Commissioner of Income Tax vs Parkview Properties (P.) Ltd.

D.K. Seth, J.—The question to be answered is: Whether, on the facts and in the circumstances of the case, the learned income tax Appellate Tribunal was justified in directing the Assessing Officer to compute the total income of the assessee without applying the provisions of Explanation to section 73 when the loss in share trading exceeded the income from other sources and the loss was a loss from speculative business contrary to the finding of the income tax Appellate Tribunal that the loss is not a speculative loss ?

The Assessing Officer had disallowed the benefit of the Explanation to section 73 of the income tax Act, 1961, to the assessee in respect of the assessment year 1989-90 declining to set off the loss in share dealing on the ground that this share dealing is a speculation business carried on by the assessee u/s 73 of the income tax Act, 1961. The Commissioner (Appeals) and the learned Tribunal had reversed the said order and had allowed the benefit of the Explanation to section 73 holding that the main source of income of the assessee consists of income from interest on securities and income from house properties. It appears from the order of the appellate authority and the learned Tribunal that the income on the head of interest on securities and income from other sources exceed the income of the assessee on other heads. From page 25, paragraph 3 of the order of the learned Tribunal, it appears that the income from other sources was Rs. 5,73,701 whereas the business income was Rs. 3,33,670. Upon such finding, the Tribunal had allowed the benefit of the Explanation to section 73 and had permitted setting off the business loss without treating the same as a speculation loss.

It is abundantly clear from the said finding that the learned Tribunal had allowed the benefit of the Explanation to section 73 after setting off of the speculation loss. In order to ascertain whether an assessee would be entitled to the benefit of the Explanation to section 73, it is to be examined first whether the assessee comes within the exception provided in the said Explanation. It is to be found out as to how it stands before the benefit of the Explanation to section 73 is allowed. The expression "... gross total income consists mainly of income... chargeable under the heads...." used in the Explanation is clear and unambiguous. It gives out the intent of the Legislature. Section 73 restricts adjustment of speculation loss with speculation profit only. Speculation loss is not permitted to be adjusted against business profit. This restriction is relaxed and adjustment is made permissible by reason of the Explanation in respect of a company whose gross total income consists mainly of income chargeable under the heads specified. It is the gross total income, which is to be taken into account first. If this test is satisfied, then only setting off against business profit is permissible.

While computing the gross total income, loss is also to be taken into account. Loss is also treated as negative profit. The gross total income as defined in section 80B(5) of the said Act means the total income computed in accordance with the provision of the Act before making any deduction under Chapter VI-A. It is also a well-settled proposition that the words ''income'', ''profits'' and ''gains'' have to be understood as including losses. In one sense, profit and gains represent positive income whereas loss represents negative income. It was so held in Commissioner of Income Tax (Central), Delhi Vs. Harprasad and Co. P. Ltd., and Commissioner of Income Tax, Bangalore Vs. J.H. Gotla, Yadagiri, , in construing the word "income" in section 16 of the Indian income tax Act, 1922. There is hardly any difference in the definition of "income" in the 1961 Act with that of the 1922 Act. In the case of Eastern Aviation & Industries Ltd. v. CIT [1994] 208 ITR 1023 , this court had held that the Explanation to section 73 could be applied before the principle of deduction is applied, namely after computing the income as defined u/s 80B of the said Act.

Applying the said principle in the present case, we find that there was a loss in the share dealing account, i.e., Rs. 8,98,799. If the same is treated to be a negative profit, then definitely the income from other sources and dividend income (interest on securities) being Rs. 5,73,701 is lesser. Therefore, the main income consists of the business of share trading which is the main object of the assessee. The business income computed after setting of the loss in share trading assessed at Rs. 3,33,670 does not represent the business income since it was arrived at after applying the benefit of Explanation to section 73, namely, setting off the speculative income. Therefore, in our view, both the Commissioner (Appeals) and the learned Tribunal proceeded on an erroneous view of the proposition of law in respect of section 73 which in sub-section (1) makes it clear that speculation loss cannot be set off except against a speculative profit permissible of being carried forward for being set off in the subsequent years stretching to a period of eight years and not otherwise, unless the test of the Explanation is satisfied, which, in our opinion, is not being satisfied in the present case. Therefore, the reference is answered in the negative, in favour of the Department. No costs.

R.N. Sinha, J.

I agree.