Melville Finvest Ltd. V. Joint Commissioner of Income Tax (Assts.)

ITTA/47/2004

AI Insights

The case involves M/s. Melville Finvest Ltd., which appealed against the assessment of income and treatment of losses by the Income Tax authorities. The appellant argued that their primary business activities did not constitute a 'speculation business' as defined under Section 73 of the Income Tax Act, 1961, and that losses from the fall in value of shares should be adjustable against other income. The Income Tax authorities had treated the appellant's activities as speculation business, leading to the disallowance of loss set-off against non-speculative income. The court examined the definitions and provisions under Section 73 and upheld the authorities' decision, dismissing the appeal.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 676823 (HC-ANDHRA_PRADESH)
• Appeal Type: Others
• Pronouncement Date: 03-12-2014
• Assessment Year: misc
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Revenue
• Court: HIGH COURT
• Department Lawyers: J V PRASAD
• Assessee Lawyers: A V KAUNDINYA
• Keywords: Assessment Year; Income Tax; Loss adjustment; Revised Returns; Speculation business
• Section: 143(3); 143(2); 73; 143(1)(a); 260-A

Judgement Text

"*THE HON’BLE SRI JUSTICE L.NARASIMHA REDDY AND *THE HON’BLE SRI JUSTICE CHALLA KODANDA RAM +I.T.T.A.No.47 of 2004 % Dated 03.12.2014 # M/s. Melville Finvest Ltd. ….Appellant $ Joint Commissioner of Income Tax (Assts.). ….Respondent ! Counsel for the appellant : Sri A.V.Krishna Kaundinya ^ Counsel for respondent : Sri J.V.Prasad < GIST: > HEAD NOTE: ? Cases referred: THE HON’BLE SRI JUSTICE L.NARASIMHA REDDY AND THE HON’BLE SRI JUSTICE CHALLA KODANDA RAM I.T.T.A.No.47 of 2004 JUDGMENT: (Per LNR,J) This appeal presents an occasion to address certain typical situations covered by Section 73 of the Income Tax Act, 1961 (for short ‘the Act’). The appellant is a company, undertaking various activities including the trade in yarn, making investments, such as purchase and sale of shares of other companies. For the assessment year 1997-98, the appellant filed returns showing loss of Rs.29,71,990/-. The Assessing Officer gave an intimation making prima facie adjustment under Section 143(1)(a) of the Act. On the one hand, the loss of Rs.29,71,990/- was ignored and on the other hand, the assessee was shown to be having income of Rs.53,37,168/-. Aggrieved thereby, the appellant filed an appeal before the Commissioner of Income Tax. The appeal was allowed and the matter was remanded to the Assessing officer to undertake an exercise under Sub-Sections (2) and (3) of Section 143 of the Act. After remand, the appellant filed revised returns, posting the same loss but with certain different calculations. The Assessing Officer passed an order determining the income of the appellant at Rs.54,49,940/-. An appeal was filed against the order of Assessment before the Commissioner (Appeals). The appeal was dismissed on 21.03.2002. Thereafter, the appellant filed I.T.A.No.565/Hyd/02 before the Hyderabad Bench of the Income Tax Appellate Tribunal. The appeal was dismissed on 28.02.2003. Hence, this further appeal under Section 260-A of the Act. Sri A.V.Krihsna Kaundinya, learned counsel for the appellant submits that there was no basis for the Assessing Officer or the Commissioner or the Tribunal in treating the appellant as the one carrying on speculation business. He submits that the principal activity of the appellant was making investments and purchase and sale of shares and in that view of the matter, it cannot be treated as a company falling within the ambit of explanation to Section 73 of the Act. Learned counsel further submits that one of the items disallowed by the Assessing Officer viz., Rs.1,40,47,723/- on account of fall in the value of the shares is in fact an actual loss and the same ought to have been adjusted from the income of the appellant. It is also urged that the even if a company falls under explanation to Section 73 of the Act, the occasion to disallow any loss would arise, only when the activity of purchase and sale of shares takes place and not when it is on account of the depletion in the value of the shares which are very much in the possession of the assessee. Sri J.V.Prasad, learned counsel for the respondent submits that the circumstances, under which a company can be treated as carrying on speculation business are furnished in detail in the explanation to Section 73 of the Act and on the undisputed facts, the appellant falls into that category. He submits that it makes little difference, whether the so called loss posted by the company attracted by Section 73 of the Act on account of sale of shares or the fall in value thereof. According to the learned counsel, no amount representing the loss of a company through a business of such activity would qualify for set off against the other non-speculative income. The Act creates several facilities for deduction mostly in the form of losses from the income earned by that very assessee. It is not uncommon that an assessee who otherwise earns considerable profit would be tempted to post loss, speculative or otherwise, so that the liability to pay income tax on the profits earned is obviated or minimised. In the process, non-existent or speculative activities are also taken up. Obviously to curb such tendencies, the Parliament introduced Section 73 of the Act, which reads: 73. Losses in speculation business:- (1) Any loss, computed in respect of a speculation business carried on by the assessee, shall not be set off except against profits and gains, if any, of another speculation business. (2) Where for any assessment year any loss computed in respect of a speculation business has not been wholly set off under sub-section (1), so much of the loss as is not so set off or the whole loss where the assessee had no income from any other speculation business, shall, subject to the other provisions of the Chapter, be carried forward to the following assessment year, and- (i) it shall be set off against the profits and gains, if any, of nay speculation business carried on by him assessable for that assessment year; and (ii) if the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on. (3) In respect of allowance on account of depreciation or capital expenditure on scientific research, the provisions of sub-section (2) of section 72 shall apply in relation to speculation business as they apply in relation to any other business. (4) No loss shall be carried forward under this section for more than four assessment years immediately succeeding the assessment year for which the loss was first computed. From this, it becomes clear that any loss, which an assessee is said to have incurred in respect of a speculation business, cannot be set off against the profits and gains from other activities. The only exception is that the loss of such nature can be posted against the income earned from another speculative activity. The circumstances, under which a company can be treated as the one carrying on speculation business, are enumerated in the Explanation. In a way, it can be said that any company, which undertakes the activity of purchase or sale of shares of other companies, but not being the one in the category, enlisted within the brackets is liable to be treated as the one carrying on speculation business. It is not the case of the appellant that it falls into any of the categories, mentioned in the bracketed portion of the Explanation. It is also admitted fact that it undertakes the activity of sale and purchase of shares of other companies. That brings within the fold of the Explanation. Once a company is categorized as the one carrying on speculation business, an act of segregation needs to be undertaken. The entire loss incurred by the company does not disqualify for set off against profits from other activities. It is only such portion of the loss which is incurred in the speculative activity that gets disqualified. Learned counsel for the appellant strongly relied upon the expression “to the extent to which business consists of purchase and sale of shares” occurring at the end of the Explanation and submitted that the loss that can be refused for adjustment can be only when it occurs in the event of purchase of shares. In our view, the expression referred to above is intended only to segregate the losses, which an assessee may incur from the speculative business on the one hand and non-speculative business on the other hand. It cannot be treated as a provision, directing that only such portion of the loss, which occurs on account of the sale or purchase of shares can be taken into account for the purpose of Section 73. Even the appellant does not dispute that. If it incurs loss on sale of shares, such loss does not qualify for set off against its profits from other activity. That being the case, it is just un-understandable as to how the loss which is said to have occurred on account of the fall in value of the shares which are very much in its possession deserves to be treated on a higher or better footing. If the contention is accepted, it would lead to absurdity. We do not find any merits in the appeal and it is accordingly dismissed. The miscellaneous petition filed in this appeal shall also stand disposed of. There shall be no order as to costs. ____________________ L.NARASIMHA REDDY, J ______________________ CHALLA KODANDA RAM, J Date: 03.12.2014 Note: L.R.Copy to be marked. JSU THE HON’BLE SRI JUSTICE L.NARASIMHA REDDY AND THE HON’BLE SRI JUSTICE CHALLA KODANDA RAM I.T.T.A.No.47 of 2004 Date: 03.12.2014 JSU "