Non-Speculative Business Loss can be set off against speculative Business Income

1.  Heard Sri Krishna Agarwal, learned counsel appearing on behalf of the appellant. No one is present on behalf of the respondent.

2. The present appeal has been filed against the judgement and order dated 06.06.2013 passed by the Income Tax Appellate Tribunal in ITA No. 114/Lkw/2011 for the assessment year 2005- ­2006.

3. The brief facts of the case are that the assessee company is in the business of Iron Alloys Steel, MS Ingots as in the past. The assessee company has also shown the interest income and profit from sale of shares during the year of consideration.

4. The assessee company has filed return of the income declaring nil income after setting off business loss of the earlier year of 2,16,81,488.50 to the extent of available profit has been filed. The assessing authority has completed the assessment under Section 143(3) of the Income Tax Act at the total income of Rs. 2,17,46,490/-treating the share trading business as speculative profit to the tune of Rs. 3,84,09,932/­.

5. The assessee has filed an appeal before the CIT (Appeal), Kanpur. The CIT (Appeal) vide order dated 07.01.2011 has directed that the income of the assessee company is liable to be taxed at Rs. 3,84,09,932/­ and business loss of Rs. 1,66,63,443/­ is liable to be carried forward as per law that too after verification by the assessing authority. In fact, CIT (Appeals) has enhanced the income from Rs. 2,17,46,489/­ to Rs. 3,84,09,932/­.

6. Aggrieved by the order of the CIT(Appeal), the assessee filed an appeal before the Income Tax Appellate Tribunal who vide order dated 06.06.2013 has allowed the appeal of the assessee and has directed the Assessing Authority to allow set off from non ­speculative business against profit from speculative business.

7. The present appeal has been filed by the Department/ the Commissioner of the Income Tax by which the impugned judgment and order of the ITAT dated 06.06.2013 has been challenged.

8. Following substantial questions of law are referred for consideration before this Court;

I. Whether the ITAT was correct in law and on facts in holding that non ­speculative business loss of current year and carry forward non ­speculative business loss of earlier years can be set off from the income of speculative business of the current years?

II. Whether the ITAT was in error in allowing loss in non ­speculative business to be set off from income of speculative business without appreciating that set off of loss against income is governed by and limited to provisions of Sections 72 and 73 in particular and Sections 70 to 80 in general which do not provide for set off loss of non ­speculative business against income from speculative business.

III. Whether the ITAT erred in law and in fact in failing to appreciate that Section 28 provides that a speculative business shall be deemed to be distinct and separate from any other business and this being the case loss from non ­speculative business could not be set off against profits of speculative business.

9. The appeal has been admitted on the above mentioned questions of law by this Court on 10.10.2013. Notices are issued to the assessee. However, even after the service, no one has put appearance on behalf of the assessee.

10. We have heard the learned counsel for the Department and perused the impugned order of the Tribunal. The learned counsel for the appellant has submitted that the impugned order of the Tribunal cannot sustain.

Learned counsel for the appellant has submitted that Section 72 (1) of the Income Tax Act provides that the non ­speculative business loss can be set off against ‘profit and gains, if any, of any business or profession’ carried on by assessee and assessable in that assessment year, and when it cannot be so set off, it shall be carried forward to the following assessment year.

12. The Tribunal has dealt with the aforesaid submission of the department and has categorically held that the expression ”any” business clearly includes of business without making distinct in between the speculative and non­ speculative business, and therefore, going by the plain language of the statutory provision loss in a business, other than non ­speculative business, cannot be set off against profit of speculative business as also non ­speculative business.

13. The Tribunal has also considered and has held that the CIT (A) was right in appreciating that speculative business and non­ speculative business are treated as distinct business but what he clearly missed out was that the purpose and impact of this distinction reflects only set off loss in speculation business against the profit of non ­speculation business.

14. The Tribunal has dealt with the issue in detail while allowing the claim of the assessee as also the appeal filed by the assessee. For the ready reference the relevant extract of the order of the Tribunal is quoted herein below;

“8. To understand the scope of these restrictions, it will be appropriate to take a look at the purpose and the backdrop in which the restrictions on set off of speculation losses was brought in the statute. Until assessment year 1953- ­54, income tax law did not recognize any such distinction between losses in speculation and non­ speculation business. It was only with effect from 1^st April, 1953 that the distinction between speculation business and non ­speculation business was introduce by introducing a proviso to section 24(1) of Income Tax Act, 1922, which is broadly in pari material with the provisions of section 73(1) and 73(2) of the present Income Tax Act, which stated that “provided further that in computing the profits and gains chargeable under the head ‘profits and gains of business, profession or vacation’, any loss sustained in speculative transactions which are in the nature of a business shall not be taken into account except to the extent of the amount of profits and gains, if any, in any other business consisting of speculative transaction”. Elaborating upon the scope of this statutory provision Hon’ble Supreme Court, in the case of CIT vs. Jagannath Mahadeo Prasad (71 ITR 296) observed as follows:

The answer to the question referred to the High Court obviously depends on the interpretation of the second proviso 24(1) of the Act in interpreting this provision, the purpose of Section 24(1) and (2) has to be kept in view. Under the Act, the Income Tax Officer has to determine the total income of an assessee under Section 23(1), (3) or (4) of the Act. In determining this total income, income under all the various heads enumerated in section 6 has to be taken into account. Sections 7 to 10 and 12 lay down the principles on which the income under these various heads is to be computed. In the case of income from business, profession or vocation, the income has to be computed under Section 10(1) of the Act. Section 10(2) of the Act lays down certain deductions which have to be made in computing the profits and gains from business, profession or vacation. It is during this computation to be made by the Income ­tax Officer under Section 23 of the income from business, profession or vacation in accordance with section 10(1) of the Act that the Income ­tax officer is further required the apply the provisions of section 24. Section 24 is, thus, a provision laying down the manner of computation of total income. The principal clause of section 24(1) lays down that, if there be a loss of profits or gains in any year under any of the heads mentioned in section 6, that loss has to be set off against the income, profits or gains of the assessee under any other head in that year. If this provision had stood by itself without any provisos, the result would have been that all losses incurred by an assessee under any of the heads mentioned in section 6 would be adjusted against profits under all other heads, and then the total income of the assessee would be worked out on the basis. The first proviso to this sub­section, however, lays down an exception to this general rule contained in the principal clause. The exception relates to income from business consisting of speculative transactions, and places the limitation that losses sustained in speculative transactions are not to be taken into account in computing the profits and gains chargeable under the head “Profits and Gains of business, profession or vocation”, except to the extent that they will be set off against profits and gains in any other business which itself consists of speculative transaction. The effect of the proviso is that if there are profits in speculative business, those profits are added to income under the other heads mentioned in section 6 for purpose of computing the total income of the assessee in order to determine the tax under Section 23 of the Act on the other hand losses in speculative business are not to be taken into account when computing the total income, except to the extent to which they can be set off against profits from other speculative business. The first proviso thus, clearly limits the applicability of the principal clause of section 24(1); and, when applied, it governs the manner in which the total income of the assessee is to be computed. In the case before us, the Income­ tax Officer was clearly right in the assessment years 1958­- 59 and 1959- ­60 in not setting off the losses in the speculative business against the income earned in those years either from property or from ready business in kappas.

15. In view of the aforesaid finding, the Tribunal came to the conclusion that there was differentiation in approach towards profits and loss of the speculation business, in as much as, while its profits were taken into account for computation of overall income or loss, its losses were to be examined for the said purpose. The Tribunal while come to the said conclusion, has considered the judgment of the Hon’ble Supreme Court laid down in the case of CIT vs. Jagannath Mahadeo Prasad (71 ITR 296) as also the similar principles set out by the Bombay High Court in the case of AR Mahadevia vs CIT (65 ITR 308).

16. Learned counsel for the appellant is not able to provide any contrary decisions. In our opinion, the impugned order of the Tribunal is based on material facts and is supported by the decisions aforesaid, hence need no interference by this Court.

17. The appeal filed by the department is, accordingly, dismissed.