Commissioner of Income Tax, Cochin v. M/S Harrisons Malayalam Financial Services Ltd., Cochin

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT: THE HONOURABLE MR.JUSTICE THOTTATHIL B.RADHAKRISHNAN & THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN FRIDAY, THE 3RD DAY OF AUGUST 2012/12TH SRAVANA 1934 ## **I.T.A.No.96 of 2000** ------------------------------------ [AGAINST THE ORDER IN I.T.A.NO.74(COCH)/1996 DATED 28.04.2000 OF THE INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH, COCHIN] (ASSESSMENT YEAR 1992-93) ------------------- APPELLANT:- ------------------- THE COMMISSIONER OF INCOME TAX, COCHIN. BY ADV.SRI.P.K.R.MENON (SR.), SENIOR COUNSEL FOR GOVERNMENT OF INDIA (TAXES) SRI.JOSE JOSEPH, STANDING COUNSEL FOR GOVERNMENT OF INDIA (TAXES) ## RESPONDENT:- ----------------------- M/S.HARRISONS MALAYALAM FINANCIAL SERVICES LTD., COCHIN - 03. BY ADV. SRI.A.K.JAYASANKAR NAMBIAR (SENIOR ADVOCATE) SRI.ANIL D. NAIR SMT.PRIYA MAHESH SMT.PREETHA S.NAIR. THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 24-07-2012, THE COURT ON 03-08-2012 DELIVERED THE FOLLOWING:- Thottathil B.Radhakrishnan & K.Vinod Chandran, JJ. ------------------------------------------I.T.A.No.96 of 2000 ------------------------------------------Dated this, the 3[rd] day of August, 2012 ## JUDGMENT ## K.Vinod Chandran,J: The Revenue is in appeal against the orders of the appellate authorities reversing the disallowance of a claim; by the assessing officer. 2. The assessee is an investment company, doing business in shares and debentures. For the assessment year 1992-93, the assessee had dividend income from the shares which were retained and not sold during the year. Though the assessee returned the said dividend income under the head “other sources”, at the time of assessment, the assessee claimed for setting off of the carried forward business loss to the extent it could not be set off against profits and gains of the business; against such dividend income. In fact, the claim of the assessee was that the dividend income obtained by the assessee during the year ought to be considered as profits and gains of the business, since the dividend was directly attributable to the business of the assessee, i.e., derived from the shares which ought to have been considered as stock-in-trade of the assessee. The I.T.A.No.96 of 2000 - 2 - assessing officer disallowed the claim primarily on the basis that such income was returned under the head “other sources” and the same was derived from investments and not stock-in-trade. 3. The first appellate authority, relying on the decisions of the Hon'ble Supreme Court in _**Investment Ltd. v. C.I.T.**_ [(1970) 77 ITR 533] and _**Western States Trading co. P. Ltd. v. C.I.T.**_ [(1971) 80 ITR 21] and also the decision of the Delhi High Court in _**C.I.T. v. R.Dalmia**_ [(1974) 96 ITR 463], reversed the disallowance and held that the dividends on shares would form part of income from business. The Tribunal concurred with the first appellate authority. 4. The learned counsel for the assessee Smt.Preetha S.Nair would rely on the above decisions to contend that the assessee being engaged in the business of stock trading, necessarily retain certain stocks in the course of its business; and in the process, would gain dividend on such retention; which could only be treated as income from business and any business loss carried forward could be set off against such dividend income. Both the appellate authorities, according to the learned counsel, having found on facts that the dividend income earned by the assessee was one in the course of the business, this Court cannot at this stage upset such findings, especially so under jurisdiction conferred under Section 260A of the Act. I.T.A.No.96 of 2000 - 3 - 5. The learned Senior Counsel for the Revenue Sri.P.K.R.Menon, however, would contend that the assessee himself has returned the income as “income from other sources” and cannot make a volte-face during the assessment proceedings claiming it to be business income. The learned Senior Counsel would also place reliance on the decision of the Supreme Court in _**Bengal & Assam Investors Ltd. v. Commissioner of Income Tax**_ [(1966) 59 ITR 547]. 6. In _**Investment Ltd. case**_ ( _supra_ ) the assessee Company was incorporated with the object, _inter alia,_ of investing its funds in debentures and shares and for acquiring, holding and dealing with such debentures and shares. While for the assessment years 1952-53, 1954-55 and 1955-56 the Income Tax Officer accepted the claims of the company that the shares and securities being stock-in-trade, for the assessment year 1953-54 the loss resulting from the sale of a particular security was held to be of a capital nature, especially since in the balance-sheet the company had valued the securities at cost and described its stock as “investment”. The Supreme Court held that the determination whether the loss suffered by the sale of securities was of a capital nature, was a mixed question of fact and law. Though the finding for the other assessment years could not be held to be conclusive, the same was held to be good and cogent evidence of the I.T.A.No.96 of 2000 - 4 - nature of transaction in shares and securities carried on by the assessee even with respect to the relevant year. Holding that no firm conclusion could be drawn from the treatment of such security as “investment” as disclosed in the balance-sheet, it was found that on facts the securities were stock-in-trade and the loss suffered even for the relevant year was a revenue loss. 7. _**Western State Trading Co. case**_ ( _supra_ ) was a case in which the assessee owned a colliery, which was sold in the relevant year and together with the issue of the claim of loss incurred on sale of colliery, the issue of set off of business loss of earlier years against the dividend income also arose. The Supreme Court upheld the claim of the assessee on the ground that the amount of dividend would form part of the business of the assessee if the share, which earns such dividend, were a part of the assessee's trading assets. In that case, since such a dispute was never raised by the Revenue, the question was answered in favour of the assessee. 8. The learned Senior Counsel for the Revenue has placed reliance on the Supreme Court judgment in _**Bengal & Assam Investors Ltd. case**_ ( _supra_ ). The assessee was an investment company; and the dividend it earned, on the shares it held, was held to be not “business income”. On facts, it was clearly held that the shares I.T.A.No.96 of 2000 - 5 - held by the investment company were not stock-in-trade of the company and, hence, the dividend could not be assessed as business income. It was held: “It seems to us that on principle before dividends on shares can be assessed under section 10, the assessee, be it an individual or a company or another other entity must carry on business in respect of shares; that is to say, the assessee must deal in those shares. It is evident that if an individual person invests in shares for the purpose of earning dividend he is not carrying on a business. The only way he can come under section 10 is by converting the shares into stock-in-trade, i.e., by carrying on the business of dealing in stocks and shares as did the assessee in **Commissioner of Income-tax v. Bai Shirinbai K.Kooka** [(1962) 46 ITR 86 (SC)]”. Since in the said case no facts were brought out to show that the company was in any way carrying on business in shares and the business of the company was merely investment with a view to holding them for the purpose of earning dividends, the stock held by the company was held to be not in the nature of business and, hence, was not stock-in-trade. All the decisions cited above were under the Income-tax Act, 1922; but the principle would squarely apply here too. I.T.A.No.96 of 2000 - 6 - 9. We are of the opinion that the _**Bengal & Assam Investors Ltd. case**_ ( _supra_ ) is one in which there was nothing to show that the assessee was carrying on business in shares. The assessee therein, just like any other individual was investing in shares for the purpose of earning dividend and the securities on which dividend was earned could not have been treated as shares held by them as stock-in-trade. 10. The facts in the present case are otherwise and we are of the opinion that the Supreme Court decisions relied on by the learned counsel for the assessee is more apposite. In _**Investment Ltd. case**_ ( _supra_ ), the Supreme Court held that method of accounting regularly employed by the assessee can be discarded only if the taxing authority is of the opinion that the income earned cannot be properly deduced therefrom. The method employed by the company in valuing stock at cost and describing such stock in the balance-sheet as “investments”, were held to be not decisive of the fact that the stock valued was not stock-in-trade. The finding of the first appellate authority as well as the Tribunal that the shares held by the assessee, which earned dividend income, constituted stock-in-trade; does not necessarily give rise to a question of law. The appellate authorities having concurred on facts that the dividend income earned by the assessee was eligible to be brought I.T.A.No.96 of 2000 - 7 - forward as loss of the previous years, in our opinion, cannot be interfered with in this appeal. The assessee is a company regularly dealing in shares and debentures. It is not one incorporated for the purpose of investment alone and the business activities, as disclosed from the records, would indicate regular dealings in shares and stocks. The findings of fact entered into by the Tribunal, confirming the findings of the first appellate authority, cannot at all be said to be perverse. They are essentially findings on facts. The questions of law raised by the Revenue does not at all arise from the impugned order. In the result, we reject the appeal confirming the orders of the Tribunal. Sd/Thottathil B.Radhakrishnan Judge Sd/- vku/ K.Vinod Chandran Judge. - true copy -