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Dividend income/PF/Set-off: Treated as `business income'

T. Banusekar

IF an employee dies, and his nominees receive the accumulated balance in the PF account, will the same be exempt in the hands of such nominees?

Also, an employee after retirement is engaged as a retainer by his former employer. If the employer reimburses the employee's medical expenses to the extent of 5 per cent of the retainer fee, subject to production of actual bills. Is the same taxable in the hands of the former employee?


Under Section 10(12) of the I-T Act, 1961 the accumulated balance due and payable to an employee in a recognised provident fund account is exempt to the extent stipulated in the IV Schedule. The exemption is available provided the employee has rendered continuous service for five years, which, however, may be relaxed under certain circumstances. These aspects have been discussed in this column, on October 27. There is nothing in Section 10(12), or in the Schedule, to indicate that the exemption will be available to the nominees on the death of the employee.

However, it should only be logical that the same should be available to the nominees for if this were not the case, the very purpose and spirit of Section 10(12) would stand defeated.

Reimbursement of medical expenses even if subject to production of bills will be taxable as business income in the hands of the former employee, who is now engaged as a retainer by the company. This would be so because under Section 28, the value of any benefit or perquisite arising from business or the exercise of a profession is to be taxed as business income.


A private limited company has bought and sold the shares of another company through a stockbroker registered with SEBI. There has been actual delivery of these scrips.

These shares are held as stock-in-trade. The assessing officer wants to invoke Section 73 and treat the loss arising from the purchase and sale of such shares as a speculative loss. Is the officer justified? Can the dividend income from these shares be treated as business income?



Section 56 of the I-T Act, 1961 expressly provides that dividend can be taxed only as income from other sources. Therefore, it would not be possible to treat the same as business income. However, with regard to brought forward business losses, the same can be set-off against such dividend income where the shares are held as stock-in-trade. Reference in this connection may be made to the following decisions:

Lakshmi Industries (P) Ltd v CIT [1961] 41 ITR 645 (Mad)

Western States Trading Co (P) Ltd v CIT [1971] 80 ITR 21 (SC)

CIT v Conanada Radhaswami Bank Ltd [1965] 57 ITR 306 (SC)

The explanation to Section 73 provides that where one company is engaged in the buying and selling of shares of other companies, the loss arising there from is to be treated as a speculation loss. This explanation is not applicable to banking companies; investment companies or companies whose aggregate income under the heads other than "profits and gains of business or profession" is greater than the income under the head "profits and gains of business or profession".

The explanation being specific in nature will override the provisions of Section 43(5), which provides that a transaction is not speculative if there is periodic or ultimate delivery of goods and commodities including shares and scrips.

The intention of this explanation to Section 73 is quite evident from para 19.2 of the Circular No 204, dated July 24, 1976, which states that the provision has been brought in to curb the device (being purchasing and selling of shares of other companies) resorted to by business houses controlling groups of companies.

The explanation, however, seems to be affecting even companies which do not resort to such buying and selling for tax evasion. Apart from the legislative intent referred to above, the following arguments may be raised before the authorities to support the view that the explanation would be applicable only where the buying and selling of shares by one company of another is with a view to evade taxes.

  • The decision of the Supreme Court in the case of Girdharilal & Sons v Balbir Nath Mathur AIR1986 SC 1499 where it has been observed that "... the primary and foremost task of a court in interpreting a statute is to ascertain the intention of the legislature, actual or imputed." Having ascertained the intention, the court must then strive to so interpret the statute as to promote/advance the object and purpose of the enactment.

  • A statute is an edict of the legislature, and the conventional way of interpreting or construing a statute is to seek the `intention' of its maker and that a statute is to be construed according "to the intent of them that make it" and "the duty of the judicature is to act upon the true intention of the legislature (the mens or sententia legis)."

  • The most fair and rational method for interpreting a statute is by exploring the intention of the legislature through the most natural and probable signs which are "either the words, the context; the subject matter, the effects and consequence, or the spirit and reason of the law" and that a bare interpretation of the words and application of a legislative intent devoid of conceptor purpose will reduce most of the remedial and beneficent legislation to futility.

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