CIT vs. Darshan Securities Pvt. Ltd (Bombay High Court)

Expl to s. 73: Share loss to be first set-off to determine what GTI consists of

The assessee earned Rs. 2.25 crores from service charges, suffered a loss of Rs.2.23 crores from share trading and earned dividend of Rs.4.79 lakhs. The assessee set off the share trading loss from the service charges and claimed that as its’ gross total income comprised mainly of dividend income, the Explanation to s. 73 (which deems share trading loss to be speculation loss) was not applicable. The department claimed that the share trading loss had to be kept out of the computation for determining whether or not the gross total income comprised mainly of dividend etc. The Tribunal rejected the department’s plea. On appeal to the High Court, HELD dismissing the appeal:

The department’s submission that in computing the gross total income for the purpose of the explanation to s. 73, income under the heads of “Profits and gains of business” must be ignored and /or that the share loss should not be allowed to be set off against the income from any other source under the head “Profits and gains of business” is not acceptable because it leads to an incongruous situation where in determining whether a company is carrying on a speculation business within the meaning of the Explanation, sub-section (1) of s. 73 is applied in the first instance. This is not permissible as a matter of statutory interpretation because the Explanation is designed to define a situation where a company is deemed to carry on speculation business. It is only thereafter that sub-section (1) of s. 73 can apply. Applying the provisions of s. 73(1) to determine whether a company is carrying on speculation business would reverse the order of application. Legislature has mandated that in order to determine whether the exception that is carved out by the Explanation applies, a computation of the gross total income has to be made in accordance with the normal provisions of the Act and it is only thereafter that it has to be determined whether the gross total income so computed consists mainly of income which is chargeable under the heads referred to in the Explanation to s. 73 or not.