Thursday, 11 September 2014

Whether when assessee company is mainly engaged in earning profits from purchase and sale of shares, dividend income is merely incidental to holding of such stocks and thus, is chargeable to tax as income from other sources - YES: HC

THE issue before the Bench is - Whether when the assessee company is mainly engaged in earning profits from purchase and sale of shares, dividend income is merely incidental to holding of such stocks and thus, is chargeable to tax as income from other sources u/s 56(2). And the verdict goes in favour of the assessee.
Facts of the case
The assessee concern is in the business of purchase and sale of shares and also derives income from dividend, commission and interest. For the AY 1992-93, assessee had filed a return showing nil income. It had showed income from dividend, commission and interest under the head "profits & gains from business or profession". AO had not accepted the submission of assessee and while
passing an order u/s 143(3), it was held that the income disclosed by assessee from dividend, commission and interest was liable to be assessed under the head "income from other sources" and not under the head "profit & gains from business or profession". On appeal, CIT(A), found that since the assessee had been purchasing shares and debentures and was also selling the same, the income derived in the form of interest, dividend, debentures and shares was liable to be assessed as business income and, therefore, such income was liable to be assessed under the head "profits & gains from business or profession". The CIT(A), accordingly, allowed the appeal and deleted the addition so made by AO.
On further appeal by Revenue, Tribunal had set aside the order of the appellate authority and restored the order of AO holding that the income of the assessee derived from dividend, commission etc was liable to be assessed under the head "Income from other sources" u/s 56(2).
Held that,
++ it is a cardinal principle of law relating to Income Tax that the income tax is single charge on a total income of an assessee. For the purpose of computation, the Statute recognises different kinds of income which it classifies under different heads of income. For each head of income, the Statute provides a mode for computing the quantum of such income. The contention that dividend income received by the appellant in respect of shares held by him was income from business chargeable under Section 14 of the Act under the head profit against the business and profession cannot be accepted. Section 14 starts with the words "Save as otherwise provided by this Act", which indicates that for the purpose of charge of income tax and computation of total income, all income shall be classified under the five following heads of income specified in Section 14 unless it is specifically provided otherwise elsewhere by the Act. On the other hand, Section 56(2) clearly provides that dividends would be chargeable to income tax under the head "Income from other sources". The mandatory character of Section 56(2) read with Section 14 is indicated by the language employed therein that the following income namely, "dividends" shall be chargeable to income tax under the head "Income from other sources" and the intention of the legislature in making "dividends" chargeable under the heading "Income from other sources" is apparently clear. The legislature has made various heads of income. Every item of income would fall under a particular head or the other. For the purpose of computing the income, the particular section dealing with that head will have to be looked into. The various sources of income, profit and gains which have been so specified under various heads become chargeable under Section 14 either as income from salary, property, profits and gains in business and profession, capital gains or income from other sources;
++ in the instant case, the appellant held shares as stock-in-trade. The dividend income earned by him on the shares does not cease to be income which arises in the course of business, though for the purpose of chargeability to tax, such income would be included under the head "Income from other sources". We find that where a shareholder receives dividends in respect of the shares held by him, the dividend is received because of the fact of his holding the shares. When in the instant case, the appellant deals in shares and buys them in order to sell them, his main activity is the purchase and sale of shares. There may be no doubt of earning substantial dividends on the shares but one has to consider from the point of view that the appellant's business income consist of purchase and sale of shares. The appellant does not purchase the shares with a view to get dividend, but the object of purchasing his shares is to earn profit by the sale of those shares. In our opinion earning of dividends is thus merely the incidental result to the main activity of the purchase and sale of shares. In our view, receipt of dividends will not be chargeable to income tax under the head "profits & gains from business or profession";
++ in the light of the aforesaid, it is immaterial whether the shares are held by the appellant as stock-in-trade. The dividend income derived from these shares is specifically chargeable under the head "Income from other sources". Consequently, it is immaterial whether the appellant is a dealer or a trader and caries on business of purchase and sale of shares. We find that the Tribunal after relying upon the decisions of the Bombay High Court in CIT, Bombay City-II Vs. D.G.Goenka, 1981 ITR (129), 260 and of the Gujarat High Court in additional Commissioner of Income-Tax Vs. Laxmi Agents P.Ltd.,1980 ITR (125), 227 had rightly come to the conclusion that the dividend income arrived at by the appellant was chargeable under the head "Income from other sources". For the reasons stated aforesaid, we do not agree with the decision cited by the counsel for the assessee of the Delhi High Court in CIT Vs. Excellent Commercial Enterprises and Investment Ltd., 2005-TIOL-108-HC-DEL-IT. We do not find any error in the impugned order passed by the Tribunal. Accordingly, the question of law is answered in favour of the Department and against the assessee. The appeal fails and is dismissed.

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