Starline Ispat & Alloys Ltd. v. Deputy Commissioner of Income-tax, Circle 8, Mumbai

Pramod Kumar, Accountant Member. - The short issue that we are required to adjudicate in this appeal is whether or not the CIT(A) was justified in upholding the action of the Assessing Officer in declining set off of the speculation loss from share dealings against the dividend income earned from the shares held as stock-in-trade in the course of such share dealings. This grievance is raised by way of following well-drafted grounds of appeal set out in the memorandum of appeal :

"1. The learned CIT(A) erred in upholding that Explanation to section 73 of the Income-tax Act, 1961, is applicable to the appellant, even though its only business is dealing in shares and securities.

2. The learned CIT(A) erred in holding that the appellant is not covered by the exception provided in bracketed portion of Explanation to section 73 of the Income-tax Act, 1961, although gross total income consists mainly of ‘income from other sources’.

3. The learned CIT(A) erred in holding that for the purposes of calculating gross total income, as provided in bracketed portion of Explanation to section 73 of the Income-tax Act, 1961, the appellant should include loss on dealing in shares.

4. The learned Assessing Officer erred in not allowing set off of the dividend income against loss on dealing in shares on the ground that dividend is assessed under the head ‘Income from other sources’, and furthermore same cannot be treated as income from speculative business."

2. The assessment year involved is 1997-98 and the impugned assessment is framed under section 143(3) of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’).

3. The material facts are as follows. The assessee is engaged in the business of dealings in shares and securities. In the course of scrutiny assessment proceedings, the Assessing Officer noticed that assessee’s loss from this business is Rs. 91,66,327, that its income from other sources is Rs. 10,13,826, and the assessee has claimed a set off of business losses against income from other sources. On these facts, the Assessing Officer issued a notice to the assessee requiring him to show cause as to why, in the light of the provisions of Explanation to section 73 which, according to the Assessing Officer, were applicable on these facts, the claim for set off not be declined. The elaborate submissions made by the assessee is response to this show-cause notice, inter alia, emphasized (i) that it is only when composite business is carried on by the assessee and only when a part of such composite business pertains to dealing in shares and securities, that Explanation to section 73 can come into play; (ii) that the only business carried on by the assessee was dealing in shares and securities; (iii) that the said Explanation itself provides that in the event of the losses being held as losses in ‘speculation business’ the losses so incurred in the business will not be set off except against profits and gains of any other speculation business, which implies that set off can be declined only when two businesses, i.e. the business in which loss is incurred and the business in the course of which taxable profits are earned, are completely distinct in character; (iv) that since profits against which loss is claimed for set off is directly linked with the said, assuming it is so, ‘speculation business’, inasmuch as the dividends are earned on the shares which were dealt with as stock-in-trade, and therefore the dividends earned and the losses incurred are pertaining to the same business; and (v) that the profits or losses of the business, after excluding the profits or losses which are said to be on account of speculation business, are less than income from other sources, and, therefore, the case of the assessee is covered by the income composition exclusion test inbuilt in Explanation to section 73 itself. Mainly on the strength of these submissions, the assessee submitted that declining the set off, as then proposed by the Assessing Officer, will be contrary to correct legal position. The Assessing Officer was urged to accept the claim of the assessee and allow set off of losses on share dealings against the income from other sources.

4. The Assessing Officer was, however, far from impressed by these submissions. The Assessing Officer was of the view that provisions of the law are clear, unambiguous and admit no controversy. He was of the view that composite business argument is unsustainable as the law provides that loss incurred by a company in trading of the shares in other company is to be treated as speculation loss. He further stated that dividends being treated as business profits is impermissible as these are to be taxed as ‘income from other sources’. In any event, the Assessing Officer added that even if dividend income is to be treated as business income, it cannot be said to be the profit of speculation business as losses incurred on ‘sale and purchase of shares is deemed to be losses of speculation business by the virtue of special provisions of the Act’, and, therefore, ‘even if dividend income is to be treated as business income, the same cannot be said to profit of speculation business because there is no deeming provision for the same’. The Assessing Officer finally concluded that the assessee’s argument to the effect that gross total income mainly consists of dividend income is also not acceptable because there is no deeming provision for the same. On the basis of this reasoning, the Assessing Officer declined the set off of losses incurred in share dealings against dividend income earned by the assessee.

5. Aggrieved, assessee carried the matter in appeal before the CIT(A) but without any success. In an order in which the emphasis apparently was on the economy of words rather than the need to set out the reasons for coming to particular conclusion, and after long quotes from the assessment order from the erudite submissions filed by the assessee, the CIT(A) held as follows :

"Having considered very carefully submissions and arguments of the learned authorized representative of the appellant company, I am of the view that the Explanation to section 73 of the Act is squarely applicable to the appellant company; and that appellant company is not covered by the exception provided in the said Explanation, and, as such, I hold that the Assessing Officer has rightly, and in accordance with the provisions of section 73 of the Act, not allowed set off of the speculation loss from share dealings against dividend income. Hence, all the submissions and arguments on behalf of the appellant company are rejected, and the order of the Assessing Officer is confirmed."

6. The assessee is not satisfied and is in further appeal before us.

7. Learned counsel states that the issue in appeal is covered in favour of the assessee by a number of decisions passed by various co-ordinate Benches of this Tribunal. Our attention is invited to the order dated 31st March, 2003 passed by Mumbai G Bench in the case of Associated Capital Market Management Ltd. v. Joint CIT [IT Appeal No. 1103 (Mum.) of 2001]; assessment year 1996-97, which has been subsequently followed by Mumbai C Bench in the case of Cosy Mercantile Ltd. v. Dy. CIT [IT Appeal No. 3511 (Mum.) of 2001]; assessment year 1997-98 vide order dated 27th July, 2005. The proposition accepted by the Tribunal in these cases is that where gross total income of the assessee comprises loss from business and positive income from other sources, even though figure of loss is more than the positive income, Explanation to section 73 will not apply. Learned counsel also relies upon the submissions made by the assessee from time to time and which have been elaborately set out in the orders of the authorities below. The impugned orders are, therefore, stated to be contrary to the settled legal position. Learned Departmental Representative, on the other hand, relies upon Hon’ble Calcutta High Court’s judgment in the case of CIT v. Park View Properties (P.) Ltd. [2003] 261 ITR 473 (Cal.) wherein Their Lordships have held that where losses from share dealings are more than the positive incomes under income from other sources, the income composition test in the Explanation to section 73 cannot be said to be satisfied. Learned Departmental Representative submits that the law having been so settled by Their Lordships and there being no contrary decision on this issue by any other High Court, the Tribunal cannot disregard the Hon’ble Calcutta High Court. As for the other issues raised by the assessee, learned Departmental Representative mainly relies upon the orders of the authorities below and vehemently submits that these legal contentions are devoid of any merits at all. We are thus urged to approve the orders of the authorities below and decline to interfere in the matter. In rejoinder, learned counsel for the assessee submits that the said Calcutta High Court decision has been duly considered in the orders passed by the Tribunal, and yet those Benches of the Tribunal have expressly followed the orders by the co-ordinate Benches in preference over judgment of the non-jurisdictional High Court. It is submitted that while a non-jurisdictional High Court is not a binding precedent for the Tribunal, an order passed by a co-ordinate Bench is surely a binding precedent. It is not open to us, as put by the learned counsel in his own humble but unambiguous way, to take any other view of the matter on this issue than the view taken by the co-ordinate Benches, and, just in case the view so taken does not meet our concurrence, we can do nothing more than referring the matter to a larger Bench. The matter is no longer res integra and it is not for us to now consider whether or not the co-ordinate Benches were justified in disregarding the judgment of Hon’ble Calcutta High Court. As regards other issues raised by the assessee, learned counsel for the assessee once again reiterated the stand taken by the assessee before the authorities below. All these issues, however, need not be considered by us as the assessee succeeds, in the light of the decisions of the co-ordinate Benches, on the income composition test. On the strength of all these arguments, we are urged to vacate the orders of the authorities below and direct the Assessing Officer to allow the set off claimed by the assessee. We have heard the rival contentions, perused the material on record and duly considered factual matrix of the case as also the applicable legal position.

8. Let us take a look at the scheme of section 73, so far as it is relevant to the issue in appeal before us. Section 73(1) provides that any loss, in respect of a speculation business carried on by the assessee, shall not be set off except against profits and losses of the assessee, if any, of another speculation business. In other words, therefore, losses incurred in a speculation business in a year can be set off only against losses in another speculations business in that year. This step essentially requires determination of losses from a speculation business first.

9. The expression ‘speculation business’ is defined at two places in the Income-tax Act - first Explanation 2 to section 28 read with section 43(5); and, second - in Explanation to section 73 of the Act. In both of these places, the emphasis is on business as a whole and not on transactions. Explanation 2 to section 28 states that where speculation transaction carried on by the assessee are of such a nature as to constitute a business, such speculation business shall be deemed to be distinct and separate from any other business. Speculative transactions, in turn, are defined in section 43(5) which broadly, and subject to certain exceptions which are not relevant for the present purposes, cover the transactions in which a contract for sale and purchase of any commodity, including for stocks and securities, is periodically or ultimately settled otherwise than by actual delivery or transfer of the commodity or scrips. It is thus clear that when an assessee carries on speculative transactions in the course of, what can be described as, business, such business is to be deemed as distinct from any other business carried on by the assessee. The emphasis is on a business as a whole. The computation of profits of such a speculation business has to be therefore something more than arithmetical exercise of aggregating the profits and losses from the speculative transactions. It must, therefore, take into account all profits and losses which are attributable to such speculation business. Explanation to section 73 expands the scope of ‘speculation business’ a little further, by introducing a deeming fiction. This deeming fiction provides that in where business of a company includes purchasing and selling shares of other companies, to that extent, the company shall be deemed to be carrying ‘speculation business’. Once again, the emphasis is on the business as a whole, and not to the transactions of sale and purchase per se. What is to be, therefore, computed as ‘losses of speculation business’, in the context of bar on set off in section 73(1), is of the business as a whole and not merely the aggregate or net result of profits and losses on all such transactions of purchase and sale. There are two exclusion clauses, however, from this deeming fiction and these exclusion clauses are built in the Explanation to section 73 itself. The first exclusion clause is based on ‘income composition test’ providing that where gross total income of the assessee-company predominantly consists of passive incomes chargeable under the heads ‘Income from house property’, ‘Income from house properties’ and ‘Income from capital gains’, this deeming fiction will not apply. The second exclusion clause is based on ‘business activity test’ which lays down that where predominant business activity of the business is ‘banking’ or ‘granting of loans and advances’, again this deeming fiction will have no application.

10. Let us take a pause here and try to fathom underlying philosophy and rationale of the exclusion clauses set out in Explanation to section 73 of the Act, and also of the very scheme of the section 73 itself. To our understanding, our appreciation of this aspect should surely give us insight into the nature and scope of this deeming provision, which, in turn, should enable us to interpret the law in a more meaningful and holistic manner. The task of interpretation of a statutory enactment, as observed by inimitable Justice Bhagwati in the landmark judgment in the case of K.P. Varghese v. ITO [1981] 131 ITR 597¹ (SC), is not a mechanical task. It is more than a mere reading of a mathematical formulae because very few words possess the precision of mathematical symbols. It is an attempt to discover the intent of Legislature from the language used by it and it must always be remembered that language is at best an imperfect instrument for expression of human thought, and, as pointed by Lord Denning, it would be idle to expect every statutory provision to be drafted with "divine prescience and perfect clarity". Having so laid down the ground rules, Justice Bhagwati added that ". . . we must construe its language having regard to the object and the purpose which the Legislature had in view in enacting that provision and in the context of setting in which it occurs". Bearing in mind this important principle of interpretation of statutory enactments, let us try to appreciate the underlying rationale and philosophy of the Explanation to section 73.

11. We find guidance from decision of the Tribunal in the case of Aman Portfolio (P.) Ltd. v. Dy. CIT [2005] 92 ITD 324 (Delhi). In this decision, our Tribunal had an occasion to analyze the scope of Explanation to section 73 and the background in which it was introduced. It was noted that the Explanation to section 73 was introduced, with effect from 1st April, 1977, by the Taxation Laws (Amendment) Act, 1975, and that applicability of this Explanation is confined to the companies, and, even amongst companies, it is not applicable to the companies whose gross total income mainly consists of income chargeable under the head ‘Interest on securities’, ‘income from house property’, ‘capital gains’ and ‘income from other sources’. It is also not applicable to the companies whose main business is banking or granting of loans and advances. The Legislature apparently thought that the business of sale and purchase or shares should be deemed to be speculative business as there was evidence to show that some companies were adopting a device to manipulate the prices of shares, which are dealt with amongst the controlling groups, to reduce their taxable income. That was the reason, as noted by the Tribunal in Aman Portfolio (P.) Ltd.’s case (supra), that the Explanation was introduced. While introducing this legal provision, however, care was taken to ensure that the companies whose income is not predominantly under the head ‘Income from business’ are not hit by this Explanation, on the footing, as noted by the Tribunal, that such companies would be "predominantly investment companies carrying on genuine investment business for the benefit of the members or the shareholders, and should therefore be spared from the rigour of Explanation". That is one way of looking at the first exclusion clause. The other perspective, in our understanding, is that if an assessee-company does not have business income as its main source, there should generally be no question of maneuvering reduction of taxable business income by entering into, what could possibly be, share purchase and sale transaction for the purpose of avoiding taxes. The underlying philosophy is that these transactions for purchase and sale of shares, while be perfectly valid or legal, could possibly be to avoid or reduce taxes and without commercial motives. The second exclusion clause provides for exclusion of banking and finance businesses from application of Explanation to section 73. In Aman Portfolio’s case, Tribunal’s appreciation of reasoning for this exclusion clause was that these banking and finance "companies were not likely to indulge in manipulations as their predominant business was that of money lending" and that "these companies were under the control of the Banking Regu- lation Act and strict supervision was exercise by the RBI over dealings of such companies, and any manipulation by them by indulging in speculation could be separately dealt with". Once again, the clearly discernible underlying philosophy of this exclusion clause is that these companies were not likely to get into maneuvering, by way of entering into transactions for purchase and sale of shares of other companies, for the purpose of avoiding or reducing their tax liabilities. We have taken note of the fact that section 8 of the Banking Regulations Act prohibits banking companies from buying or selling, directly or indirectly, in any goods, including in shares or stocks, except in realization of securities given to or held by the banking companies. In these circumstances, the transactions for sale and purchase of the shares could not but have been bona fide and genuine. These transactions cannot obviously be viewed as devices to reduce profits. The exclusion clause took care of this. As for the companies which were in the business of granting loans and advances also, the transactions for sale of securities given to, or held by, such finance companies was inevitable, and, to keep these genuine transactions out of the legal provision enacted for neutralizing an unscrupulous maneuvering for reducing or avoiding taxes, exclusion clauses inbuilt in the Explanation extended to such finance companies as well. It is thus clear that the underlying rationale and philosophy of the exclusion clauses is that on account of introduction of such sweeping generalizations, as are inherent in the scheme of the Explanation to section 73, genuine losses incurred as an integral and inextricable part of the business are not declined set off against profits from such businesses. This object is quite in tandem with the overall object of introducing Explanation to section 73, as set out in the CBDT Circular No. 204, dated 24th July, 1976 (paragraph 19.2), "to curb device sometimes resorted to by business houses controlling groups of companies to manipulate and reduce the taxable income of the companies under their control", and thus to ensure that artificial losses maneuvered in the hands of the assessee companies which have profits from other business, are not allowed to be set off against their such profits. In the light of the above discussions, a few things emerge - first, that, so far as set off of speculation losses is concerned, what is really required to be determined for the purposes of section 73(1), as also for the purposes of Explanation to section 73 as well as Explanation (2) to section 28, that profits or losses of the speculation business are to be ascertained which essentially involves viewing all the activities in connection with such purchase and sale of shares as a separate set of activities constituting business; - second, that, so far as the purpose of Explanation to section 73 is concerned, the undisputed intent of Legislature, as acknowledged by the CBDT itself, is to ensure that artificial losses maneuvered in the hands of the assessee companies which have profits from other business, are not allowed to be set off against their such profits; and - third, that, so far as purpose of the exclusion clause embedded in the Explanation to section 73 is concerned, the exclusion clauses are to ensure that genuine losses incurred as an integral and inextricable part of the business are not declined set off against profits from such business.

12. It is also necessary to appreciate the relevance, or irrelevance, of chargeability of an income under a particular head, so far as the question of set off of an income under section 73(1) is concerned. To recapitulate, section 73(1) provides that "any loss, computed in respect of a speculation business carried on by the assessee, shall not be set off except against profits and gains of another speculation business". The expression used in this section is ‘profits and gains’ of the business, and, it is only elementary that the expression "profits and gains of a business" is certainly wider in scope than "profits and gains of a business chargeable under the head ‘Income from business’". While on this distinction, it will be useful to refer to the following observations made by the Hon’ble Supreme Court in the case of Western States Trading Co. (P.) Ltd. v. CIT [1971] 80 ITR 21 :

". . . It is well-settled by the decisions of this Court that [see CIT v. Cocanada Radhaswami Bank [1965] 57 ITR 306 (SC)] that section 6 classifies taxable income under different heads but the scheme is that income tax is and section 6 only classifies the taxable income under different heads for the purpose of computation of net income of the assessee. While sub-section (1) of section 24 provides for setting off the loss under one of the heads mentioned in section 6 against the profits under a different head in the same year, sub-section (2) provides for carrying forward of the loss for one year and setting off the same against the profits and gains of the assessee from the business in subsequent year or years. It was emphasized in the aforesaid decision that sub-section (2) of section 24 is in contradiction with sub-section (1) and is concerned only with the business and not under with its head under section 6 of the Act. Dividends are included in the meaning of income under sub-section (1A) of section 12 which is a residuary head. Applying the principles adverted to before, the amount of dividends would form part of the income from business of the assessee if the shares were a part of the assessee’s trading assets and the assessee would be entitled to a set off as claimed against the loss from its business incurred in previous years. It does not appear to have been disputed at any stage that the shares formed part of the stock-in-trade of the share dealing business of the assessee. There could be no reason, therefore, for the assessee not being entitled to the set off claimed." [Emphasis supplied]

As their Lordships did take note of the position that one set of provisions ‘classifies the taxability of income under several heads for the purpose of computation of net income’ while the other set of provisions is ‘concerned only with the business and not with its heads (of taxability)’. Their Lordships unambiguously noted the contradiction that section 24(1) and (2), which dealt with carry forward of business losses in the 1922 Act, in the sense that while sub-section (1) dealt with the loss incurred under the head ‘Income from business’, sub-section (2) referred to income of the business and not under the head under which it is taxed. Due note of taxability of dividend income, under the residuary head of income from other sources, was duly taken. In effect, it was noted that a loss incurred under the head ‘Income from business’ could be set off against income under any other head as long as it was in the nature of the income of the business. The reason was that the law referred to the business income, and not as income chargeable under the head ‘Business income’. The wordings in section 73(1) referring to business and not chargeability under the head ‘Business income’, in the light of this discussion, assume importance.

13. Let us now turn to the facts of the case before us.

14. We need to, first of all, decide whether the assessee, on the facts of this case, could be said to be engaged in the speculation business, and, if the assessee is held to be in the speculation business, what is the quantum of losses incurred by the assessee in such a business. Unless the assessee is engaged in the speculation business, the disability under section 73(1) does not come to play at all, and unless we quantify the losses incurred by the assessee in this business, we would not be able to ascertain the extent to which this disability applies.

15. In this sweepingly generalized provision of Explanation to section 73, and save and except for the situations in which exclusion clauses set out in this Explanation apply, to the extent business of the assessee consists of purchase and sale of shares of other companies, it is to be considered to be ‘speculation business’. In the present case, the business of the assessee undoubtedly consists only of purchase and sale of shares of other companies. Normally, therefore, the profits earned by the business of the assesssee-company are to be treated as profits of the speculation business. Clearly this reading of the legal provision is at huge variance with undisputed object and purpose of the legal provision. While the intent was to only to ensure that artificial losses maneuvered in the hands of the assessee companies which have profits from other business, are not allowed to be set off against profits of their such other business, even in a situation, only business of the assessee is dealing in shares, the provisions of Explanation to section 73 find application.

16. That takes us to the question whether it is open to us to read down the provisions of Explanation to section 73 so as to bring the legal provision in harmony with the object and purpose of the legal provision. One way of so reading down the provisions could be, as was held by the Tribunal in Aman Portfolio (P.) Ltd.’s case (supra), that the provisions of Explanation to section 73 could not be invoked unless there was some material on record to show that the assessee is a company controlled by a business house and the share transactions in question are effected with a view to manipulate or reduce its income. However, this decision has subsequently been specifically disapproved by a Division Bench of this Tribunal in the case of Dy. CIT v. Frontline Capital Services (P.) Ltd. [2005] 4 SOT 473 (Delhi). This aspect of the matter and our reservations, even if any, on the course so adopted by the Division Bench, need not, however, detain us for long, as, on the facts of this case, perhaps the assessee succeeds on an even more fundamental aspect, and the question whether or not the provisions of Explanation to section 73 could be invoked, without meeting the tests laid down in Aman Portfolio’s case (supra), could be purely academic.

17. A plain reading of the provisions of section 73(1), and the way in which it is often interpreted, sometimes puzzles us a little bit. In case an assessee has only one business, it is only logical that the assessee cannot have any grievance against a bar on the losses of that business being set off against profits and gains of any other business. There is no other business of the assessee, in fact. So, in case that assessee losses money in its business, there is no question of these losses being set off against profits of any other business. This restriction is academic as the assessee has only one business and that business is deemed to be in the nature of a speculation business. Undoubtedly, income of a business may be chargeable under various heads but all incomes of the business, whether chargeable under the head ‘Profits and gains from business and profession’ or not, continue to retain the character of income "of" that business. This concept is specifically recognized by the Hon’ble Supreme Court, way back in the case of CIT v. Cocanada Radhaswami Bank [1965] 57 ITR 306 and Western States Trading Co. (P.) Ltd. v. CIT [1971] 80 ITR 21. As we have noted earlier in this order, Their Lordships were then dealing with the provisions of section 24(1) and (2), which dealt with carry forward of business losses in the 1922 Act, in the sense that while sub-section (1) dealt with the loss incurred under the head ‘Income from business’, sub-section (2) referred to income of the business and not under the head under which it is taxed. We have the same situation here. Section 71(1) deals with the "profits of gains of" speculation business and not the incomes chargeable under the head "Business income". In the present case, there is no dispute that the dividend was earned from the shares which were held as stock-in-trade. Once the dividend is found to have been earned on the shares held as stock-in-trade, the dividend income so earned cannot be viewed as divorced from the business in the course of which the shares were so held as stock-in-trade. That business, by the virtue of deeming fiction under Explanation to section 73, has been treated as a speculation business in entirety. Therefore, the dividends so earned by the assessee are also to be viewed as profits of the speculation business, even as admittedly these profits, consisting of dividends earned on shares held as stock-in-trade, are to be assessed as income from other sources. What follows, therefore, is that in case an assessee has only one business, which is treated as speculation business under Explanation to section 73, in which the assessee has incurred a loss, and the assessee has an income of the same speculation business which is assessed under a head of income other than ‘profits and gains from business and profession’, the restriction on set off under section 73(1) will not come into play. The said restriction is relevant only when the positive income is from a business other than a speculation business. That is not the position in the case before us. The dividend from shares may be taxable as ‘income from other sources’ in the light of the specific legal provisions to that effect but, beyond any dispute or contro- versy, the dividends so earned, being dividends on the shares held as stock-in-trade in the course of a business which has been treated as speculation business by the virtue of deemed fiction under Explanation to section 73, spring from the same business. The trouble actually arises due to the assumption, which is an erroneous though widely held, the speculation business losses under Explanation to section 73(1), or for that purpose, even under Explanation (2) to section 28 read with section 43(5) are the losses on account of sale and purchase of shares of other companies. That is the reason why these losses are isolated and then declined set off against other profits of the same business. If we go back to the observations made by the Assessing Officer, this fallacy will be more glaring. As we pointed out, while summarizing proceedings before the Assessing Officer, the assessee did take up the specific argument that dividend earned on the shares held as stock-in-trade should be treated as business profits. This argument was, however, rejected by the Assessing Officer by observing that "even if dividend income is considered to be a business income, then also the same cannot be treated as profits of a speculation business". The reason given for this conclusion is that "the loss incurred on sale of and purchase of shares is deemed to be loss of speculation business by virtue of special provisions of the Act" and that "dividend income is treated as business income, the same cannot be said to profit of speculation business because there is no deeming provisions for the same". This reasoning clearly proceeds on the fallacy that it is the loss on purchase and sale of shares which is to be treated as ‘loss of speculation business’ and not the loss of the entire business of purchase and sale of shares, which is required to be treated as ‘loss of the speculation business’. A co-ordinate Bench of this Tribunal, in the case of Paharpur Cooling Towers Pvt. Ltd. v. Commissioner Of Income-Tax [2003] 85 ITD 745 (Kol.) and dealing with this very aspect of the matter, has observed :

". . . A careful perusal Explanation to section 73 indicates that this Explanation lays down that the expression ‘speculation business’, under the specified circumstances, will cover to the extent ‘assessee’s business consists of the purchase and sale of such shares’. The definition thus sought to be placed is of ‘speculation business’ and not ‘speculation profits’. As to what will constitute profits from such business, this is to be essentially governed by the normal accounting principles and business practices. . . ."

These observations in Paharpur Cooling Towers Ltd.’s case (supra) were quoted, with approval, by a Special Bench of this Tribunal in the case of AMP Spg. & Wvg. Mills (P.) Ltd. v. ITO [2006] 100 ITD 142 (Ahd.)(SB). In this view of the matter, the conclusion of the Assessing Officer to the effect that deeming fiction covers only losses on purchases and sales of shares, and does not extend to other incomes in the business of purchases and sales of shares, is clearly erroneous and unsustainable in law. Once we vacate this conclusion arrived at by the Assessing Officer, we have to proceed on the basis that losses of the speculation business are to be computed in accordance with commercial principles which essentially take into account all gains and losses incidental to the main activity. It is an unambiguous legal prescription that Explanation to section 73 provides for deeming fiction of speculation business for the limited ‘purposes of this section’ and that restriction under section 73(1) comes into play only for set off against profits of a business other than speculation business. As a matter of fact, the Central Broad of Direct Taxes, vide Circular No. 23 (XXXIX-4) D, dated 12th September, 1960, has accepted the suggestion that speculation loss in a year should be adjusted against speculation profits of the particular year. The Board has observed that "speculation loss of any year should be first set off against the profits of that year...". The provisions of the 1961 Act being in pari materia with the provisions of the 1922 Act under which the above circular was issued and in the light of the provisions of section 297(2)(k), which are also explained by a co-ordinate Bench in the case of Madanlal Mohanlal Narang v. Asstt. CIT [2006] 101 TTJ 1005 (Mum.), this circular has the binding force under section 119 even now. The dividend earned from the shares held by the assessee-company as stock-in-trade, in the course of business of buying and selling such shares, has to be viewed as profit of speculation business, though chargeable under the head ‘Income from other sources’. If that be so, following the above circular, this speculation business profit, irrespective of the head under which it is assessed, is to be set off against the speculation business loss of dealing in shares. Whether the business of the assessee is speculation business or not thus ceases to be relevant, and the set off is to be allowed. The stand of the assessee, therefore, deserves to be accepted.

18. It is well-settled in law that in the case of ambiguity, a legal provision is to be interpreted in harmony with the intent of the Legislature as also the object and purpose of such a legal provision. Therefore, even if we proceed on the basis that there is some element of ambiguity in the provisions of section 73(1) inasmuch as it is not clear whether or not loss of a speculation business, chargeable under the head ‘Business income’, is to be set off against speculation business profits, not chargeable under the head ‘Business income’, it is certainly beyond doubt that there is a reasonably possible view in favour of the assessee. This view, in the light of elaborate analysis of the intent and scheme of Explanation to section 73 earlier in this order, is more in tandem with the intent of Legislature as well as object and purpose of the intent of Legislature. For this reason, as also on account of the well-accepted principle enunciated by the Hon’ble Supreme Court in the case of CIT v. Vegetable Products Ltd. [1973] 88 ITR 192 that when two reasonable constructions are possible, the construction favouring the taxpayer is to be adopted, the view that loss of a speculation business, chargeable under the head ‘Business income’, is to be set off against speculation business profits, not chargeable under the head ‘Business income’, has to be adopted. We do so, and adopt the interpretation which is not only in favour of the assessee but also in harmony with the object and purposes of the legislative provision in question.

19. In the light of the above discussions, the issue as to whether the case of the assessee will be covered by the income composition exclusion clause or not is academic. It does not call for our consideration. Our decision in this case hinges on the fact that shares from which dividends were earned were held by the assessee during the course of the speculation business, and the dividend so earned was in the nature of income of the business though chargeable under a head other than the ‘profits and gains from business and profession’. In none of the cases cited before us, this material fact is present. The law laid down in those cases will, therefore, not really affect the outcome in the present case. We are, in this context, reminded of the oft quoted observations made by the Hon’ble Supreme Court in the case of Mumbai Kamghar Sabha v. Abdulbhai Faizulbhai AIR 1976 SC 1455 that "...It is trite, going by Anglophonic principles, that a ruling of a superior court is binding in law. It is not of spiritual sanctity but of ratio wise luminosity within the edifice of facts where judicial lamp plays the legal flame." Their Lordships have added that "Beyond those walls and de hors the milleu, we cannot impart the eternal vernal value to the decisions, exalting the doctrine of precedents into prison house of bigotry, regardless of varying circumstances and myriad developments." The precedents relied upon by the learned Departmental Representative does not deal with the peculiar facts of the case, which, in our considered opinion, have clinched the issue. We, therefore, declined to be drawn in that controversy and see no need to address ourselves to the judicial precedents cited by the learned representatives.

20. For the detailed reasons set out above, we hold that the CIT(A) was not justified in upholding the action of the Assessing Officer in declining set off of the speculation loss from share dealings against the dividend income earned from the shares held as stock-in-trade in the course of such share dealings. We, therefore, uphold the grievance of the assessee. The assessee gets the relief accordingly.

21. In the result, the appeal is allowed.