TMI Blog2006 (3) TMI 528X X X X Extracts X X X X X X X X Extracts X X X X ..... the ld. CIT(A) erred in holding the loss of Rs. 17,34,239 incurred in share transactions is not a speculative loss. 3. The Assessing Officer in the assessment order observed as under : "On perusal of books of account it is revealed that the assessee-company has opening balance of Rs. 8,40,000 for 84,000 shares of Ketaki Estate. The company has purchased 1,52,000 shares of M/s. Ketaki Estate for Rs. 19,61,025. During the year the assessee-company has sold 68,500 shares of Ketaki Estate for Rs. 2,97,175 and shown the closing stock of Rs. 18,29,000. In the trade of Ketaki Estate shares the assessee-company has declared a loss of Rs. 6,76,850." 4. The Assessing Officer found that M/s. R.K.M. Securities Ltd., M/s. Ketaki Estates and the assessee-company had common Directors namely Shri Raj Kumar Modi who verified and signed the returns of the three companies. In the circumstances, the Assessing Officer held to quote as under : "The assessee-company has created a loss by putting the shares from one company to another company in which the directors are the same or are having a substantial interest, and loss has been created just to adjust the main income." 2.2 The Assessi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d otherwise than by actual delivery or transfer of commodity. 10. It was also his submission that section 73 was beneficial in nature and has been incorporated to protect the assessee when the assessee indulges in transactions of speculative nature as per the definition contained in section 43(5). 11. He further submitted that it is not in dispute that sale and purchase of shares have been finally settled by delivery and the same are not covered under section 43(5) and are thus not of speculative nature as per section 43(5). Thus these share transactions are of non-speculative nature. For losses incurred in non-speculative transactions the question of coming into play of Explanation to section 73 does not arise at all. 12. The ld. CIT(A) agreeing with the submission of the ld. AR of the assessee observed that the Assessing Officer has made a complete hotch-potch of the fact relevant to the issue in question. Physical delivery was taken and given in all these share transfers and, as such, as per section 43(5) of the Act it is clear that they are not transactions of speculative nature. For this he relied on the decision of the Hon ble Calcutta High Court in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,434 Gross Sale Rs. 6,76,221 Loss on sale of shares Rs. 17,34,238 16. The ld. AR relied on his submissions made before the ld. CIT(A) and also supported the findings to the ld. CIT(A). He further relied on the decision of the Hyderabad B Bench of the Tribunal in the case of Godavari Capital Ltd. v. Dy. CIT [2004] 91 ITD 274 and submitted that section 73 is applicable only in cases where the assessee was carrying on a speculative business in shares. 17. We have heard the rival submissions and perused the orders of both the lower authorities and materials available on record. We have gone through the decision of the Tribunal and find that the question before the Tribunal was whether section 73 applies to a case where the assessee earns profit in speculative transactions. The Tribunal observed that sub-section (1) of section 73 starts with the words any loss, computed in respect of speculative business. . . . Thus, a plain reading of this section suggests that the section does not apply to cases where there has been profit in the speculation business. Further, Circular No. 204, dated 24-7-1976 gives the scope and effect of the newly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transaction carried on by an assessee as a distinct and separate business if the nature of such transactions are such that, it constitutes a business. This is provided under Explanation 2 to section 28 of the Act. Likewise the definition of the term speculative transaction is provided in section 43(5) in a substantive manner. Generally speaking, the ambit and scope of speculative transaction and speculative loss need to be confined within the limit provided by law contained in the above-mentioned provisions. But, further to take care of any device that may be attempted by business houses controlling group of companies for the purpose of reducing the tax incidence, the law has annexed an Explanation to section 73 of the Income-tax Act, 1961. The said Explanation is a deeming provision whereby the transaction of a company dealing in purchase and sale of shares shall be treated as speculative transaction, subject to two exceptions. 20. The said Explanation reads as under : "Where any part of the business of a company [other than a company whose gross total income consists mainly of income which is chargeable under the heads "Interest on securities", "Income from house ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ef of Explanation to section 73. Therefore, we have to see that the first category of exception is made on the basis of the "character of its gross total income". 25. As far as the second category of exception is concerned, the thrust is made on the nature of business carried on by the company. If the company is carrying as its principal business, the business of banking or the granting of loans and advances, Explanation to section 73 does not apply. The company is excluded from the ambit of Explanation on the basis of the nature of the principal business carried on by it. 26. The two kinds of exceptions provided in Explanation to section 73 are based on two independent tests laid down in the Explanation itself. The test to be applied on the first category of company is the character of its gross total income. The test laid down in the case of the second category of company is the nature of the principal business carried on by it. In the first category, where the test is that of the character of gross total income, the other test relating to the nature of principal business carried on by it does not apply. Likewise in the second category of company where the test ..... X X X X Extracts X X X X X X X X Extracts X X X X
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