Dividends on shares held as stock in trade are taxable under Income from other Sources-Allahabad High Court

HIGH COURT OF JUDICATURE AT ALLAHABAD

AFR  
Reserved  

Income Tax Appeal No. 3 of 2003  

Sangam Investments Limited .......... Appellant  
Allahabad  

Versus  

The Commissioner of Income .......... Respondents.
Tax, Allahabad.  

Hon.Tarun Agarwala,J.  
Hon. Dr. Satish Chandra,J.  

(Per: Tarun Agarwala,J.)

The appellant is in the business of purchase and sale of shares and also derives income from dividend, commission and interest. For the assessment year 1992-93 the appellant filed a return showing nil income. The appellant showed income from dividend, commission and interest under the head "profits& gains from business or profession".  

The Assessing Officer did not accept the submission of the appellant and while passing an order under Section 143(3) of the Income Tax Act (hereinafter referred to as the Act) held that the income disclosed by the appellant 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"  

Being aggrieved by the order of the Assessing Officer, the appellant filed an appeal before the Commissioner of Income Tax (Appeal), who found that since the appellant 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 Commissioner of Income Tax (Appeals), accordingly, allowed the appeal and deleted the addition so made by the Assessing Officer.  

Income Tax Department, being aggrieved, filed a second appeal before the Tribunal, which was allowed. The Tribunal set aside the order of the appellate authority and restored the order of the Assessing Officer holding that the income of the assessee derived from dividend, commission etc was liable to be assessed under the head "Income from other sources" under Section 56(2) of the Act. The assessee, being aggrieved by the order of the Tribunal, has filed the present appeal under Section 260A of the Act, which was admitted on the following substantial questions of law :  

"A. Whether on the facts and in the circumstance of the case the ITAT was legally correct in holding that the dividend received by the appellant on the shares held by them as stock-in-trade of their shares business is assessable as income from other sources and not as business income?  

B. Whether on the facts and in the circumstances of the case the ITAT was legally correct in setting aside and reversing the order of the Commissioner of Income Tax (Appeal), Allahabad and restoring the order of the Assessing Officer on the other points too when the said points were neither argued nor passed."  

We have heard at length Sri R.S.Agrawal, the learned counsel for the appellant and Sri R.K.Upadhyay, the learned counsel for the respondent.  

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.  

Section 56 of the Act deals with the categories of income which are chargeable under the head "Income from other sources". Sub-section (I) of Section 56 provides that the income of every kind which is not to be excluded from the total income under the Act shall be chargeable to income tax under the head "Income from other sources", if it is not chargeable to income tax under any of the heads specified in Section 14, items A to E. Section 14 of the Act classifies income under five heads. For the purposes of charge of income-tax and computation of total income, all income shall be classified such as salaries, income from house property, profits and gains of business or profession, capital gains or income from other sources. Any income, which is not to be excluded from the total income under the Act, is chargeable to income tax under the last head namely; "Income from other sources", if it is not chargeable to income tax under five earlier heads. Clause (i) of sub-Section (2) of Section 56 specifically provides that dividends would be charged to be income under the head "Income from other sources". Therefore, for the purpose of chargeability of income-tax income from dividends itself fall within the classification of profits and gains of business or profession. For facility Section 56(1) and (2) is extracted hereunder:  

"56(1) Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head "Income from other sources", if it is not chargeable to income-tax under any of the heads specified in section 14, items A to E.  

(2) In particular, and without prejudice to the generality of the provisions of sub-section (1), the following incomes, shall be chargeable to income-tax under the head "Income from other sources".  

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 of the Act 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 Commissioner of Income-Tax, 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 learned counsel for the assessee of the Delhi High Court in Commissioner of Income-Tax Vs. Excellent Commercial Enterprises and Investment Ltd., (2006) 282 ITR 423 (Delhi).  

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.  

Dated: 03.09. 2014  
MAA/-  

(Dr.Satish Chandra,J.) (Tarun Agarwala,J.)