ITAT LUCKNOW BENCH

IT Appeal No. 114 (Lkw.) of 2011
[ASSESSMENT YEAR 2005-06]

SUNIL K. YADAV, JUDICIAL MEMBER
AND PRAMOD KUMAR, ACCOUNTANT MEMBER

R.B. Shukla and A.R. Shukla for the Appellant.
S.L. Meena for the Respondent.

Pramod Kumar, Accountant Member - By way of this appeal, the assessee appellant has challenged correctness of learned CIT (A)'s order dated 7th January 2011, in the matter of assessment u/s 143 (3) of the Income Tax Act 1961for the assessment year 2005-06.

2. The short issue that we are required to adjudicate in this appeal is whether or not the CIT (A) was justified in declining set off of business losses, of the current year as also of the earlier years as brought forward, against profit in speculation business during the current year. This issue is raised by way of following grounds of appeal set out in the memorandum of appeal:-

3. To adjudicate in this appeal, only a few material facts need to be taken note of during the course of assessment proceedings, the Assessing Officer treated the gains on sale of shares, as speculative profits as there was no evidence of delivery of shares. While the Assessing Officer adjusted the business loss incurred during the year, which was computed at Rs.1,66,63,443, the Assessing Officer brought the balance income of Rs.2,17,46,490 to tax as speculation income in the hands of the assessee. He did not allow set off of business losses carried forward against this assessed income of Rs.1,66,63,443. Aggrieved assessee carried the matter in appeal before the CIT (A) but without any success. Not only that the CIT (A) confirmed declining the set off of business losses being carried forward against speculation profits, he also held that the speculation profit cannot be set off against business losses of the current year as well. He thus enhanced the assessed income to Rs.3,84,09,93, and, while doing so, he observed as follows:

"14. I find that the loss carried forward relating to assessment years 1998-99 and 2002-03 as evidenced from records is non-speculative business loss. However, a perusal of the assessment order for assessment year 2005-06 under appeal shows that there is speculation income to the extent of Rs.3,84,09,932/- computed by the AO as per discussion in para 6 of the assessment order reproduced in the foregoing paragraphs in para 10 of this order. The business loss of the appellant during the year is (-) Rs.1,66,63,443/- as computed by AO. However, the computation of the AO is suffers from serious mistake which is being corrected as follows:-

The business loss of the current year to the extent of Rs.1,66,63,443/-. The said business loss is not liable to be set off from the profit of speculation business to the extent of Rs.3,84,09,932/-. The provisions of carry forward and set off of business loss as contained in section 70, 71 and 72 of the I.T. Act do not provide for setting of business loss against the speculation income of the current year. Further, it is also not covered for setting off of for being in the nature of speculation income. Section 73 of the I.T. Act separately provides for loss in speculation business. Further more specifically, it is provided in section 72(1) that—

"72. [(1) Where for any assessment year, the net result of the computation under the head 'Profits and gains of business or profession' is a loss to the assessee, not being a loss sustained in a speculation business, and such loss cannot be or is not wholly set-off against income under any head of income in accordance with the provisions, of section 71, so much of the loss as has not been so set-off or; where he has no income under any other head, the whole loss shall, subject to the other provisions of this Chapter, be carried forward to the following assessment year; and-

From the above, it is clear that the business loss of current year can be set off only as per provisions of section 71 of the I.T. Act. A further reading of section 71 shows that the setting off of business income is not provided against the speculation income because speculation income is held as separate from business income as per Explanation-2 of section 28 of the I.T. Act.

15. The Ld. AR has submitted his reply vide letter dated 07.01.2011, placed on record stating that—

"We are fully entitled for set off of business loss (non-speculative) brought forward from A.Y. 1998-99 and 2002-03 against the income from speculative business of the current year. There is no other provision in Chapter-VI against our claim. The Assessing Officer has overlooked to this set off."

The reply of the appellant does not explain the position referred above -that the speculation income has been treated separate from business income as per Explanation-2 of section 28. Due to this reason and also as per the definition provided separately u/s 43 of the I.T. Act, it cannot be treated as part of business income. The different provisions relating to set off and carry forward of speculation income/loss u/s 73 of the I.T Act do not specifically provide and/or support the claim of the appellant.

16. In view of the discussion above, the income of the appellant during the year is liable to be assessed at Rs.3,84,09,932/- and business loss of Rs.1,66,63,443/- is liable to be carried forward as per law after verification by the AO. Thus, appeal results in enhancement of assessed income from assessed income of Rs.2,17,46,489/- to Rs.3,84,09,932/-."

4. The assessee is not satisfied and is in appeal before us.

5. 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.

6. We find that so far as the question of speculation business being a distinct business, for the purpose of computation of business results i.e. profits/losses, is concerned, the scheme of the Income Tax Act envisages that losses in speculation business cannot be set off against other business profits. However, this bar does not operate the other way round. Section 73(1) specifically provides that any loss in speculation business cannot be set off except against profits and losses of another speculation business. Section 73(2) further provides that if speculation losses are carried forward, such losses can only be set off against profits and gains of speculation business. It is only in this context that Explanation 2 to section 28, which treats speculation business as distinct from other businesses, is relevant. No doubt, by the virtue of Explanation 2 to Section 28, when speculative transactions carried on by the assessee are of such a nature as to constitute business, such a business shall be distinct and separate from any other business. However, in terms of section 70(1) of the Act, save as otherwise provided under the Act [as in Section 73(1) ibid], where income from any source falling under a head of income, other than capital gains, is a loss, the assessee is entitled to set off such against income from any other source under the same head of income. Accordingly, when an assessee has two distinct businesses and there is a loss in one business while profit in the other business, the loss can be set off against profit of the other business unless there is a statutory restriction of such a set off. The restriction set out in section 73 relates only to losses of speculation business being set off against profits of non speculation business, but not vice-versa. Therefore, in the absence of specific restriction on set off of normal business losses against profits of speculation business, the same cannot be inferred or assumed. Similar is the position with regard to set off of speculation losses against non speculation profits. Section 72(1) provides that non speculation business loss can be set off against "profits and gains, if any, of any (emphasis supplied by us) business or profession" carried on by assessee and assessable in that assessment year, and when it cannot be so set off, it shall be carried forward to the following assessment year. The expression "any" business clearly includes all businesses, without making any distinction between speculation and non-speculation business, and, therefore, going by the plain language of the statutory provision losses in a business, other than in speculation business, can be set off against profits of speculation business as also non speculation business.

7. Learned CIT(A) was right in appreciating that speculation business and non-speculation business are treated as distinct business, but what he clearly missed out was that the purpose and impact of this distinction restricts only set off of losses in speculation business against the profits of non-speculation business.

8. To understand the scope of these restrictions, it will be appropriate to take a look at the purpose and in the backdrop in which the restrictions on set off of speculation losses was brought in the statute. Until assessment year 1953-54, income tax law did not recognize any such distinction between losses in speculation and non-speculation business. It was only with effect from 1st April 1953 that the distinction between speculation business and non-speculation business was introduced by introducing a proviso to Section 24(1) of Income Tax Act, 1922, which is broadly in pari materia with the provisions of Section 73(1) and 73(2) of the present Income Tax Act, which stated that "Provided further that in computing the profits and gains chargeable under the head 'Profits and gains of business, profession or vocation', any loss sustained in speculative transactions which are in the nature of a business shall not be taken into account except to the extent of the amount of profits and gains, if any, in any other business consisting of speculative transactions". Elaborating upon the scope of this statutory provision, Hon'ble Supreme Court, in the case of CIT v. Jagannath Mahadeo Prasad [1969] 71 ITR 296, observed as follows:

'The answer to the question referred to the High Court obviously depends on the interpretation of the second proviso to section 24(1) of the Act. In interpreting this provision, the purpose of section 24(1) and (2) has to be kept in view. Under the Act, the Income-tax Officer has to determine the total income of an assessee under section 23(1), (3) or (4) of the Act. In determining this total income, income under all the various heads enumerated in section 6 has to be taken into account. Sections 7 to 10 and 12 lay down the principles on which the income under these various heads is to be computed. In the case of income from business, profession or vocation, the income has to be computed under section 10(1) of the Act. Section 10(2) of the Act lays down certain deductions which have to be made in computing the profits and gains from business, profession or vocation. It is during this computation to be made by the Income-tax Officer under section 23 of the income from business, profession or vocation in accordance with section 10(1) of the Act that the Income-tax Officer is further required to apply the provisions of section 24. Section 24 is, thus, a provision laying down the manner of computation of total income. The principal clause of section 24(1) lays down that, if there be a loss of profits or gains in any year under any of the heads mentioned in section 6, that loss has to be set off against the income, profits or gains of the assessee under any other head in that year. If this provision had stood by itself without any provisos, the result would have been that all losses incurred by an assessee under any of the heads mentioned in section 6 would be adjusted against profits under all other heads, and then the total income of the assessee would be worked out on that basis. The first proviso to this sub-section, however, lays down an exception to this general rule contained in the principal clause. The exception relates to income from business consisting of speculative transactions, and places the limitation that losses sustained in speculative transactions are not to be taken into account in computing the profits and gains chargeable under the head "Profits and gains of business, profession or vocation", except to the extent that they will be set off against profits and gains in any other business which itself consists of speculative transactions. The effect of the proviso is that if there are profits in speculative business, those profits are added to income under the other heads mentioned in section 6 for purposes of computing the total income of the assessee in order to determine the tax under section 23 of the Act. On the other hand, losses in speculative business are not to be taken into account when computing the total income, except to the extent to which they can be set off against profits from other speculative business. The first proviso, thus, clearly limits the applicability of the principal clause of section 24(1); and, when applied, it governs the manner in which the total income of the assessee is to be computed. In the case before us, the Income-tax Officer was clearly right in the assessment years 1958-59 and 1959-60 in not setting off the losses in the speculative business against the income earned in those years either from property or from ready business in kappas.' (Emphasis, by underlining, supplied by us)
9. Clearly, therefore, there was a differentiation in approach towards profits and losses of the speculation business inasmuch as while its profits were to be taken into account for computation of overall income or losses, its losses were to be ignored for the said purpose. This position having been accepted by Hon'ble Supreme Court in the aforesaid case, we have no reasons to take any other view of the matter. The same principle was also set out by Hon'ble Bombay High Court, in the case of A R Mahadevia v. CIT (65 ITR 308), though in the context of as to what will constitute speculation losses, wherein Their Lordships have observed that "….. what the provision contemplates is that where there are businesses consisting of speculative transactions carried on by the assessee, the loss or profit in one kind of business can be adjusted against the loss or profit in another kind of business, but a set-off of losses in speculative businesses will not be allowed against profits from business which are not speculative". The principle is thus unambiguous. It is only the set off of losses in speculation business which is hit by the differentiation in speculation and non-speculation business. This far and no further. Neither the statutory provision provides for a reverse application for this principle, i.e. profits of speculation profits not to be set off against non-speculation losses, nor there is any conceptual support for this principle either. That apart, it is not open to us to infer the same as it is not supported by the plain words of the statute. Casus omissus, even if there be any, cannot be supplied in the process of interpretation of statues. In the case of Tata Tea Ltd. v. Jt. CIT [2003] 87 ITD 351/129 Taxman 25 (Kol) (mag), speaking through one of us, it was observed that "casus omissus, which broadly refers to the principle that a matter which has not been provided in the statute but should have been there, cannot be supplied by us, as, to do so will be clearly beyond the call and scope of our duty which is only to interpret the law as it exists." As Rowlatt, J. has said, in Cape Brady Syndicate v. IRC 1 KB 64, "In a taxing statute, one has to look merely at what is clearly said; there is no room for any intendment." The temptation of resorting to a rather creative process of an aggressive interpretation of statutes, which gives an excuse to read between the lines, therefore, must be resisted. Even as we say so, we are also of the view that, in any event, there is nothing between the lines to justify such an interpretation either. Therefore, even as speculation business was to be treated as distinct business, the impact of this treatment is confined to the losses of speculation business not being set off against the incomes in the same head or incomes under the other heads. The authorities below went well beyond the statutory provisions in declining the set off of normal business losses against the speculation profits. This approach is unsustainable in law.

10. In view of these discussions, and bearing in mind entirety of the case, we uphold the plea of the assessee and direct the Assessing Officer to allow set off of normal business losses against speculation business profits.

11. In the result, appeal is allowed in the terms indicated above.