2005 (9) TMI 509 - AT - Income Tax

Summary

Issues:
1. Characterization of loss on purchase and sale of shares as speculation loss.
2. Applicability of Explanation to section 73 to treat business loss in shares as speculation loss.
3. Interpretation of legal provisions and judicial precedents regarding speculation business in share dealings.

Detailed Analysis:
1. The first issue in this case revolves around the characterization of the loss incurred by the assessee on the purchase and sale of shares as speculation loss. The Assessing Officer treated the loss as speculation loss under the provisions of Explanation to section 73 of the Income Tax Act. The assessee contended that the loss was a business loss incurred in the ordinary course of trading in shares and should be adjusted against other business income. The dispute primarily focused on whether the actual delivery of shares should prevent the loss from being classified as speculative. The Tribunal upheld the Assessing Officer's decision, citing legal precedents and the deeming fiction introduced by the Explanation to section 73.

2. The second issue raised was the applicability of the Explanation to section 73 in treating the business loss in shares as speculation loss. The assessee argued that the Explanation should not apply as the transactions were not speculative in nature, considering the actual delivery of shares. However, the Tribunal held that the Explanation creates a deeming fiction whereby transactions in shares, even with actual delivery, can be deemed speculative under certain circumstances. The Tribunal emphasized that the Explanation applies to companies carrying out transactions involving the purchase and sale of shares, regardless of actual delivery, deeming them to be engaged in speculation business.

3. The final issue involved the interpretation of legal provisions and judicial precedents regarding speculation business in share dealings. The Tribunal analyzed the provisions of Explanation 2 to section 28, which distinguishes speculation business from non-speculative business. The Tribunal rejected the assessee's argument that only when suffering a loss in a speculation business would section 73(1) apply, emphasizing that the Explanation to section 73 introduces a legal fiction applicable to companies engaged in share transactions. The Tribunal concluded that the deeming fiction in the Explanation applies to the entire activity of purchase and sale of shares, regardless of whether actual delivery took place, thus upholding the lower authorities' decision and dismissing the assessee's appeal.