Brought forward business losses can be set off against other sources of income which are in the nature of business income, though chargeable to tax under another head of income
Gagan Trading Co. Ltd Vs. DCIT. (ITA No. 678/Mum/07) Mum ITAT dated 18 February 2011
Fact of the case:- The taxpayer was engaged in the business of purchase and sale of shares and debentures. During the assessment year 2003-04, the taxpayer had earned dividend from the shares held as stock in trade. The taxpayer set off the brought forward business losses against the dividend income chargeable to tax under the head ‘Income from other sources’, dividend was taxable in the relevant assessment year. The Assessing Officer (“AO”) disallowed the claim of the set off of brought forward business losses on the ground that dividend income is brought to tax under the head ‘Income from other sources’, even though shares from which dividend income is earned are held as stock in trade by the taxpayer.
Issue before the Tribunal
• Whether the brought forward business losses can be set off against the dividend income earned from the shares held as stock in trade?
Observations and Ruling of the Tribunal
• The Tribunal referred to the principles laid down by the Supreme Court1 which held that brought forward business loss can be set off against the interest income earned by the assesse from its business of banking which was assessed to tax under the head “Interest from securities”.
• The Tribunal further observed that by the Finance Act, 1988 w.e.f. 1 April 1989, ‘Interest on securities’ as a separate head of income, was omitted as a measure of rationalisation to treat all interest income as ‘Income from other sources’. Prior to the above rationalisation, interest on securities held as investment was treated as ‘Income from other sources’ and those held as stock-in-trade were treated as ‘Income from Business’. Thus the reason for the change in law both for interest and dividend income is the same and the principle as applied to interest income would equally apply to dividend income.
• The Tribunal observed that the provisions of section 14 of the Income-tax Act (“ITA”) refer to the classification of different heads of income for the purpose of computation of total income. Thus, whether a particular income is part of the income from a business would need be decided not on the basis of the provisions of section 14 of the ITA, but on commercial principles.
• The Tribunal further held that though for the purpose of computation of the income, dividend is classified as ‘Income from other sources’, income by way of dividend was very much part of the income from business, because the shares on which dividend income was earned was stock in trade of the business carried on by the taxpayer and they formed part of the trading assets.
• The Tribunal accordingly held that the taxpayer is entitled to the set off of its carried forward business loss against dividend income as claimed by the taxpayer.
• Though currently dividend income is exempt, the above decision lays down a principle that brought forward business loss can be set off against other sources of income which are in the nature of business income, though chargeable to tax under another head of income.
• Similar position has also been affirmed by the Mumbai Tribunal2 wherein it was held that brought forward business losses can be set off against the capital gains arising from a business or profession, though chargeable to tax under any other head of income.
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