY ALLOWED. ORDER PRONOUNCED ON THE 23 RD DAY OF SEPT 2011. SD/- SD/- ( R S SYAL ) ACCOUNTANT MEMBER ( VIJAY PAL RAO ) JUDICIAL MEMBER PLACE: MUMBAI : DATED: 23 RD SEPT 2011 RAJ* COPY FORWARDED TO: 1 APPELLANT 2 RESPONDENT 3 CIT 4 CIT(A) 5 DR /TRUE COPY/ BY ORDER DY /AR ITAT MUMBAI