HIGH COURT OF GUJARAT
Commissioner of Income-tax
Appollo Vikas Steels (P.) Ltd.
Tax Appeal No. 927 of 2011
FEBRUARY 19, 2013
Akil Kureshi, J.
We permit the Revenue to raise additional question ‘C’ as per the draft amendment tendered before us today.
2. Previously, this Tax Appeal was considered by a Division Bench of this Court on 1.8.2012. At that time, the Tax Appeal contained only two questions, namely:
(a) “Whether the Appellate Tribunal is right in law and on facts in holding that the Assessing Officer was not justified in making proportionate dis allowance out of interest expenses under section 14A of the Act thereby giving relief out of total addition of Rs. 9,27,427/- made by the Assessing Officer under the said Action, without properly appreciating the facts of the case and the material brought on record by the Assessing Officer?”
(b) “Whether the Appellate Tribunal is right in law and on facts in not appreciating that the said proportionate interest expenditure was relatable to the dividend income on sales of shares which was exempt from tax as a portion of the borrowings, on which the said proportionate interest has been worked out, were utilized for the purpose of investment in shares ?”
3. The Division Bench passed a reasoned order not accepting either of the two questions. Tax Appeal was accordingly dismissed. Subsequently, however, the Revenue has filed Misc. Civil Application No.204 of 2012 contending that one additional ground which arose out of the judgment of the Tribunal was inadvertently not raised. The appellant, therefore, prayed for recalling the earlier order dated 1.8.2012 dismissing the Tax Appeal. Such request was granted and the Misc. Civil Application was allowed on 11.1.2013. Therefore, this Tax Appeal has been placed before us for admission hearing afresh.
4. Since the Revenue had not raised any question with respect to the findings and conclusions of this Court in the order dated 1.8.2012 dismissing the two questions which formed part of the Tax Appeal at the relevant time, we are not inclined to go into such questions all over again. Since the previous order was recalled by this Court in its entirety, we hereby reject those two grounds adopting the reasonings expressed by this Court in the previous order dated 1.8.2012.
5. That leaves the sole surviving question ‘C’ permitted to be added by us today, which reads thus:
“C. Whether the Appellate Tribunal is right in law and on facts in holding that the assessee was deriving majority of income under the head Capital Gain and hence the case was covered under the exception provided under explanation to section 73 of the Act ignoring the findings of the Assessing Officer that the assessee was regularly engaged in purchase and sale of shares constituting business activity as per explanation to section 73 of the Act?”
Issue, in brief, is that the respondent assessee had earned certain income during the previous year to the relevant assessment year 2005-06 by sale of shares. The Assessing Officer applied explanation to section 73 of the Income Tax Act, 1961 and held that the income arose out of speculative business of the assessee and taxed the income as business income of the assessee. The assessee’s contention that the receipt was in the nature of capital gain was not accepted.
6. The assessee carried the matter in appeal. The CIT(Appeals) allowed the appeal of the assessee and held that section 73 of the Act applies only in case of losses. There were additional reasons given by the Commissioner also, which need not be gone into. The Revenue took the matter in appeal before the Tribunal. The Tribunal confirmed the view of the CIT(Appeals). The Tribunal also gave certain independent reasons while upholding the Commissioner’s view that section 73 of the Act applies only in case of loss.
7. To our mind, the Assessing Officer committed an error in resorting to explanation to section 73 of the Act. The issue before him was whether the income earned by the assessee through sale of shares should be taxed as business income or should be treated as capital gain. Such issue had to be decided on the basis of the question whether the assessee is involved in any business of buying and selling shares or had purchased and sold the shares by way of investment. Unfortunately, the Assessing Officer went completely in a wrong direction and relied on the explanation to section 73 of the Act. We may recall that section 73 of the Act pertains to “losses in speculation business”. Sub-section (1) thereof provides that any loss computed in respect of speculation business carried on by the assessee shall not be set off except against profits and gains of another speculation business. Sub-section (2) of section 73, likewise, puts certain restrictions on carrying forward the speculative losses. Sub-section (4) further provides that no loss shall be carried forward under that section for more than four assessment years. Thus the entire section has application when the assessee has incurred loss or intends to carry forward non-absorbed loss. Explanation to section 73 reads as under:
“Explanation – Where any part of the business of a company (other than a company whose gross total income consists mainly of income which is chargeable under the heads “interest on securities”, Income from house property”, “Capital gains” and “Income from other sources” or a company the principal business of which is the business of banking or the granting of loans and advances) consists in the purchase and sale of shares of other companies, such company shall, for the purposes of this section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares.”
The explanation only provides for a deeming fiction in certain circumstances where the assessee would be deemed to be carrying on a speculation business. Such deeming fiction would not apply in situations not covered under section 73 since such explanation is applicable to section 73 only.
8. In the result, we see no merit in the appeal. We may clarify that if the Assessing Officer had, on the basis of some material at his command, given independent reasons to hold that the assessee was in the business of buying and selling shares, the treatment of income as that arising out of the business income would be justified. But that is not the fact in the present case.
9. In the result, Tax Appeal is dismissed.