Skip to content


Prudential Construction Co. Ltd. Vs. Assistant Commissioner of Income - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Hyderabad
Decided On
Reported in(2001)75ITD338(Hyd.)
AppellantPrudential Construction Co. Ltd.
RespondentAssistant Commissioner of Income
Excerpt:
.....of rs. 1,48,200 and dividend income of rs. 1,27,755. this income was also credited to profit and loss account.against the profit credited to profit and loss account, the appellant had inter alia debited loss of rs. 1,60,33,083 being "loss on sale and decrease in value of shares". schedule-l the audited accounts indicated the working of loss on sale and purchase of shares as under: in part-iv of the return, the appellant had indicated the nature of business or profession (as construction, hire purchase, leasing and trading in shares). thus, the entire loss of rs. 1,60,33,083 on share transactions as computed above was charged to profit and loss account.while processing the return, under section 143(1)(a), the assessing officer noticed that the entire loss of rs. 1,60,33,083 on share.....
Judgment:
This is an assessee's appeal against the order of the Commissioner (Appeals), Hyderabad for assessment year 1997-98. The appeal relates to the adjustment made by the assessing officer while processing the return of income under section 143(1)(a) of the Act.

Before dealing with the merits of the case, it is relevant to mention herein the facts of the case. The appellant had filed the return of income declaring therein income of Rs. 7,82,353 under the head "profits and gains of business or profession". While scrutinising the return, the assessing officer noticed that the appellant had shown nil income under the head "capital gains" and income from "other sources", under the head "income from house property", the appellant had given the remark "not applicable". The assessee had computed the income of Rs. 7,82,353 under the head "business income" as under: The appellant-company is engaged in the construction business and for the accounting year under reference, the appellant had received contract receipts from power projects to the extent of Rs. 21,00,38,488. In addition, the appellant had earned other income amounting to Rs. 29,63,444 which comprises of interest receipt of Rs. 75,798, lease rental income of Rs. 20,89,200, share of profit from firm at Rs. 5,22,497 misc. income of Rs. 1,48,200 and dividend income of Rs. 1,27,755. This income was also credited to profit and loss account.

Against the profit credited to profit and loss account, the appellant had inter alia debited loss of Rs. 1,60,33,083 being "loss on sale and decrease in value of shares". Schedule-L the audited accounts indicated the working of loss on sale and purchase of shares as under: In Part-IV of the return, the appellant had indicated the nature of business or profession (as construction, hire purchase, leasing and trading in shares). Thus, the entire loss of Rs. 1,60,33,083 on share transactions as computed above was charged to profit and loss account.

While processing the return, under section 143(1)(a), the assessing officer noticed that the entire loss of Rs. 1,60,33,083 on share transactions was a speculation loss within the meaning of Explanation - to section 73 of the Income Tax Act. He also noticed that the appellant was not a company whose gross total income consists mainly of income which is charge account under the head "interest on securities", "income from house property", "capital gains" and "income from other sources". The appellant is not a company whose principal business is the business of banking or granting of loans or advances. Therefore, loss arising on account of purchase or sale of shares was a speculation loss within the deeming provisions of Explanation to section 73 of Income Tax Act and as such could have been given set off only against speculation profit and not against business profit. Accordingly, he made an adjustment disallowing loss of Rs. 1,60,33,083 under section 143(1)(a) of Income Tax Act. While doing so, the assessing officer recorded the following reasons in the intimation sent to the assessee under section 143(1)(a) of Income Tax Act: The nature of business as filed in the return of income by the assesse-company shown as construction, leasing, hire-purchase and trading in shares. In profit and loss account an amount of Rs. 1,60,33,083 has been debited under the head "loss on sale/decrease in value of shares". From tile nature of business as furnished in the return of income, it is learnt that the assessee is not 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", "income from other sources" and this is not a company, the principal business of which is the business of banking or the granting of loans and advances, within the meaning of Explanation to section 73 of the Income Tax Act, 1961.

In view of the above, loss on sale of shares amounting to Rs. 1,60,33,083 in the instant case is the loss from speculation business which has to be set off only against income from speculation business during the year or has to be carried forward and set off against the income from speculation business of subsequent years as per the provisions of section 73 of the Income Tax Act. The claim of the assessee made for set off of loss of Rs. 1,60,33,083 against Profit and Gains of Business, otherwise, than the speculation business is not allowable and, hence, adjustment of the same is made under clause (iii) of first proviso to section 143(1)(a).

Additional tax under section 143(1A) is being levied as per the provisions of section 143(1)(a) of the Income Tax Act." Aggrieved by the action of the assessing officer, the appellant took the matter in appeal before the Commissioner (Appeals). It was contended before the Commissioner (Appeals) that the Explanation to section-73 applies only in respect of loss which arises on account of purchase and sale of shares and since in the instant case, the loss of the appellant-company arose mainly on account of revaluation of closing stock of shares, the provisions of the Explanation to section 73 could not be invoked. It was pointed out to the Commissioner (Appeals) that the actual loss on share transactions was to the extent of Rs. 6,26,225 and the balance loss of Rs. 1,54,06,858 was on account of revaluation of shares on the principle "market value or cost whichever is less". It was argued that if the provisions of Explanation to section 73 were to be invoked, only an amount of Rs. 6,26,225 relatable to purchases and sale of shares could be disallowed and the balance could not have been disallowed. It was also argued that the power of the assessing officer to make adjustment under section 143(1)(a) was limited only to the extent in respect of specified items. The adjustment made in the present case was not covered by the specified items. The appellant had also relied on the following judgments:Pradeep Kumar Harsaran Lal v. Assessing Officer (1998) 229 ITR 46 (All).

5. Surat Vankar Sahakari Sangh Ltd. v. Deputy CIT (1998) 96 Taxman 195 (Ahd-Trib)(Mag).

The Commissioner (Appeals) considered the submissions of the appellant and found them not acceptable. The Commissioner (Appeals) noted that the case of the assessee was clearly covered under clause (iii) of first proviso to section 143(1)(a). He also noted that the case of the appellant was clearly covered under Explanation to section 73 of Income Tax Act. He noted that on the basis of information contained in the return of income and the accounts and the documents accompanying the same, it is obvious that the share business of the company was a 'speculation business' within the meaning of Explanation to section 73 of Income Tax Act and, therefore, the assessing officer was justified in making an adjustment under section 143(1)(a) of Income Tax Act. He also rejected the appellant's contention that the entire income of the appellant for the assessment year under reference was income from "other sources".

He also rejected the contentions of the assessee that while computing loss on share transactions, only loss of Rs. 6,26,225 relating to purchase and sale of shares could be treated as speculation loss and balance loss of Rs. 1,54,06,858 on account of valuation of closing stock on market price or cost whichever was less is to be ignored. He noted that the appellant was a dealer in shares. Therefore, while working out the profit or loss on share dealings, opening or closing stock form integral part of computing the profit and loss account Accordingly, the learned Commissioner (Appeals) upheld the action of the assessing officer in making the adjustment of the nature mentioned above. This is subject matter of the present appeal.

The learned counsel contended that as per the provisions of section 143(1 )(a), adjustments could be made only in respect of specified items. He further argued that the scope of adjustment is restricted to only such arithmetic errors which are prima facie made from the return, documents and other material accompanying the return. He further argued that all those issues which are debatable and involved prolonged arguments and discussions and where two opinions are possible fall outside the scope of adjustments under section 143(1)(a) of Income Tax Act. For this proposition, he relied on the judgments cited before the Commissioner (Appeals) in the following cases: He further argued that the issue whether the Explanation to section 73 is applicable to the facts of the case or not is a debatable one and involves prolonged arguments and, therefore, falls outside scope of the provisions of section 143(1)(a). He further relied on the decision of Tribunal Bombay Bench in the case of Trade Team (P) Ltd. v. Deputy, CIT (1995) 54 ITD 306 (Bom-Trib), where transactions in purchase and sale of shares were not held to be speculative transaction. Therefore, it is not correct to hold that in all cases, loss arising on account of transactions in purchase and sale of shares would be speculative in nature within the meaning of Explanation to section 73 of Income Tax Act. He also argued that as per the provisions of Explanation to section 73, only such loss arising on account of purchase and sale of shares could be treated as speculation loss and not the loss resulting due to the revaluation of the closing stock of shares. He further submitted that at the most loss of Rs. 6,26,225 arising on account of transactions of purchase and sale of shares could be treated as speculation loss and the balance loss of Rs. 1,54,06,858 arising on account of valuation of closing stock of shares could not be treated as speculation loss within the meaning of Explanation to section 73 of Income Tax Act. He also submitted that the issue whether only loss arising from purchase and sale of shares without including the value of closing stock of shares or loss on account of share transactions including valuation of stock is quite arguable and, therefore, falls outside the scope of the provisions of Explanation to section 73 of Income Tax Act. In the light of these facts, he vehemently argued that the order of the Commissioner (Appeals) in confirming the action of the assessing officer be set aside and the adjustment. made by the assessing officer under section 143(1)(a) be deleted.

On the other hand, the learned Departmental Representative strongly relied on the order of the Commissioner (Appeals). He further submitted that in Part-IV of the return, the appellant had indicated the nature of business as construction, hire purchase, leasing and trading in shares. The entire profit for the assessment year under reference was shown under the head "profit and gains from business". The fact that the appellant was a dealer in shares. It is evident from the audited accounts. The learned Departmental Representative drew our attention to Schedule-G of the audited accounts which indicated the value of shares as stock-in-trade. He argued that the shares were not held as investments. Besides, the appellant had itself treated the entire loss of Rs. 1,60,33,083 on account of share transactions including valuation of closing stock of shares as business loss. Considering the fact that the appellant is not a company whose gross total income consisted mainly of income chargeable under the heads "interest on securities", income from house property", "capital gains" and "income from other sources" and was also not a company whose principal business was the business of banking or granting of loans, the loss arising on account of the transactions in purchase and sale of shares was speculation loss within the meaning of the Explanation to section 73 of Income Tax Act.

He, therefore, submitted that the order of the Commissioner (Appeals) may be confirmed.

We have given utmost consideration to the rival submissions in the matter. We have also carefully perused the material, evidence and the documents filed along with the return of income. We are certainly in agreement with the learned counsel of the appellant that the scope of' adjustments to be made under section 143(1)(a) of Income Tax Act is limited only to the specified items mentioned therein. We are also in full agreement with the submissions of the learned counsel that only such errors which are prima facie found from the returns, documents accompanying the return could be adjusted as per the provisions of section 143(1)(a) and all those issues which involve prolonged arguments or are debatable in nature fall outside the scope of prima facie adjustments mentioned under section 143(1)(a) of Income Tax Act.

All the judgments relied upon by the learned counsel fully support this view.

Now the issue that needs to be considered is whether in the light of information contained in the return, in the documents and audited accounts filed along with the return, the assessing officer was justified in making an adjustment under section 143(1)(a). Before dealing with this issue, it is evident to reproduce herein the provisions of Explanation to section 73 of Income Tax Act: "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" of 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." Now, in this case it is evident from the facts disclosed in the return and as set out in the preceding paras, the entire income of Rs. 7,82,353 disused in the return was under the head "profit and gains" from business.

In part-IV of the return, the appellant had inter alia indicated the nature of business or profession, construction, hire purchase, leasing and trading in shares. In the return, the appellant had not shown any income under the heads "interest on securities", "income from house property", "capital gains" and "income from other sources". It is not the claim of the appellant that it is a banking company engaged in the business of' banking or granting of loans and advances. The appellant is carrying on business of trading in shares and it is further evident from Schedule I and Schedule-G of the audited accounts which indicate that the appellant had held shares of 30 companies as stock-in-trade.

The value of closing stock of shares for the accounting year under reference was to the tune of Rs. 5,36,26,122. The entire information to this effect is available from the income-tax return and the accounts filed with the return of income. The appellant does not fall in the category of exceptions mentioned in Explanation to section 73 of Income Tax Act. If we, exclude the exceptions provided in the Explanation, the wording of Explanation reads as under: "Explanation - Where any part of the business of a company ................ 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." Now considering the facts that the entire income of the company was shown under the head "profit and gains" from business, the assessee is carrying on business of trading in shares and the appellant does not fall in the exceptions provided in the Explanation, the provisions of Explanation to section 73 clearly apply to the facts of the case and the entire loss relating to share transactions including valuation of closing stock is a speculation loss within the meaning of Explanation to section 73 of Income Tax Act. This is prima facie clear from the return and the documents accompanying the return. In our view, this does not involve any controversy or prolonged debate or arguments.

Therefore, we are of the view that the adjustment made by the assessing officer fell within the scope of adjustments provided under section 143(1)(a) of Income Tax Act.

One of the arguments advanced by the learned counsel is that the loss relating to purchase and sale of shares can, at the most, be treated as speculation loss and not the loss resulting in on account of valuation of closing stock. We do not agree with such proposition. As mentioned earlier, the appellant is carrying on business of trading in shares.

Where the appellant is carrying on business of purchase and sale of shares, the value of opening stock and the closing stock form integral part of the computation of profit or loss from share trading. The correct profit or loss cannot be determined without taking into account the value of opening stock and the value of closing stock. In fact, in the profit and loss account, the entire loss of Rs. 1,60,33,083 arising on account of share transactions including valuation of closing stock has been adjusted against the profit and gains from business. The appellant has not adjusted only loss of Rs. 6,26,225 to the profit and loss account and it had adjusted the entire loss of Rs. 1,60,33,083 to the business profit. Therefore, while making the adjustment under section 143(1)(a), the assessing officer was duty bound to examine this aspect as to whether loss arising from share transactions was correctly adjusted against business profit or not. Since the appellant had adjusted the entire loss of Rs. 1,60,33,083 and not of Rs. 6,26,225, the assessing officer was justified in treating the entire loss as speculation loss. It may also be mentioned that there cannot be any controversy as made out by the appellant that the loss on share transactions has to be determined by excluding the value of closing stock of the shares. It is only made out by the appellant to wriggle out the rigours of Explanation to section 73 of Income Tax Act.

We have also carefully considered the decision of Income Tax Appellate Tribunal, Bombay Bench in the case of Trade Team (P) Ltd.'s case (supra). But, the decision in that case is not applicable to the facts of the present case. In that case, the assessee was not a dealer in shares and there was a solitary transactions of purchase and sale of shares. The shares were held as investment for a period of 3 years and thereafter sold. Loss suffered on this account was claimed as a short term capital loss. In the light of these facts, the Tribunal held that where the assessee was not a dealer in shares and the transaction was a solitary transaction on loss suffered was a short-term capital loss and not a speculative loss within the meaning of Explanation to section 73 of Income Tax Act. In this case, the appellant is admittedly dealer in shares and the appellant has also shown the value of closing stock as stock-in-trade. Besides, the volume of share transactions is quite extensive. Further, it is not the case of the appellant that the loss from share business was a capital loss. It is not a solitary transaction and these facts are clearly mentioned in the return of income and also the documents and audited accounts accompanying the return filed.

Therefore, by no stretch of imagination, the decision of Tribunal Bombay Bench referred to above can be applied to the facts of the present case.

In the light of detailed facts, discussions and reasoning given above, we are of the view that the entire loss arising on account of trading in shares is speculation loss within the meaning of Explanation to section 73 of Income Tax Act. As per the provisions of section 73 of Income Tax Act, such speculation loss can only be given set off against the speculation profit. There being no speculation profit for the assessment year under reference, the assessing officer was perfectly justified in making an adjustment under section 143(1)(a) while processing the return and such adjustment was justified under clause (iii) of first proviso to section 143(1)(a) of the Income Tax Act.

Accordingly, the order of the Commissioner (Appeals) is confirmed and the appeal is dismissed.


Save Judgments// Add Notes // Store Search Result sets // Organizer Client Files //